Saturday, February 8, 2014

Second Chance - Disposal of their Properties

On 6 Feb 2014, Second Properties Ltd has entered into an option agreement to dispose all their properties at a price of $175,376,412, which is somewhat a premium to the total market value of $134,773,500.


Rationale

The proposed disposal is expected to unlock equity value tied up in the real estate for a number of years and the company will use the proceeds for:

1.) 39% of the proceeds will be used to repay all the debts, bringing the gearing to 0.
2.) 6% of the proceeds will be used to distribute dividends to shareholders.
3.) 55% of the proceeds will be used to redeploy into business operations which can generate a higher return.

Thoughts

I thought it's a pretty good deal.

Based on the market value alone they probably would have made significant profits from it. Now with a premium proceeds, they have gained easily another $40 Million profits.

For investors, based on the 6% proceeds out of $175,376,412 and outstanding shares of 677,210,218, each share will be awarded $0.0155 which translates to about $15.5 per lot. It's pretty good I must say for investors. I hope I am calculating this correctly.

Based on this move, it does seem that the Group is feeling some heat on their properties and have decide to lock in their profits.

A friend of mine who are invested in the shares were quite disappointed that the company has decided to part with their golden nest. By giving up their properties business, revenue is expected to fall almost 28% and investors should expect quite a significant drop in their FY dividends.

Whether this move will be good for investors in the long run it is a guess to anyone. For Salleh the CEO, he certainly feels like a good deal for the company.





4 comments:

  1. B,

    Glass half-full or half-empty situation depending on the investor.

    I guess your friend may not have owned REITs during the meltdown in 2008:

    1) Rental income can go down or suffer defaults by tenants.

    2) Property assets can be downgraded.

    3) Debts, while great as leverage for higher DPUs during boom times, can be a dead weight when you can't roll-over without paying at higher interest rates during crunch time, or when you got a ratings downgrade...

    4) Cash can be a lot of fun in a deflationary environment when property prices are coming down...

    And that's perhaps why some business owners and CEOs earn more than us minority investors ;)

    Of course things will be different if the CEO disposed of the assets and the REITs go up in prices and DPUs go up and away for the benefit of the new REIT's shareholders!

    Not vested. Just sing song.

    Life is simple for minority investors. Like what management does, continue hold or buy more.

    Don't like, sell lor!

    LOL!

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    1. Hi Smol

      Yes you are right.

      Should property tanks and interest rates suddenly shoots up, we probably think the CEO as god who has make important brave decision and saviour of the shareholders money.

      Oh well, as a vested minority shareholder myself I guess I just keep it to see where it takes from here. I dont own much cash but I like company that owns cash to take advantage of any weakness in the market itself.

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  2. When I heard the news, I decided to sell it the next morning as I am invested in Second Chance mainly for income. I was surprised that that the deal was executed at $0.455 when I queue at $0.44.

    Mr Market seemed happy about the turn of events.

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    Replies
    1. Hi betta man

      The company has made premium profits in addition to its market value so I think its a positive news for investors. Aside from the 6% dividend that will be distributed, NAV for the company has also risen to 45 cents so I think that explains the behaviour for the stock price increase.

      I think short term the company might be thinking of where to use the proceeds that can maximize better returns than properties. The yield for properties is definitely low at current valuation price so it might not be that difficult to replicate.

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