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Saizen REIT: To buy or not to buy?

Wednesday, May 23, 2012

Regular readers would know my whole story with Saizen REIT. I remain invested in the REIT for various reasons which I believe are still valid.



This blog post is to answer a question which I have received from readers, friends and family alike. Is it a good time to buy more units of Saizen REIT?

This is a question which I would avoid giving a direct answer to. There is a great deal of subjectivity.

However, I would present some numbers here and you decide.

The annualised DPU is some 1.22c based on the last payout. At 13.6c a unit, the distribution yield is some 8.97%. Sounds good?

However, bearing in mind that its warrants will expire on the 1st of next month, I expect the warrants to be fully exercised within these few days. The exercise price is 9c. This would increase the units in issue by some 13%.

So, everything being equal, it would be reasonable to expect the DPU and distribution yield to reduce somewhat. Revised DPU is about 1.08c which would give us a distribution yield of 7.94% based on 13.6c a unit. Still sounds good?

I would also like to throw in the possibility of the JPY weakening further. The lowest the JPY has been against the S$, I remember, was S$12.50 to JPY1,000. That was a few years ago. It is currently about S$15.80 to JPY1,000. This is already weaker than late last year when it was more than S$16.00 to JPY1,000. Assuming that the JPY weakens another 20% from current levels, I expect the DPU to be 0.864c which would give us a distribution yield of 6.35%. Still good enough?

Of course, the weakening of the JPY is very unlikely to happen overnight in such a large magnitude. Neither is this a guaranteed scenario although it is highly probable with the Japanese government keen on weakening its currency.

What I have done so far is to assume the worst case scenario, barring more natural disasters and an attack by Godzilla. What I have not done yet is to take into consideration what the management might do to bump up DPU in JPY terms.

With the warrants exercised, the gearing of Saizen REIT would drop to the low 20+%. The REIT would probably continue looking for yield accretive purchases. Gearing is expected to hit the optimum 40% in such an instance. It is estimated that DPU could increase some 30% then. Promising, isn't it? Remember that this remains guesswork on our part, however.

I have mentioned this before but it pays to be reminded also that Saizen REIT's loans are amortising in nature. This means that its debt burden would reduce in time. In fact, I made the observation before that if the REIT's loans were not amortising in nature, its DPU would be some 50% higher than it is now.

Now, you decide if Saizen REIT is a buy for you at 13.6c a unit.

Related post:
Saizen REIT: Acquisitions to increase DPU.

See Saizen REIT's May 2012 presentation: here.

22 comments:

Unknown said...

Buy slowly, Euro have lot to lose if they allow Greece to go. This is just hedge fund spreading rumour in the market to scare invester.
Good, since this sell down will provide us an opportunity to buy cheap.
I hope they really whack it down to sti 2000 will be even better.
but i dont think i see that, I see dow 14000 by Q4 , my guess. The real thing will come next year, when all in recession cannot pay up. That is the real trouble begin.
Good luck.

victor

Unknown said...

Hi AK
It would be irresponsible of me, to call buy slowly.So my earlier post is void. Why?
If really Greece defaulted, it is no small event,this one will definitely cause the whole world into something more serious than Lehman.This means we see low low px for stock for a long time. Not those for one to 2 years, but that of the great depression scenario.
Just wait till mkt hit bottom, when we see it is not going anywhere for a long period. That is the time to buy slowly.

May all be well

victor

Unknown said...

There was a site who claim countries which defaulted always return to great growth after default, and it give sample country like Argentina, Russia, and several other. This is wrong. Greece is different, because it is part of a bigger Europe. And we have it link to Spain and Italy which will follow if greece defaulted and whole Europe will be in deep recession. Contagion!!!domino , one after the other. And we haven't seen Eastern europe in the picture yet, They will be if Spain and Italy go.
i will Hold all buying for now.

victor

AK71 said...

Hi Victor,

Thanks for sharing your evolving views with us. :)

Ray said...

As if the Europe mess isn't enough, there are many (and it's gaining credibility) that believe Facebook is going to bring about DotCom Bubble v2.0

Zuckerburg selling 30million IIRC of his shares within days of IPO certainly is not going down well with investors at the moment.

AK71 said...

Hi Ray,

Is he even allowed to do that? Isn't there a moratorium period? Terrible.

Ray said...

Ya terrible. I thought there are regulations from SEC that stop him from doing so but apparently not.

http://www.latimes.com/business/technology/la-fi-tn-facebook-zuckerberg-shares-20120522,0,7382543.story

Anyway hope none of your readers here bought FB. I don't really believe their business is sustainable. but i'm not Warren Buffett so who cares what I think. LOL

AK71 said...

Hi Ray,

Well, even WB makes mistakes.

I don't invest in other markets. The Singapore stock market keeps me busy enough. ;p

Marco said...

Bought Saizen at 13.7, 13.6 & 13.5cents...

Do you have any idea on the issuance price of the Saizen warrants?

Howyuan said...

I refer to comment 3 by Victor, regarding his view on defaulted countries.

His examples cited are valid. But his point made on Greece is not clear, so i assume that he meant if Greece continues to remain as a user of the Euro even if she defaulted.

If that was indeed what he meant, then yes, Greece will not be able to return to great growth post defaulting.

However, Greece can experience great growth after she defaulted, if she reverted back to the Drachma. That means full control of fiscal and monetary policy. Of course the initial recovering period will be hard.

Euro is doomed from the start because each members has a common monetary policy, but varied fiscal policies.

Ray said...

Hi AK,

The Saizen presentation slides seem inaccessible now.
Anyway the price of Saizen is free-falling at the moment, any concerns with the business ?

JW said...

I'm still holding on to my Saizen.

I believe some are selling the mother shares to convert the warrants (which they probably received for free) at 9cents.

JW said...

Oops forgot to add. I'm expect a share consolidation within the very near future after the warrants expire.

Ray said...

I think Saizen is a falling knife now. Better not catch it. Wait till dust settle first. Today it has reach 0.127 range.

AK71 said...

Hi Marco,

I believe that the warrants which were free are to be exercised at 9c a piece.

AK71 said...

Hi Howyuan,

Yup, the eurozone is going to have a hard time trying to keep it all together.

I am relying on the wisdom of our elder statesman on this:

Mr. Lee Kuan Yew on the eurozone crisis.

AK71 said...

Hi Ray,

Yes, the link doesn't seem to be working now. Strange.

Anyway, if we are investing for income and not trading the counter, it is probably OK to buy in at prices which we feel we could get a satisfactory distribution yield.

As I divested most of my position last year as its unit price rebounded to test resistance at 15c, I bought some back today. ;)

AK71 said...

Hi JW,

I share your views. Sell the mother shares and pay 9c to convert the free warrants. An arbitrage opportunity.

Apart from the dilution of DPU by some 12%, I do not see any deterioration in the REIT's fundamentals in the current time frame. In fact, I see a stronger balance sheet ready to capitalise on yield accretive initiatives. :)

SnOOpy168 said...

thanks for the reminder AK.

I got some to avg my holdings.

Huat ah & good weekend.

AK71 said...

Hi SnOOpy168,

Two things I like: HUAT and good weekends! ;p

Marco said...

I will buy more at 12.5 cents...

AK71 said...

Hi Marco,

At that price, many would be buying, I am almost 100% sure. ;)

 
 
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