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K-Green Trust: 3Q 2010 results.

Monday, October 18, 2010

K-Green Trust announced the following today:

1. The profit after tax achieved for the period from date of listing on 29 June to 30 September 2010 was $4.6 million, 26.5% higher than forecast.

2. Profit after tax for the third quarter was $4.4 million.

3. EPS for the period from date of listing to 30 September 2010 was 0.73 cents.

4. Free cash flow for the third quarter was $19.2 million.

5. Net asset value per unit as at 30 September 2010 was $1.15.

The strong set of numbers is encouraging. Read announcement here.

Related post:
K-Green Trust: Possibly stabilised.
K-Green Trust: A stable source of passive income.


Anonymous said...

It reported a quarterly net profit of S$4.4 million in 3Q 2010 and yet intends to pay out over $25 million in FY 2010 and a further S$50 million in FY 2011. Considering that it is currently operating a near 100% capacity and a further 10% return (unlikely) on a $100 million investment, can its earnings in FY 2011 foot its distribution bill ?

I guess the alternative will be to use its free cash-flow to fund its distributions. But such a scenario is akin to a Trust using its own equity to fund a dividend. Generally, such a capital structure can aptly be termed as a self-liquidating trust where its NAV trends towards 0 eventually. At the moment, the only business trust with such a structure is FSLT and its NAV has fallen dramatically over the past few years as it seeks to pay out more than it earns.

Naturally, the above points are meaningless if KGT is planning (and capable) of raising its earning in excess of S$50 million annually.

Cheers :)

AK71 said...

Hi Nick,

Thanks for your insights. It would be interesting to see how things unfold here.

Anonymous said...

I think that sometime ago, I read something similar about shipping trust too. The self liquidating trust, which does not make sense for me.

Anyway, a friend in the shipping business warns me to stay clear of shipping trust. The reasons explained to me, was beyond my grasp at that time.


AK71 said...

Hi SnOOpy88,

You might want to read this post then:

FSL Trust: Where to from here?

Might be easier to digest. ;)

Anonymous said...

Hello SnOOpy88,

A self-liquidating trust is a business trust which pays out more than it earns by distributing all of its cash-flow to its unit-holders. This means that the dividend represents both the operating profits AND a return of capital.

This can be illustrated in the following example -

Daily Revenue: $1.00
Depreciation: $0.50
Net Profit: $0.50
Distribution: $1.00

Trust A owns $10 worth of assets which yields $1 cash-flow per day. The asset has a life-span of 20 days. If Trust A paid out $1 dividend per day, by Day 20, its NAV will have shrunk to 0 since the asset has depreciated completely. This means that whoever has bought Trust A would have seen his share price fall to 0 though the distributions throughout the days would have given him a decent profit.

The problem arises when people start to equate current DPU as a perpetual real yield.

Lets look at Trust B which operates similar asset -

Daily Revenue: $1
Depreciation: $0.50
Net Profit: $0.50
Distribution: $0.50

As we can see here, Trust B pays out ONLY its net earnings. It retains income due from depreciation and keeps it within the Trust for asset renewal. By Day 20, the Trust asset would have been fully depreciated, however it would have a cash-pile of $10 and can acquire another similar asset. In this case here, Trust B's distribution yield is perpetual and truly sustainable.

Currently, there is trend for business trust to operate in this capital structure in order to provide a yield + growth story to its unit-holders. Lets call this hypothetical entity Trust C -

Daily Revenue: $1
Depreciation: $0.50
Net Profit: $0.50
Distribution: $0.25

Trust C operates similar set of assets but only chooses to pay out 50% of its NET Earnings to unit-holders regularly. The Trust not only retains income due from depreciation for asset renewal but it also retains a portion of its earnings for asset GROWTH. By Day 20, it would have sufficient funds to renew its assets and a further $5 of retained earnings available to purchase new assets. This translates to an impressive 50% growth in NAV !

Naturally, such a Trust will have a higher margin of safety since there is a huge buffer between its operating cash-flow and distributions hence a slight dip in revenue will not impact its distributions unlike Trust A.

With regards to shipping trust or any business trust that owns depreciating assets (ie BOT plants, aircraft, railway leases etc), it is important to understand which capital structure the Trust is using. Trust A may not necessarily be a terrible Trust since it still allows the unit-holder to make a profit. However, if Trust A and Trust C have similar yields, it is obvious which one is a better buy (in terms of cap structure). Price matters here.

At the moment, for local shipping trust, PST and RMT is using Trust C model. Naturally, this doesn't make them a better business trust to invest structure is just one set of criteria to look out for !!!

Disclaimer: This represents my own views alone. Do your own research. Vested in a few biz trust including ship trust.

Hope this helps !

Cheers :)

AK71 said...

Hi Nick,

Thanks for this very enlightening comment. You do not disappoint. ;)

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