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How to tell if a company is a potential takeover target?

Sometimes, we see companies being taken over and, many times, at a huge premium. Have you wondered how takeover targets are determined?

Well, quantitatively, one way to determine if a company has the potential to be a takeover target is to look at its Enterprise Multiple. This is a financial ratio that is arrived at by dividing Enterprise Value by EBITDA (earnings before interest, taxes, depreciation and amortisation).

So, to understand Enterprise Multiple, we have to understand Enterprise Value and EBITDA.

Enterprise Value is the company's market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents. This is a more accurate takeover valuation than just looking at the company's market capitalisation.

EBITDA is used to evaluate profitability of a company. EBIT looks at operating profits and EBITDA looks at earnings before any accounting or financing adjustments come into the picture.

Put Enterprise Value over EBITDA and we get a ratio. The lower the ratio, the more attractive the company is as a takeover target because a lower ratio suggests that the company's valuation is cheaper.

Of course, each industry has its own norms. So, a low Enterprise Multiple does not make a company a more attractive takeover target if every company in the industry has the same low ratio. If, however, a company has a much lower Enterprise Multiple than its peers, then, it is probably an attractive takeover target.

See the Enterprise Multiple of China Minzhong: here.
See the Enterprise Multiple of ASL Marine, Marco Polo Marine and Jaya Holdings: here.

The above links bring us to a service provided by "Infinancial Analytics" which I discovered quite by accident. I wish to draw readers' attention to the section on "About Market Valuation" at the bottom of the pages.

Although useful, EV/EBITDA is only one approach in valuing a company and shouldn't be the be all and end all.

Related posts:
1. China Minzhong: New substantial shareholder.
2. Marco Polo Marine: A neglected gem.
3. Recommended books for FA.

Inexpensive high class food ready in 5 minutes!

People sometimes have this impression that AK71 only eats oatmeal, barley, bread and cheap hawker fare. Well, AK71 consumes "atas" (high class) food also from time to time. Honest!

Today, AK71 decided to go Western because Western is atas. So, fish and chips? Atas or not? OK, ok. I know fish and chips was a working class food in Britain. Not very atas. How come it acquired an atas status in Asia?

What about sausages and mashed potato? In Britain, those who read "Bash Street Kids" would know, the dish is called "bangers and mash". This is a traditional British offering and also a common working class dish.

See? All these "atas" Western dishes are actually not so in Britain!

Anyway, I had a craving for sausages and mashed potato. So, I feigned ignorance and pretended it was atas.

At the supermarket, I picked a box which looked promising. The words "Vienna sausage" were printed on the box.

Vienna? Wasn't that place home to Mozart and Beethoven? Well, if the sausages are good enough for talented musicians, they are good enough for AK71!

Maybe, they will bring out the musician in me... You don't think so? Neither did I.

Ready to eat in 5 minutes and 30 seconds!

My good and rather old microwave oven. No fancy digital numbers and soft touch buttons.

Bon appetit!

Proudly produced in Singapore by Delifrance Singapore Pte Ltd. I wonder how much such a meal would cost in one of their restaurants?

How much did I pay for this? An "atas" $4.90. Burp...

Caution! The very health conscious type, please avoid.

More good deals? Check these out:

Cafes in Singapore up to 90% cheaper

LMIR: DPU improved 20%.

I am pleasantly surprised to see LMIR's DPU improving some 20% from 0.74c to 0.89c, quarter on quarter. At the price of 55c a unit, annualised, we are looking at a DPU of 3.56c and a distribution yield of 6.47%.

There is also a new face at LMIR. The REIT has a new CEO, Mr. Alvin Cheng. After many quarters of mediocre performance, I hope that having a new CEO would see the REIT doing better.

As it was revealed that the higher DPU was due to contributions from 6 acquisitions completed in 4Q 2012, any further increase in DPU, barring further acquisitions, will have to come from AEIs, improving occupancy and rental reversions. Efforts under the former CEO had been rather weak in these areas which led me to conclude LMIR was not run as well as it could have been.

I look forward to more good news with a new CEO at the helm of the REIT.

Related posts:
1. Unimpressive 4Q 2012.
2. Divested 42.5%.

See: LMIR 1Q 2013 results release.

Rickmers Maritime Trust: 1 for 1 Rights Issue.

I like rights issues when the money raised is used to fund yield accretive activities. Basically, it means I am investing more money for higher returns.

However, I don't like rights issues when the money raised is used to strengthen balance sheets. Returns, in all likelihood, would be watered down and investors end up immediately poorer.

In the last few years, I provided quite a few examples of rights issues, both good and bad, here in ASSI. Today, a full page ad and in full colour, no less, in The Business Times, encouraged unit holders to "SECURE YOUR 10% DPU YIELD" and "ACCEPT YOUR ENTITLEMENTS TODAY". This was an ad by Rickmers Maritime Trust (RMT).

It has been a long time since I followed developments at RMT. So, somewhat rusty, I went through the ad for details on the rights issue.

The main reason for the rights issue is to "repay bank loans and to strengthen balance sheet". OK, no need to read anymore. Flip the page.

Well, since it has been quite a while since I encountered a rights issue, curious me went on reading.

After the rights issue, RMT's gearing ratio will decline to 51.8%. So, then, is the balance sheet "strong" after the rights issue? It does not seem so. Gearing is still pretty high.

Since investors are probably in this for income, what about DPU? As this is a 1 for 1 rights issue, the number of units in issue will double. Since the proceeds are not used to fund yield accretive activities, DPU logically should reduce by half. However, in this case, it will stay unchanged at 0.6 US cent per quarter for FY2013 as RMT will double its income distribution to unit holders.

Therefore, it is not that the Trust is generating twice as much income as before, it is simply paying out twice as much as before with the same level of income!

Digging around a bit more, I discovered that a few of the charters will be expiring in 2014 and chances are for rates to reduce. Why? The charters are locked in at rates of above US$25,000 a day which is at least 3 times more than current spot rates for similar vessels!

This is why RMT only made mention of DPU maintaining at 0.6 US cent per quarter for FY2013. There is a chance and a high one that DPU will reduce in FY2014.

Thus, as an investment for income, beyond FY2013, RMT does not inspire much confidence. As an investment for growth, RMT simply does not make the cut.

If there is one good reason to invest in RMT, it is its NAV/unit of US$0.50 (S$0.60), post rights issue. Paying S$0.30 per unit, simplistically, investors will be buying container ships at half price! Unless they are corporate raiders, however, this fact is most probably only of academic interest to these investors.

So, to invest or not to invest? The answer lies in understanding our motivations and risk appetites as investors. Ask if the investment adequately compensates us for the risks we are being asked to undertake.

See research by S&P: here.

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Continuing interest in S-REITs.

We might have heard people saying "low can go lower and high can go higher" and if we have been an investor for a while, we would know that this is indeed the case.

S-REITs' performance in recent times has been nothing short of stellar. I will admit that I am turning cautious on S-REITs and I have said as much in an earlier blog post:

Never lose money in real estate and REITs?

In that blog post, I said I had turned cautious on S-REITs but I had not turned negative on them. This has not changed.

Conditions remain benign for S-REITs and as long as they stay this way, S-REITs will continue to be attractive to yield hungry investors. Money will always go to where it is treated best.

But while Singapore-listed REITs may seem expensive after a rally over the past year or so, they aren’t when compared with equities and bonds, says Tim Gibson, head of Asian property equities at Henderson Global Investors, which manages US$106.7 billion.

REITs are generally required to pay out much of the income from their underlying properties as dividends. Gibson says S-REITs offer the highest yields, both on an absolute basis and compared with the country’s five-year government bonds.

The yield on the FTSE ST REIT Index is around 5.17 percent, while the five-year Singapore bond yields around 0.5 percent and the Straits Times Index’s (STI) dividend yield is around 2.8 percent.

“As long as interest rates remain under control, S-REITs are in the sweet spot to continue their strong performance,” Gibson says.

Henderson’s new Global Property Income Fund will invest around 25 percent of its assets in Singapore-listed REITs.

Source: Dow Jones Newswire.

U.S. Investors are rediscovering their appetite for foreign real estate... putting more money into overseas funds that invest in offices, malls and apartment complexes than they have in six years.

New Jersey's pension fund recently invested US$500 million in a new US$4 billion real estate portfolio that Blackstone Group is raising for real estate investment in Asia.

Commercial real estate provides diversification away from stocks and bonds, and boost income while reducing overall risk because it acts differently than stocks and bonds over time.

Foreign REITs that own top-notch property in many parts of the world tend to be cheaper than those in the U.S.

REITs usually trade at premiums to the value of the real estate they own because investors are willing to pay for the liquidity that REITs offer, and because the value that many REIT management teams can create through acquisitions, developments and superior operations.

Source: Reuters.

Could S-REITs see their unit prices climbing higher? Well, if the reports are to be believed and if S-REITs are viewed as being more attractive investments than REITs in other countries, we could see their unit prices going to a level where distribution yields are much lower than they are now.

Some readers might remember that I mentioned Saizen REIT is relatively inexpensive compared to residential properties J-REITs and, not too long ago, Mr. Market woke up to this fact. Even so, the REIT, at 20c per unit, is still trading at a discount of about 20% to its NAV.

Although I reduced my overall investment in S-REITs last year as I moved resources to certain undervalued stocks, S-REITs remain a big part of my portfolio as I enjoy the relatively high distribution yields they generate for me.

Related posts:
1. Saizen REIT: A brief break through.
2. AIMS AMP Capital Industrial REIT: Making money.
3. 2012 full year passive income from S-REITs.