by Joseph Nathan
When Temasek releases its latest “Summary Reporting”, I find the various reports from our mainstream media very confusing.
With a headline that screams “Temasek’s net portfolio value hits record high for third year running”, one would expect its returns on investment to be doing well too. Interestingly, its latest Total Shareholder Return or TSR for the same period fell to 1.49%, quantified by the statement that this is “on the back of market volatility”.
Does this make any sense?
Understanding Asset Valuation
Most Singaporeans owned a 99-year lease on their new HDB flat. Its value goes up and down. When all is well, a 5-room can be valued at S$600,000 or higher but when the market is down, it can be valued at much less. What we can be sure of is the fact that valuation is relative to market condition and the prevailing policy.
For families who buy to live in their asset, valuation has a very little material impact. Up or down, they still need a roof over their heads. The same is true of buying a car in Singapore. Despite knowing it is a money-losing asset with high operating costs, many Singaporeans still buy a car as most of them need it for work or family. Despite being bled helplessly like a slaughtered chicken, they still continue to make such horrible investment but this is their personal choice, not a professional investment choice.
From an investment perspective, however, valuation and operating costs matter. Professional investors primarily invest to make a profit, not to be sentimental or to live or enjoy their asset. All assets and investment are regularly updated by fresh independent valuation and this impact the book value of their overall investment. Even equity investment is marked to market and nothing is left to mere assumption unless it is a family-owned investment company.
Validating Asset Valuation
For organisations, the senior management periodically presents their financial performance to their shareholders, substantiated by hard data. All assumptions are also properly explained, documented and validated.
In a good year, most shareholders tend to be more forgiving. But in bad years, they will call in their independent accountants and financial controllers to tear apart these data to validate why their returns have fallen and if they had been taken for a ride by the senior management. Senior management has to properly account for their past performance and also assure the shareholders that they have a grounded plan to beat the difficult market condition during challenging years. “I trust my best” is not an option in the boardroom.
For average Singaporeans like us, we do not need those accounting skills to make sense of our everyday investment in housing, car or equity. If the valuation is high, it is because the asset is yielding a good return. With a good return, the improved cash flow increases the asset value. If the rental of HDB is high, the value of our HDB will also be high. Returns and valuation complement one another. If the return is low or weak, so will the valuation. There is a correlation between return and value of investment.
Here lies the unexplained discrepancy in the case of Temasek’s latest statements. If its shareholder return is taking a hit, year on year, its valuation should also be affected. I am clueless why no journalist from Channel News Asia, Straits Times or Business Times had not asked for more clarification to this discrepancy.
Look at it this way. If my house, an investment, cannot generate a good rental income, which is a “return” on my investment, then logic dictates that should I seek an appraisal from any valuation agency, I would naturally get a lower valuation. On hindsight, I can only blame myself for not seeking better investment advice or engage the service of real professionals.
If the market condition gets worse and my house remains vacant and needs more enhancement to make it rentable, then my investment will be further weakened by these additional operating costs or capital expenditure. By now, I do not need to engage a valuation agency to be telling me that my valuation will now be much worse.
The valuation that is priced to market in such an instance is most depressing. Logically, why would I want such validation and risks being mocked by others for making a bad investment? Better to be explicit in narrating that my investment is for the long term as the market will self-correct at some point. No one can fault such a motherhood statement. In the interim, I can take consolation from my old valuation appraisal report, which is higher, and wait for the light at the end of the tunnel.
If Temasek’s investment has been subjected to a challenging investment environment these past years, how can their portfolio value remains high when their return has taken a hit year on year?
As detail financial information on Temasek is privileged, we can only rely on their “Summary Reporting” and take them at their face value.
After all, will the senior management at Temasek dare lie to Singaporeans?
As there is indeed a discrepancy that just does not make sense to average Singaporean like myself, I hope our journalists, and the “experts” that they had to rely upon, can be more constructive in enlightening us. It is always good to be learning new trick and insight.
As Temasek is active in our bond market, why aren’t journalists conducting a more insightful review as to whether the fall in its TSR to 1.49% will have any material impact on our bond market, and should Singaporeans who are holding these bonds be a concern? As the guaranteed return on its bonds are higher than 1.49%, what is the implication for Temasek?
Since our Sing-dollar has appreciated much against the Chinese yuan and Indian rupee over these past years, it means that Temasek can buy more for less. If so, there should be a positive impact on the valuation of its fresh investment in China and India at face value. As such, it will be good to know just how much of the 1.62% increase in its portfolio value, from S$308 billion to S$313 billion, is attributed to the currency advantage of our Sing-dollar.
Over time, the reverse could be true. Can Temasek still stay positive on its TSR and portfolio value by this time, next year? After all, the decline of its TSR from 12.19% to 1.49% is quite substantial. Can more bond issuing be a solution or will it become its Achilles heel since it cannot continue to pay out more than its earning?
The Hard Truth is looking like Temasek is facing some very serious challenges. As the trade tension between the US and China is likely to be protracted, should Singaporeans be a concern?
I hope the journalists from our MSMs will do more justice with such news instead of trying to sensationalize them with confusing headlines or make sweeping statements that make no sense. If they are not asking logical questions of Temasek, who can Singaporeans rely upon? At this rate, Singapore’s comparative advantage as a financial centre for the region will be ruined by such a poor level of journalism.
Singapore deserves better.
This was first published on Joseph Nathan-Hard Truths of SG’s Facebook page and reproduced with permission.