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Thursday, January 22, 2015

Recent Action - OUE Limited

I am pretty sure that I am going to receive quite a bit of backlash after this post following some unsightly comments from the hardwarezone forum for my decision to divest AHT two weeks ago. Regardless, I will try to be as transparent as possible and hope readers do their own diligence before deciding to invest their hard earned money. This is one of those evidence that if you don't do your own diligence and simply follow other bloggers purchase, the situation may not turn out to be great.

Today, I made the decision to divest all my 5 lots of OUE Ltd at a price of $2.22. Given that I had purchased them last September at a price of $2.16, this represents a minor gain of $0.06/lot, which translates into a total gain of $300 in absolute amount. I suspect the reason for the increase is due to the latest Keppel Land announcement which Keppel Corp has offered to purchase at a premium. This boosted the whole property related counters which are currently traded at a discount. Having said that, OUE isn't any of your Keppel Land or Capitalmall Asia and I seriously doubt the big boss up there is willing to privatize this asset generating machine.

I have blogged a few times last year after my purchase on OUE and you can view them here below for those who are interested:

Rationale for divesting

My thesis for the strength of this company is still the same as before. I think the company is currently trading at an undemanding book valuation of around 0.53, which is almost half what their liquidation value is right now. The earnings though are a little weak so this Iis very much more an asset play than anything else.

However, there are a couple of things which makes me think deeper:

1.) Confirmation of divestment of Crowne Plaza Changi Airport & Extension

When I purchased the company back then, I was playing a little guessing game about the potential divestment of the abovementioned assets. When news about the confirmation was announced, the market doesn't seem to take into that positively. This is in conjunction with the previous divestment when they injected their two Reits properties arm OUE Hospitality and OUE Commercial Trust and the share price slumped down heavily. This is just something I don't really understand. Is there something behind the curtain that retail investors does not really know?

2.) Guaranteed Income Support

The above reason could perhaps be attributed to this income support cause. Given that the management chose to aggressively inject their properties into the Reits arm without any stabilization, they are able to recycle capital quickly but chose to provide guarantee income support to these Reits as a result. As an investor, I am not sure if that is the best option to do because some of these capitals are not being recycled to obtain a higher required rate of return.

3.) Aggressive Venturing

If you read about the background of the Riady family, they are almost into all the businesses you can think of. Properties, retail, hospitality, food and beverages, logistics, recreation are all part of their diversified business. This is not necessarily a bad thing per se, but you can see how the risk has increased because of this. Imagine if there were recession and their capital is stuck in any of these businesses. Further, we look at the Return on Equity over the past few years and they do not really impress.

4.) No Share Buyback

I remain baffled why the company did not step up to stabilize things when the share price is weak by doing things such as share buyback to give investors a vote of confidence. Instead, what they have done is to use their capital to some mutual funds which yield at about 3% after inflation. I'm not sure if the management see that is more value or is the undemanding valuation of their current share price is more value. The action doesn't seem to justify some of the reasoning in my head.

Final Thoughts

It's always easy to put the blame on others when things doesn't go in your favor but difficult to concede that it's your own mistake through our own personal reflection. Again, I wanted to highlight the risk of following a blogger's pick on stocks when you do not do your own due diligence.

Thankfully, this is a situation where I managed to get out unscathed because of the optimistic nature of the property related market today due to Keppel Land privatization.
As mentioned above, I feel that this a case where I may have overlooked some of the key important items and the lack of having further due diligence in knowing more about the management style and history. I have taken a step up by recognizing my own mistake without doing enough when I purchased the company.

This does not mean that the fundamentals of the company is bad. But some of the things and actions at the moment left a few question marks in my head which I do not really understand and because of this I do not feel very comfortable investing in something I am not entirely sure of. This may seem like a quick trade in and out but I rather be at a situation out right now. As it is looking right now, I may already be regretting my action.

I may be vested back in this company some time in the future, regardless if the share price is higher than now, once I have understood the whole situation much better. But until then, I rather focus in companies I know much better.

What about you? Anyone been in this situation before?

AGM - Fraser Commercial Trust (FCOT)

It's been quite a while since I've last been to AGM which I think was for FCT last year during around the same time. The venue was the same at Alexandra Point which seemed very familiar to me by now. The AGM started at 10am in the morning, and I made my way slowly there taking mrt and walking breezily from the Labrador station.

This is one of the better AGM I have been to because the question and answer was honest, direct and related. There isn't quite any silly questions you would listen when you attend to the other AGM. I will be summarizing the whole AGM incident to those who are interested so here we go.


The first question was asked by none other than myself. I went through the report quite a bit on the past couple of days and there was no really burning questions but I still proceed to ask anyway.

Q: My first question was pertaining to the way they have presented the NPI vs NPI on a cash basis (AR page 26). As you can see the NPI on a cash basis for FY2014 was higher than FY2013 and I found out that this is due to the effects of accounting treatment where they recognized the income on a straight line basis so I went to ask what is it exactly since I find it pretty unique.

A: The CEO responded by saying that they have been reporting this way over the past few quarters as they want to track the NPI on a cashflow basis. What happened was the income was smoothed out by the rental upward revision by recognizing them on a straight line basis so rather than we have a lumpy NPI, this gets smooth out over the quarters.

Q: My next question was pertaining to the AU properties, which makes up 33% of the overall portfolio and subsequent questions from others later were also revolving the AU properties, so I shall just consolidate them at one go. The questions were pertaining to the future projection, cap rates, economy, hedging and acquisition of AU properties.

A: For future projection and economy, the CEO concedes that the market is currently soft, especially for commodities cities and that there may be potential vacancies due to increase in supply in certain areas. However, the management is looking actively for potential acquisition in areas such as Sydney, Melbourne and Brisbane because the NPI yield is extremely attractive and they would make a suitable accretive acquisition. For SG properties, they concede that they are not able to find attractive yield at this point in time.

On hedging, the management have hedged by using the borrowings in AU denominated currency which provides a natural hedge against the currency itself. In other words, if AUD depreciates, the NPI would suffer but they will be offset by a lower interest expense and a realized exchange gain. I thought that was a smart move and is something maybe the AHT management can learn something from.

Q: There were concerns relating to the expiring of the tax concession in Mar 2015 which Mr. Tharman has yet to announce. If the concession is not extended, then Reits which hold foreign properties would not enjoy tax discounts and this will severely impact the underlying income of the DPU.

A: One of the legal person stepped up to confirm that it is indeed a risk and all they can do is to wait for further news. However, the concession would only impact future foreign properties acquisition and not current, so it will not impact the two assets they currently have in their portfolio. To me, I feel this is still a big risk but there are other Reits which may be in more danger, think AHT, LMIRT and Ascott. Woof!!!

Q: There was another person who asked about the potential divestment of the 55 Market Street, which only makes up a very minor portion of the overall portfolio. Is the management intending to divest this and focus on properties which yield higher?

A: The Chairman took this question and confirm that this is in amongst one of their agenda list to do and when the right time comes, they will divest this asset at a right price.

Final Thoughts

I really like everything about FCOT at the moment after going through all the numbers.

I thought the management has taken ample steps to ensure that there will be sufficient earnings step-up visibility that increases shareholder's value over time yet at the same mitigate the risk by doing things like refinancing all loans requirements till FY2017 and hedging currency risk appropriately, etc.

Moving forward over the next 2-3 years, it is unlikely that we will see any big activity movement as the step up rental play will still be sufficient to drive the earnings and DPU upward. In fact, I like that the management has plans to focus on organic growth through asset enhancement rather than acquisition, which most other Reits do through raising funds and buy.

The below graph says it all about their future plans. Sufficient step-up rents, no refinancing of loans until FY2017 and average cost of debt at 2.7%.

At current price, it may seem a little overstretched but this is definitely a keep for me for the next few years. They will be announcing their Q1 FY15 results shortly. You can bet that earnings and DPU will keep going up on that.

I am still thinking of whether to go for tomorrow FCT AGM at the same place. If I do, I'll do a summary like the one I did here. The food there was well organized as well. I managed to eat a free lunch today :)

Thanks for reading and cheers to those vested as I am.

Tuesday, January 20, 2015

"Jan 15" - SG Transactions & Portfolio Update"

No. of Shares
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
FraserCenter Point Trust
China Merchant Pacific
SembCorp Ind
Ascott Reit
Mapletree Greater China Commercial Trust
FraserCommercial Trust
ST Engineering
Stamford Land
King Wan

Total SGD


Before I began my first portfolio update for the new year, I have made some changes to the layout from the number of lots to the number of shares as SGX has changed the allocation recently to 100 shares. It's just less confusing if we now state them in number of shares.

There are just a couple of light activities in the first month of the new year as we have already seen some volatility in the market.

This month, I have divested my stake in Ascendas Hospitality Trust (AHT) which I have blogged here.

I have also added a couple more shares for China Merchant Pacific (CMP) when it pulled back slightly to $0.975. The thesis for buying the shares remain the same: Strong Cashflow, sufficient dividend payouts based on diluted earnings and positive contributions from the newly purchased jiurui expressway. I also like the fact that they previously did a private placement at $0.985 as one of the ways to fund the acquisition, which is a couple of percentage points higher than their market price back then. They could of course have issued them at a much lower price and dilute the shareholders more, but even at  $0.985 there are takers easily. The bond convertibles are almost being redeemed at a faster interval now, so we can see a huge drop in finance expenses in the upcoming results. They are expected to retain at least the $0.0425 for their final dividend distributions paid in May.

The portfolio has increased slightly from the previous month of $279,780 to $282,570 this month. A few of the Reits have run up due to the impending results (and dividends) announcement so I am extremely looking forward to receiving the first dividend payments from next month. The estimated annual dividends from the portfolio is $14,668. Still slowly building up my arsenal of dividend payers.

Expenses have been tight, as expected and I am already looking forward to months with bounty dividend payouts to ease off the expenses. I have booked a quick trip to HK by the end of the month to settle some family issues so the expenses for this month will be rocket high again.

How is your portfolio doing for the month of Jan? Already adding into undervalued shares?

Saturday, January 17, 2015

5 Books purchased from Amazon

In one of my resolutions for this year, I have plans to read at least 12 books in a year which translate into a book a month.

Over this weekend, I went to the Amazon to make my first step into purchasing these books and these are books with great reviews recommended by either friends or bloggers that meet my criteria to continue improving on self-reading.

Without further ado, these are the 5 books I purchased.

1.) The Rosie Project
I actually stole this book from LP's list of recommended book in 2014. This is also one of the recommended book of the month of Oct 13 by Amazon.

I love books with a lot of hearty and touching moments and from the quick synopsis I think I might get the best of both.

2.) How to Fail at Almost Everything and Still Win Big

The title says it all about what this book is all about.

In one of his excerpts, the author mentioned about "Systems are for winners". That's exactly what I am currently doing, trying to create a system and win big at the end of the game. When you've got a strategy and system going, you are going to get better productivity that makes money works for you. They may still require you to spend time on it, but the productivity should increase over time.

3.) Security Analysis

For value investors, I don't think this book requires any further introduction.

I've been wanting to pick up this book from a year ago but has always failed to do so. This book is pretty thick and they are more like textbook than leisure reading explaining about value investing and fundamental analysis. I was told that the content was pretty technical so I am definitely looking forward to reading and picking up something from it.

4.) Barbarians At The Gate

This is actually a book that is recommended by my professor during my investment banking module back when I was still taking the MBA.

Barbarians At The Gate is a classic account of the fall of RJR Nabisco, something that happens at the Wall Street that changes the face of corporate banking ever again. Looking forward to reading from it.

5.) Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions

Another very technical book recommended during my MBA time.

This is more to the step by step valuation methodology for a startup and venture capitalist before they move on to the mature stage. It's definitely interesting to see how it differs from the usual valuation method we used for other companies.

Okay, I admit that 5 books might take me forever to read. The fact that I only have time to read when my son goes to bed, or when I was pooing in the toilet makes it even harder to complete them.

But the third and fifth book would probably account for at least 3 normal books and it's definitely not very easy to digest them. I'll be applying that along my investing journey so we'll see if that is going to help out.

I'll take it as a successful goal if I can complete these before the year finishes.

Anyone has thoughts on these books or read them previously?

Thursday, January 15, 2015

My BOLD crystal ball prediction for Ascott Reits

I am vested with 15 lots of Ascott Reits since my last participation in their Rights Issue which they raised back in Nov 2013. If you are interested, you can view them here and here. Before that in Jan 2013, they have raised another private placement which you can view them here.
I don't have a crystal ball, but I am going to make a bold prediction regarding the Reit.
Every investor of Ascott Reit should know the management objective which they have highlighted several times in the past years. They are on a sprint global expansion to have operational 80,000 units by 2020. Yesterday, there is an article (here) that further emphasized on this goal.
In the article, Lee Chee Koon, Ascott's CEO, said:
"In 2015, there will be no let-up in our expansion. We will continue our global expansion, with a target to open more than 20 properties this year. These will be in China, India, Indonesia, Korea, Malaysia, Phillipines, Vietnam, Oman and Saudi Arabia. We are on track to achieve our target of 40,000 apartment units worldwide by end this year and aim to have 80,000 units by 2020."
The thing I like and don't like about Ascott Reit is on one hand they are well on track expanding their asset cap, which is a good thing but on the other hand they are "forcing" investors to subscribe to the rights issue or placement, and you have no choice but to subscribe if you do not want to be diluted. Some investors think it is fine if the asset acqusition they make is accretive, but little do they consider the impact of Theoretical ex-rights price (TERP) which I would talk about in more detail later. This is management's financial fund engineering at its very best. Push up the price, then do rights issue, leaving investors with little choice to decide.
Just take a look at the investor presentation below which they have highlighted to the investors back in Oct 2014. All you see is how they have emphasized their CAGR have grown for their total asset base and total unitholder's distribution, without any mentioning of the distribution per unit. For those who bothers to actually calculate the DPU year on year, it actually looks like the one I presented below. The reason for this is of course pretty clear. DPU has not been increasing on an uptrend as they usually raise a substantial discount to the rights issue to participate with huge additional units that brings down the yield. If there is one thing I've learnt from my previous work stint at a Reit company, it is that anything that is not favorable do not show it to the investors. DPU, in this case, happens to be the one and most sensitive to investors' sentiment, so hide them well.

In my mind, their strategy is like this:
Buy assets -> Increasing Total Distributions (not DPU) -> Push up price -> Gearing cap at around 40% -> Raise rights issue/placement -> Buy assets and repeat.

DPU Table
*FY14 Annualized
DPU Trend over the past 5 years
Theoretically, there is nothing extremely wrong with this move since DPU is not extremely compromised and investors are still getting around 6.6% to 7% yield. But on the other hand, we have a situation where value is not created. Note that I did not mention that value is destroyed but value is just not created.
For example, the last rights issue raised was for a 5-for-1 at an issue price of $1. This was at an extremely huge discount to the last closing price of $1.29 before the announcement. The next day after the announcement, the share price drops massively to around $1.21. However, that is not the point I want to make.
The Theoretical ex-rights price (TERP) has actually went to $1.24 after the rights, which means that it is a huge drop from the then current price at $1.29. That is certainly not value creating at all, even if you fully participate in your rights. For those who are curious how to calculate the TERP, you can use the following formula below:

Final Thoughts
Ascott's Gearing is currently close to 40% and the last time they issue rights and placement before that was when gearing was at 41%. Given their aggresive expansion plan for this year, there is no doubt that rights or placement will soon be on the cards. My suspect is after the full year announcement in Mar/Apr.
As an investor, you should at least prepare some funds to participate in the rights if you do not wish to be diluted. The alternative is to sell the rights or sell the shares altogether. Selling them before the announcement will probably save you a couple more percentage points as I believe they will similarly issue rights that makes the TERP goes down after that.
Again, I wish to highlight that this move by Ascott is financial engineering at its best. They are certainly not value destroying to the shareholders, but they are not value creating as well. They grow their asset base steadily and gets the best part of the pie while as investors your DPU remains rather stagnant at that stage.
Now, we'll just wait if the crystal ball prediction is right.

What do you think of this engineering exercise done by Ascott's management?

Wednesday, January 14, 2015

Recent Action - Ascendas Hospitality Trust

In the beginning of the year, I have always wanted to review and reduce the holdings in my portfolio which is now currently at 13 companies. My intention is to identify the weak performers, flush them out and concentrate on those with quality fundamentals because it doesn't seem justifiable to spend the time and effort to monitor them.
Ascendas Hospitality Trust is one of those I have identified as weak performers and until today, I still think the management is not fundamentally strong enough that I can bet my money on to bring the company to greater heights.
I bought these shares during the IPO days at 88 cents and during these couple of years, I've received a fair amount of dividends, though they are still underwater at this point. Today, I have sold all 7 lots of AHT at a price of 68 cents.
In this post, I will just quickly touch on a few reasons why I decide to sell off the shares:
1.) Hedging Exchange Rate
Until today, I remain baffled to why the management did not hedge currency risk from the start knowing that the majority of their concentrations are from Australia and Japan and this would have impacted their earning distributions.
The management has only started to hedge after a couple of unfavourable currency movement impacting their bottomline and because of this today they are still incurring the cost of unwinding cross currency swap which will last until 4QFY15. 
2.) Poor Capital Allocator
A good management is one who is able to create value for the shareholders through proper recycling of assets to purchase, divest or raise funds that would maximize the best interests of the shareholders. I posted in the previous article about the difficulty for Reits to retain earnings because of their distribution policy and all the more so this becomes an important factor especially for Reit managers.
AHT management is weak in this areas. For example, the placement exercise to raise funds to acquire the Park Hotel Clarke Quay and Osaka Namba Hotel were DPU destructive as they had to raise funds at the lower end range of the spectrum that could not meet the NPI yield sustained for the new hotels. Even though distribution income raised by about 25.2% compared to the previous year, the distribution per unit declined 3.9% as a result of increasing number of outstanding units.
This reminds me of the recent exercise for LMIRT which I have blogged here. When your share price is in a decline and you had to raise funds by further offering discounts to placement or rights issue, you are giving the investors a double whammy and destroying value, even if the acquisition is "accretive" when they say so in the pro-forma financial effect.
A good counter example of this would be Ascott Reit or Capitamall Trust. Like AHT or LMIRT, the management likes to raise funds to acquire new properties when the need arises. The difference is that the management would do well to push up the share price before raising equity so that gives both side a little room for breather.
3.) Capitalization Rate
Next, we take a look at the company's capitalization rate, which measures the efficiency of the management in extracting out the rental income from each hotels. This is taken by dividing the hotel's respective NPI by their asset valuation.
Since most of the concentrations of AHT's portfolio are in Australia, in particular Sydney, we will be focusing on that. Based on the FY13/14 report, the capitalization rate for its AU properties works out to be 7.83% (AUD 45.3 / AUD 578). This is above the average capitalization rate for Sydney and Melbourne which I have pulled from JLL. So this part looks rather satisfactory.
However, if we are comparing them against Stamford Land, their capitalization rate works out to be above 8%.

4.) Gearing / Dividend / Payout Ratio / Price-to-Book / Price-to-RNAV
Comparing some of the financial indicators against Stamford Land with similar profile, both of which I am vested, I get the following comparisons below.
Gearing %38.3%38.8%
Dividend Yield %7.3%5.5%
Payout Ratio100.0%100.0%

On one look, it doesn't appear too much different with AHT winning on the dividend yield portion. However, as previously mentioned in my SL post, the company is currently recording their assets under historical basis so by revaluing, they would do much better in terms of the gearing and Price-to-Book. The question is if the 1.8% spread in the dividend yield justifies paying the difference for the stock.

Final Thoughts

When people buy this share, the first thing they are usually interested in is the dividend yield and the second is the Ascendas brand. But looking beyond that, I'm sure the results for the past 2 years speak for itself and for myself, this has been a disappointing purchase. The situation in the past few years for Australia has not been the greatest, but I think some of their decisions have not been helping. Maybe under a different management, they could have done differently.

What about you? Are you vested in this share? What do you think of AHT?

Monday, January 12, 2015

Is 2nd Chance at $0.38 an opportunistic buy at this time?

2nd Chance is one of those stocks I used to own in the past because of the steady dividends they pay but have since divested them at around $0.455. They have given me quite a good appreciation and dividends over the past couple of years, so I must say it's definitely good investment return for me.

Over the past few weeks, the share price has been trending down fiercely and today it makes its way down to a low of $0.38, pretty fierce if you ask me. Now, the big question is if the current price of $0.38 justifies an opportunity to buy?

I am probably not going to run through all the details about the company but just wanted to highlight on a few things to note:

1.) Failed execution of spinning properties into Reits

This is probably the biggest reason why the share price have plummeted downwards fiercely.

When news first broke out that they were going to spin off their properties into a Reit and a potential special dividend might be issued, investors were jumping to joy and these has sent their share price rocketted upwards.

On the eve of the New Year, the company has confirmed that SGX has rejected their letter of eligibility to list the Fund by the Target Date. The proposed spinoff has now collapsed. What I have read from The Edge magazine was that SGX seems reluctant to allow the proposal to go through as they were holding strata type of the building rather than the whole building itself, which is what most Reits have.

This has major repercussions as we will probably see in the later parts.

2.) IAS 40 - Fair Value Accounting

I've mentioned this new reporting standard a couple of times in my previous articles so I will not be repeating them again.

As you can see from the above failed spin-off, it means that the company is unable to divest their properties at a good timing and a good price and are now having "stuck" to hold huge amount of property assets in their balance sheet. One negative impact I can think of immediately was capital is locked and they are unable to be recycled, mostly to repay borrowings cycle they are currently engaged in.

What IAS 40 makes it worse is that the company has been recognizing fair value gain over the past few years because of the appreciating asset which boosted the equity portion of the earnings. Now that the properties cycle is on the other end, the company would most likely having to recognize a fair value loss, which was what happened in the recent Q1FY15 they had reported. This will have a downside pressure on earnings and book value as the equity portion will keep decreasing if this goes on.

Q1 FY15 Results

3.) Core business activities facing pressure and competition

This leads us to the next point.

If we deep dive down into its core business activities, we see that their earnings are mostly concentrated from their properties activities, including recognizing the fair value gain on their investment properties. This can be pretty risky if the sector is in a decline like it is right now.

Revenue Q1 FY15

Profit Q1 FY15
Apparel business is facing some negative profitability due to the closure of some shops and competition wars while the gold business margin is dropping due to the falling retail price. It is quite obvious that the core activities are facing some headwinds heading into the future, which will bring downward pressure on earnings.

4.) Outstanding New Warrants

This is a tricky one to be honest.

The new warrants are currently issued at $0.40 and are exercisable during 25 July 2016 to 24 July 2017. The number of outstanding new warrants for this is huge at 577,024,950.

The immediate reaction to this will always be dilution for the existing shareholders, at least for the period mentioned above. Still, the current market price is at $0.38 at the moment so as it seems dilution will not take effect unless it goes above $0.40 otherwise.

The interesting thing about them issuing warrants is that the management is confident that the conversion will take place and they will use this proceeds to repay off the borrowings. This is what they did back in 2012 when the warrants converted amounted to $25.31 million and they used this to repay off their borrowings. In my mind, the cycle goes like this:

Borrow money --> Issue high dividend --> Push up share price --> Issue warrants --> Conversion used to repay borrowings

It appears that if none of these warrants are exercised by the above period, then the company will have to think of alternatives to repay its borrowings, which is mostly short term.

We can see why existing investors are concerned about the dilution which may take place by then. If assuming all the warrants are converted, this will add into the outstanding shares to become 677,210,218 + 577,024,950 = 1,254,235,168. What this means is if the EPS annualized is $0.01 currently, you will get $0.0054, which is almost 46% diluted. Last year dividends alone amounted to about $0.037 cents/share. This is a huge concern if you ask me.


Mr. Salleh is a good businessman with a very candid profile who are very honest about his business.

The whole objective is to ultimately turn the business into a billion dollar market cap project with the process of driving up earnings through proper recycling of its assets, enticing investors into the high dividends it pay out (sometimes even through borrowings), issuing the warrants, pushing up the share price, using the conversion to repay off the borrowings and repeating the cycle.

Using a quick reverse valuation model, I assume the current price at $0.38, last year earnings per share at $0.0244 (stemming out any one-off gain), a discount rate of 15%, and I get a perpetuity growth of 8.7%. If you are in any doubt, just ask yourself whether the terminal growth rate of 8.7% is sustainable to warrant a current price of $0.38. This is assuming undiluted. If there are dilution involved in a later stage, the perpetuity growth will increase to 11.5%.

Maybe you will get an answer and give yourself that second chance to decide.