Singaporean Hedge Opportunity? (KPELY.PK)

Very interesting article in the Wall Street Journal today for those who are interested in foreign investing as a hedge against domestic volatility.

Chris Prystay wrote about Southeast Asian investments in an article entitled Shelter in Singapore --- Analysts Say Oil Services, REITs Would Resist U.S. Slowdown (If you don't subscribe, sign up to get up to eight weeks free and they'll thrown a little money my way) .
One of the companies mentioned in the article, Keppel Corporation (KPELY.PK), is in my portfolio and remains very interesting for me as a bet on several SE Asian sectors. I went into the reasons why I like KepCorp back in April when I first purchased it, if you're interested.

The analysts quoted in this article believe the oil services and real estate sectors in Singapore, while they will be buffetted along with the rest of the nation's companies in the wake of Bernanke's interest rate decisions, should in the long term not be unduly harmed by the volatility of the US markets.

This is very good news for Keppel -- the article notes that they, along with Sembcorp, control most ocean rig construction in the world and that they should thrive as long as oil exploration and production remains profitable, due both to expanding demand for rigs and to the advanced age of much of the current fleet. The analyst, David Mok of DBS Vickers, believes that this demand cycle will remain in force as long as oil remains above about $30/barrel. I'd be more conservative and say I'd start to get worried if oil dips well below $50 ... but I don't see either of those scenarios playing out anytime soon.

But the other nice thing, not specifically tied to Keppel in this article, is that Keppel is a large conglomerate with a few key segments, nearly all of which appear to be useful hedges against US downturns if we follow the logic here.

Real Estate Investment Trusts in Singapore are also noted here as a good investment -- and Keppel has a hand in there with their Keppel Land subsidiary. While not specifically a REIT, they do manage similar properties and move with REITs in some ways. Investors have not bid up REITs as a safe haven investment in Singapore as they often do in the US, so the thought there is that they've been punished unnecessarily. Should be good news for Keppel Land.

The other big parts of Keppel, their infrastructure business and oil refining, are tied to SE Asian infrastructure (esp. water and electricity) and to global refined product demand. The refinery business has been subject to some severe volatility due to US gasoline formulation changes, but I expect the worst of that has passed, and the demand for imported refined fuels should continue to increase in the US as localities continue to block the construction of new refineries and, God forbid, hurricanes continue to damage the existing ones -- even if we don't consider the importance of growing domestic and regional demand for gasoline and other refined products in and near Singapore.

Nothing new here, just another perspective from some analysts to assuage fears that the US market and inflation/interest rate concerns will cause a global contagion that crushes everything -- there are places to put money where it should perform well over the long term regardless of the direction of US markets.

Keep up with One Guy's Investments, Free Subscription
Enter your email address:

Delivered by FeedBurner

Earnings updates

It's a very busy earnings week for me, and as luck would have it I'll be traveling for a week or so and won't be able to post for a while. Here are my quick thoughts on the companies that have reported recently:

Taser (TASR) this morning finally finished filling in and sealing over the hole they had dug for themselves over the past year or so. They are now building sales again, and you can practically taste the market's relief. Lawsuits are becoming a non-issue since Taser is handily winning all of them or having them summarily dismissed, but that's not enough to boost the shares -- what they need is a return to significant sales growth. It seems to finally be starting, so even though they missed estimates slightly the shares are rallying a bit on 30% sales gains and hopes for a return to TASR's perch as a fast-growing company with a monopoly on its core products. I've been patient with Taser even though it's well underwater for me, and I plan to continue to patiently watch as it returns to sales growth, hopefully some earnings growth, and a recovery of the stock's valuation.

Keppel Land was a little bit light on earnings yesterday, which brought the shares down and depressed parent Keppel Corporation (KPELY) , which I own, a bit as well. I just bought these KepCorp shares at pretty much their recent highs, and I knew it was earnings season so I was taking a risk ... the real news for Keppel, however, will come with tomorrow's release of earnings for the parent company and any updates to their guidance about yard expansion, size of the order book, or other commentary on the great market they're seeing for their deepsea drilling rigs. Could move either way on these earnings tomorrow, but in the long run I expect the shares to do very well even though they're not in the bargain bin.

Rayonier (RYN) reported earlier this week, and a quick look at the numbers made shareholders very nervous. Nothing to worry that much about, earnings were down fairly dramatically due to the timing of some land sales (they're not selling as much wholesale land now, they're trying to move up the development chain and get more value, which is taking more time), and to some other seasonal weakness in the business. RYN's earnings have never been all that consistent, but in the long term I'm happy to have a strong position in my portfolio in Rayonier as it represents investments in land and timber which should remain a good diversifier for me.

Radyne Corporation (RADN), which I bought about a year ago as Radyne Comstream, reported continued earnings growth as well -- I have some nervousness about holding this one because it has grown so fast, but I have to remind myself of what a bargain it was when I initially picked up shares. The Xicom merger is clearly working very well -- it might have nibbled at their margins a little, but sales and earnings growth have been very good, they're getting paid (receivables are dropping), and their order book has grown dramatically so they have a very solid backlog to supply. I'll be watching RADN to see if there's any weakness or overvaluation that might make me want to lighten my holdings a little, but I don't see that yet -- and even after this big merger and a year of torrid growth this is still a tiny $300 million company with a lot of room to grow its presence in the satellite telecom business.

And Gol Linhas Aereas Inteligentes (GOL) released earnings a couple days ago, too -- they beat the estimates of the Street by a little bit, though it didn't really impact the share price since expectations had been steadily gaining. The big impact of Varig's problems probably won't show on their earnings for a quarter or two, assuming they continue to gain market share as I expect, but they are still showing good steady growth in income, cost cutting, route expansion (just opened up to Chile), and they're getting more attention from US investors. GOL continues to look like a great long term story to me, though I wouldn't be surprised to see them temporarily lose altitude at some point after the remarkable six months they've had.

Akamai(AKAM) , Formfactor(FORM) , and MEMC Electronic Materials (WFR) are all reporting today, and Intuitive Surgical (ISRG) tomorrow -- all very strong performers over the past year with gains of well over 100% (though not all have gained quite that much for me, I bought ISRG fairly high). These companies have pretty huge expectations built in, but it seems to me that their markets are booming and they should have no trouble meeting those high expectations, or at least coming close. All still look like long term winners to me, though I am a little concerned about valuation with Akamai and, to a lesser degree, Formfactor. Not enough to sell out yet, but I will be looking closely at their results to see if I'm still willing to be that their growth is going to continue at these rapid rates.

Keep up with One Guy's Investments, Free Subscription
Enter your email address:

Delivered by FeedBurner

More on Deepsea Drilling (KPELY, SDRLF)

Some interesting news out on my two investments in the drilling arena over the last day or two.

I just bought shares of Keppel Corporation, also referred to as KepCorp, on Monday, smack dab in the middle of its reporting season, so I knew there would be some action. So far, their subsidiaries have reported "ok" to weak earnings, which have caused a minor bit of profit taking -- Telecom and Transportation reported pretty flat earnings, and Singapore Petroleum reported that they're still having some trouble with pricing and margins, though I expect that to work itself out pretty quickly and they're certainly still pulling in nice profits even as they dip from recent highs.

On the positive side, Keppel Offshore and Marine, the critical part of the company for near-term growth, reported that they're upgrading two of their shipyards to handle drilling rig construction in anticipation of a big upsurge in Chinese demand for offshore drilling equipment. They noted earlier that they were planning this, and that they expect to continue to be able to take big orders -- even rush orders, they implied, if companies are willing to pay through the nose for pre-2009 delivery. They'll be releasing earnings for the conglomerate on Thursday this week, and has guided to 32% gain in earnings, with plenty of analysts expecting a lot of upside in the Offshore and Marine division.

My purchase was, as usual, probably pretty poorly timed in the short term -- I bought right at the new all time high. While it makes sense to buy some companies on the upswing if you see potential for significant growth to continue, it's quite possible that I overpaid, depending on how the shares react to earnings this week. So far, they've dipped back down by a couple percentage points on the Singapore Petroleum news. If they dip further on the earnings news, I'll have to consider adding to my position, but my best guess is that their earnings will beat expectations. and that any guidance they offer will be quite optimistic given the expected refining turnaround and the huge orderbook for the shipyards.

Speaking of shipyards, Keppel a few days ago christened the SeaDrill 3, the latest rig newbuilding for SeaDrill, a nice tie-in to the other updates I've been watching.

SeaDrill I also purchased quite recently, and they've been on a buying spree picking up other offshore drilling companies in order to consolidate the industry and quickly build up a large fleet of rigs and service and drilling ships. Their biggest purchase to this point has been Smedvig, a deal the ink isn't even dry on yet, and already rumors are swirling about their next target. Everyone knows John Fredriksen's reputation for moving quickly and aggressively in acquisitions, so any hint of the next step gets some good press.

And this time they issued much more than a hint -- the head of the new SeaDrill Management division, Hans Van Royen, who is also the former CEO of Smedvig, yesterday seemed to get a little bit too big for his britches in announcing their intended takeover of two companies, and he was quickly shot down by SeaDrill CEO and Fredriksen right-hand-man Tor Olav Troim.

Here's the first article from Reuters -- essentially, Van Royen said offers were out for the remaining shares of Apexindo and Eastern Drilling, and they expect to hear from those companies shortly. Tor Olav Troim was not mentioned in this article.

But shortly thereafter, Troim was quoted in an updated version essentially contradicting Van Royen said. That updated version seems to have disappeared from the free web, so here are the quotes from Troim:

"We have seen this as a possibility, but we have no plan to do it at all -- for the moment."

Van Royen is quoted as saying: "We are looking forward to taking over Eastern Drilling and we have given an offer ... and also to Apexindo. I think we will get their answers by the end of this month."

He said the buyout offer to Apexindo was made on Thursday while Eastern Drilling was also approached last week.

Troim said no bid had been made. "Not at all, on the contrary," he said.

SeaDrill already owns large minority positions in both these companies, 40% of Eastern and 33% of Apexindo, and could theoretically acquire the balance of both for about half a billion dollars, assuming the owners want to sell.

Interesting to see that the new management and old haven't quite meshed on their market message yet (unless this is all staged in order to keep people guessing). I'd like to hear what's happening behind closed doors in those corporate office this week. My suspicion is that Van Royen is telling the truth, but getting a big ahead of himself in that Fredriksen likes to hold his cards very close to his vest until he's ready to throw down a winning hand ... we'll see.

And SeaDrill, no surprise, also noted that it has exercised options on contracts for two newbuildings -- semisubmersibles, in this case, that will be built by Daewoo and SembCorp (SembCorp is another Singaporean shipbuilder and Keppel's biggest competitor, but there's plenty of business to go around for everyone). SeaDrill seems to want everything that floats, so I expect more acquisitions and more newbuilding orders to come out in good time.

Keep up with One Guy's Investments, Free Subscription
Enter your email address:

Delivered by FeedBurner

More International Investing (KPELY.PK)

This morning I picked up shares in Keppel Corporation, which is a Singaporean conglomerate, at $19.30. I bought the sponsored ADRs on the pink sheets, which have a 2:1 ratio with the Singapore-listed shares, so at today's closing price in Singapore of S$15.20 I slightly overpaid -- as is typical for these pink sheet ADRs -- and my shares come in at roughly S$15.31 at the current exchange rate. Shares in Keppel on the pink sheets are quite
a bit more liquid than the SeaDrill shares I picked up last week, so I didn't have to pay quite as much of a premium, which was nice.

Why did I invest in Keppel? I was looking for more international exposure, and thought that Asia was a likely spot for additional investment, and I was continuing to look for areas that I'm somewhat underinvested in -- energy, infrastructure, telecom, and real estate.

I thought about adding some more ETF holdings to my portfolio -- and particularly, the Malaysian and Singaporean index ETF's seemed promising ... as did the Taiwan index shares, which have generally underperformed the region lately. Chinese demand is helping these smaller Asian economies boom, and all have something to recommend them.

But I hate to always buy into whole countries if I can pick out strong companies in those countries that I prefer. In India it made sense to buy into a closed-end fund (IFN) because I can't buy shares in India (except for the few very overpriced ADRs on the US exchanges), and in Korea it made sense to buy the index (EWY) because I like a lot of the huge Korean companies, including Posco, Samsung, Hyundai and several of the banks.

But Singapore, which I finally narrowed to as the focus of my searching, doesn't have an index that appeals to me. As a city state with a big financial industry, their index is nearly half made up of banks and other big financials. I'd just as soon own a bank with a broader reach, as I do with UBS, and the financial sector isn't what appeals to me most about investing in this region.

So I looked at a few of the bigger and more liquid and easily-tradeable companies that I might be able to get my hands on individually. And Keppel stood out.

I had already heard the name, because SeaDrill has some huge orders in with Keppel for new jack-up rigs, so that helped. (And in a little coincidence, it appears SeaDrill is bidding to take over the remaining 70% it doesn't own of Apexindo, the big Indonesian driller and another big Keppel client).

Keppel is one of the dominant builders of ocean-drilling exploration and production rigs for oil and gas in the world -- ten years ago, when oil prices where in the doldrums, most of the big yards got out of the rig business (as well as the tanker business and other related products), which means that there are few big players left ... two of which are Singaporean and together account for well over half of the market.

So they're building rigs as fast as they can, and booking newbuilding contracts with delivery dates now out to 2009 ... which gives Keppel's Offshore and Marine division a great tailwind and a good floor as they have more than $7 billion in their order book at the moment. All of Keppel's 17 yards around the world are as busy as they've ever been building new rigs and service vehicles and booking newbuildings at record-high prices, refurbishing all kinds of vessels, and helping to keep the older rigs that are still in heavy demand operating past their planned lifespans. This upswing in spending in oil services, and in the ocean-based drilling sector in particular, is expected to continue into the foreseeable future as all the oil companies are planning significant capital spending growth (and that spending is expected to hold up as long as oil remains above $50 or so, which seems a safe bet at the moment).

Keppel itself is projecting that this boom in their business will last at least ten years, according to quotes from the company in this ChannelNewsAsia article. And optimism about their earnings release this week is running fairly high, too, with 30%+ growth expected according to a Washington Post article (free reg. required) from this morning.

But that's a big part of my justification for investing in SeaDrill, too, so there had to be something different about Keppel -- aside from being a little further up the chain than SeaDrill as the manufacturers of rigs and other deepwater drilling equipment, rather than the operators.

And there is -- Keppel has two other major divisions and a few other significant outlying investments that are very appealing. A diagram of their major holdings illustrates the extent of their reach, but here are the most compelling arms of the octopus for me:

Keppel Land -- this property developer and landowner does both residential and office property development and leasing. The majority of their portfolio is in Singapore, but they're expanding their international reach in the region with a goal of building it up to 30% of their portfolio. They have very significant new and under-construction holdings in China, Vietnam, Thailand, and elsewhere in the region. They'll be spinning off ownership in some of this property to KREIT, which should help them invest in more land and construction and pull in some nice property management fees. I already own a couple Chinese gaming and internet companies in Shanda and NetEase, which are volatile enough to give me heartburn, and I like the idea of getting a little Chinese real estate exposure (though some folks think that's a bubble building as well).

Singaporean real estate seems to be doing well and on an upswing, and in the long term I really like residential real estate in all of urban asia. Keppel Land, which is 54% owned by Keppel Corp and handles most (but not all) of the
conglomerate's real estate ventures, reports tomorrow.

And the Keppel Infrastructure division has some interesting businesses
as well, with a growing utilities business in electricity generation and waste management, which should provide some steady long term returns, and investments in a couple of very interesting businesses -- Singapore Petroleum, a big refiner that they own 48% of (and which has had trouble recently with margins, largely thanks to high US gasoline inventories and additive transition problems that are both expected to work themselves out soon), and parts of Echo Broadband in Germany and MobilOne, a big cellular provider (Keppel Telecom, owner of these businesses, reported today with decent earnings and is 81% owned by Keppel Corp).

Keppel is in earnings release mode at the moment, and has already risen pretty dramatically from last week on their preliminary good earnings from some divisions, significant optimism about the earnings to come out later this week, and the strength of the continuing strong order book for seaborne oil services products, especially new drilling rigs, which should account for the lion's share of their upside in the near future. The conglomerate releases earnings this week on
Thursday, and given the strength of the rig business I thought opening my preliminary position before earnings made more sense than waiting.

Oh, and as we so often find when investing overseas, they pay a nice dividend -- over 3.5% this year, and estimated by Citigroup to build to close to 5% in the coming years as the divisions throw off growing piles of cash. And they're trading at a lower valuation than a lot of their big competitors, thanks to the drag from Singapore Petroleum (that should be nearly over) and, I suppose, to the "conglomerate discount."

So there you have it -- one company that covers a lot of the sectors I was looking for, with great upside exposure to the boom in oil sector capital spending ... and I don't have to buy an ETF loaded with big banks to get in. I expect the downside to be very limited in Keppel, and the upside with the booming demand for rigs could be very significant indeed as their deliveries hit the water over the next five+ years.

Keep up with One Guy's Investments, Free Subscription
Enter your email address:

Delivered by FeedBurner