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CapitaMalls Asia: Farewell.

Saturday, May 3, 2014

I have filled the form in acceptance of the voluntary conditional cash offer for CapitaMalls Asia.

Although there are arguments that the offer price is unfair and although I can understand the arguments, I feel that there is a great degree of subjectivity too. Much is relative.

Just like how we compare an investment with another to see how it could be undervalued or overvalued, we could also compare an investment with itself in the past to see how its value has changed over time.


CapitaLand’s offer works out to about 1.2x CapitaMalls Asia’s book value now which is cheaper than the 1.5x book value when it listed in 2009. If we want 1.5x book value today, the price is closer to $2.70 a share.

So, for someone who bought into CapitaMalls Asia at the IPO price of $2.12 a share, obviously, the voluntary conditional cash offer of $2.22 a share leaves a bad taste in the mouth. However, for someone who bought at under $1.20 a share during the lows in late 2011 which was at a 20% discount to the NAV/share back then, $2.22 is probably a sweet enough exit price.

I think it is a fair enough offer and I explained why in an earlier blog post:

"The NAV/share is $1.84. So, this offer is a 20% premium to book value. NAV grew 10% year on year. So, being paid $2.22 a share, it is like getting paid in advance for growth that is likely to happen in the next couple of years."

We might want to remember what Warren Buffett thinks of IPOs. If you cannot remember, go to the earlier blog post I mentioned above: CapitaMalls Asia: Being offered $2.22 a share.

Better to wait for a price that is so attractive that even a mediocre sale gives good results.

The Amazing Spider-Man 2!

Friday, May 2, 2014

My broker has done it again!





Also, I got a free dinner, a free tub of pop corn and a bottle of Pepsi! Happy!




Two thumbs up!

Related post:
A movie treat from my stock broker.

First REIT: Reply from the management.

Thursday, May 1, 2014

A reader, Gregg, first shared his concerns regarding Sarang Hospital in First REIT's portfolio here in the comments section: Gregg's comment.

Sarang Hospital

Another reader wrote in with a list of questions for the REIT's management and shared these with me in an email. Here is the email with the replies from the management in red.

1. Noted that there is impairment provided in subsidiary of S$8,136,000 in the statement of total return. Could you advise me the reason of this impairment being provided and which subsidiary? Understand usually DCF was prepared to determine whether impairment is necessary. Since the impairment is being provided, does that means that the present value of the future cash flow is lower than the carrying amount of the investment?
 
We have made some provisions for impairment to our investment in South Korea, Sarang Hospital.
This S$8.1m is the impairment provided at Trust level for Kalmore Investments Pte Ltd, the holding company of Kalmore (Korea) Limited which owned Sarang Hospital. 
 
2. Under note 9 of the financial statements, there is deferred tax income recognised relating to changes in fair value of investment properties of S$11,667,000 despite the fact that there is increase in fair value of investment properties of S$61,334,000 (net) under note 12. Could you advise which property does the S$11m relating to? 
 
The write back of the deferred tax relates to the Indonesia properties mainly due to lower building reinstatement values as provided by the independent valuers, as compared to the net book value of the properties.
 
3. In note 14 of the financial statements, an impairment allowance is provided of S$2.165 million. Please advise which property it is related to and what are the Trust's action to recover this debt. Noted that there was also provision made in prior year of S$547k, is it relating to the same debtor? 
 
The impairment allowance of S$2.165 million was made for Sarang Hospital.  We have taken legal actions in the past two years to recover the debt from the vendor.
 
There is no provision of S$547K make in the prior year however the provision of S$567K was made for amount due (intercompany balance) from Kalmore Investment Pte Ltd (Subsidiary of First REIT) at Trust Level in FY2013.
 
4. Noted that the fair value of Sarang Hospital decreased to S$6.3m compared to purchase price of S$13m. Please advise the reason of 50% decrease in fair value. 
 
·         As the Vendor and Guarantor for the Master Lease Agreement encountered unforeseen financial difficulties, he was unable to fulfill his contracted rental obligation.
 
·         Hence, through the Valuer’s (CBRE) independent assessment and judgement, it was more appropriate to value Sarang Hospital on a “market rental basis”, ignoring the contracted rental in the Master Lease Agreement which was guaranteed by the Vendor.
 
·         Due to the lack of similar comparables in the market, the Valuer has adopted a “proxy approach” to determine the market rent. Apart from the Valuer’s investigations into rentals achieved with comparable properties and within the broader market, the Valuer has relied on anecdotal evidence which include their discussions with active brokers, investment and fund managers as well as fund investors.
 
·         They have also considered the relativity of asset class pricing. This includes the relativity of the healthcare real estate sector against other comparable markets, and the relativity of the healthcare real estate sector against other asset classes within the relevant market.
 

I suppose that the curious decision of buying a lone property in South Korea has turned out to be a bad one. Fortunately, it should not have a big negative impact on the REIT as a whole.

Related post:
First REIT: Purchase in South Korea.
(Dated 9 July 2011.)

Buying an apartment: Considerations for first timers (UPDATED).

Wednesday, April 30, 2014

A reader recently asked me if I would blog about buying an apartment for first timers in Singapore. 

I thought of this before but decided that I am not a good candidate for this topic because for most people in Singapore, their first apartment would be from HDB and I don't have any experience in this area.

However, I have blogged about buying real estate in Singapore before and quite a few times too. 





So, in case you are thinking of buying an apartment either for self stay or for investment, you might want to consider the following points:

1. To rent or to buy?

In some countries, there is a strong culture of renting. 

This is usually when buying a home is considered too expensive. 

This is the case in places like Japan, Taipei and Hong Kong, for examples. In a report, it was stated that more young people in London prefer to be renters in recent years.

Does renting make more sense in Singapore now as well with sky high prices? 


Well, according to the "Rule of 15", it could make sense anywhere in the world. 

In a nutshell,

"Rule of 15" says that if we could buy a home at a price that is 15 times or less the annual rent a similar property would fetch in the area, it makes more sense to buy than to rent.


Personally, I prefer to own the apartment I stay in but I can see how renting could make sense especially if prices of homes are sky high. 




2. HDB flats

Of course, as Singaporeans, we are lucky because we have good quality public housing. 

It is reasonable to assume that for most Singaporeans, their first apartment will be from the HDB. 

Of course, there has been and will always be debate on whether HDB flats are priced fairly but unless we want to move to Johor, we have to accept that HDB flats are the most affordable housing choice for most Singaporeans. 

Using the "Rule of 15" will help us stay grounded and avoid the atas DBSS which were going for as much as $888,000 at one time, for example. 

(Thank goodness, DBSS has been thrown out together with MBT.)

Although we could choose a housing loan with a duration that terminates at age 65 and I am assuming that most people need a loan to buy their first apartment, I think we should aim to keep the cost of borrowing down. 

This should become a more important consideration in an environment where interest rates are more likely to increase. 






3. Condominiums

Of course, there will always be people who would prefer to stay in private housing and anecdotal evidence shows that the numbers are probably larger than what we might think. 

If we think that HDB flats are expensive real estate, then, condominiums in Singapore are simply too extravagant. 

A new 5 room HDB flat in CCK costs about $300.00 per square foot. 

An executive condominium in CCK will cost at least 2.5x that amount while a 99 years leasehold private condominium in CCK will cost at least 4x that amount.

So, for those who want condo living and if they qualify, buying a new executive condominium seems to provide a margin of safety compared to buying a new 99 years leasehold private condominium.


After 10 years of occupation, executive condominiums will attain full private condominium status.







Remember, condo living is not a need. It is a want.

Consider carefully whether we can really afford it, which is an objective exercise, and consider carefully if it provides value for money, which of course can be quite subjective. 

It would be utter misery if we were to become a slave to our home as we sweat to service the loan instead of enjoying our home with peace of mind.

"If to stay in a condominium, we are forced to live like paupers, the price is too high."


MAS has a good page on "Buying a Home":
http://www.mas.gov.sg/moneysense/life-events/buying-a-home.aspx







If you are going to buy your first apartment soon, you might want to bear these in mind as you think of the options available. 

You might also want to read the related posts below which this blog draws from.

Buying an apartment is probably the single biggest financial transaction for most people. 

Don't be swept away by emotions.

Staying grounded will help people to keep their finances healthy and, also, their homes.




Related posts:
1. To rent or to buy: Rule of 15.
2. Slaving to stay in a condominium.

QAF Limited: Rising 5c to 93c a share.

Tuesday, April 29, 2014

I have had a long position in QAF for a while now and I have received a few rounds of dividends. Based on my entry prices, the dividend yield is more than 7%.

I like to think that the dividends received help to pay for some of my groceries like Gardenia wholemeal bread, Cowhead organic rolled oats and the occasional box of Farmland hash browns.

Today, QAF's share price rose by 5c. The counter is still trading CD for a DPS of 4c. I believe the counter will go XD in the first few days of May which is soon.

Technically, could share price go higher to close the gap at 95c or test the highs of 12 months ago at $1.05? It could, of course. There is almost no accounting for prices and my bowling ball agrees with me on this one.


Fundamentally, going through the annual report, although revenue improved year on year by some 4%, costs and expenses went up by 5%. EPS actually fell a bigger 15.2% from 6.6c to 5.6c, year on year. A big part of this was because of provision made for an unrealised forex loss of $5.4 million due to a much weaker A$ against the S$. Otherwise, EPS would have fallen by a smaller magnitude to 6.3c.

The other reason for a lower EPS is that the number of shares in issue increased by some 4.2%. Most of the new shares are from the QAF Scrip Dividend Scheme (SDS) while 6% of the new shares were share options exercised by employees at $0.536 per share.

There are 3,975,000 more options yet to be exercised by employees but these remaining options if exercised now will form less than 1% of the total shares in issue. So, any further dilution because of this is likely to be negligible. Whether there will be more shares issued because of SDS is harder to say.


Quite obviously, to a big degree, whether EPS will improve or not will depend on the strength of the A$. Assuming that the weak A$ persists this year and everything else remains equal, with a full year dividend payout of 5c per share and an EPS of 5.6c, it means that QAF now has a dividend payout ratio of about 92.9% which leaves very little by way of retained earnings.

As a reflection of difficult conditions that QAF faced, NAV per share also fell, year on year, from 74.8c to 72.6c at the end of 2013.

Buying at 93c a share means buying at a PE ratio of 16.6x and a 28% premium to NAV. Unless the A$ strengthens once more, QAF's earnings will have to improve quite dramatically through other means to justify a share price of 93c.

A few days ago, QAF reported stronger 1Q 2014 results. Now, are these numbers what we need to justify a share price of 93c?

1Q EPS improved from 2.2c to 2.3c while NAV/share improved from 72.6c to 75.6c, year on year. Although sales improved in Australia and Malaysia, their currencies' relative weakness means that results aren't as spectacular in S$ terms. Will the stronger results be repeated in the next three quarters of 2014?

If the stronger 1Q 2014 results are replicable for the whole year, then, we could be looking at a full year EPS of 9.2c and a NAV/share of 84.6c. This would make 93c a share inexpensive.

To buy or not to buy? Well, call me kiasu but if I believe that the NAV/share could be 84.6c by end of 2014, I would want to buy closer to that price, give or take a couple of bids. I rather wait to buy at a price I am more comfortable with than to chase after a rising share price.

See: 1Q 2014 results.

Relates post:
Supporting my companies and getting paid.

Yummy yum yum ($0.30) lunch made with love!

Last night, I went shopping with my mom. In NTUC Fairprice's dried goods section, I saw a pack of green beans. Very nice looking beans too. Price: $2.25.

I said to my mom that it has been a while since I had green bean soup that she makes. So, she offered to cook for me and I could bring it to work for lunch today.



That packet of green beans made 10 bowls of green bean soup. Each bowl is about 450 ml in volume. So, my lunch today costs $0.30, maybe. Why a few cents more? Must include cost of sugar and gas, I guess. LOL.

My mom would usually add glutinous rice and Gula Melaka but I have a preference for plainer staples in the last few years. Imagine I actually find plain porridge yummy. So, this is just green bean, water and very little sugar.

Thanks, mom!

Related post:
Yummy yum yum ($1.10) lunch.

Hock Lian Seng: Won a $221.8 million contract.

Monday, April 28, 2014

Despite a major contract win amounting to $221.8 million recently, Hock Lian Seng has not managed excite Mr. Market. Add this recent win to the $105.5 million win in February, Hock Lian Seng now has a very healthy order book.

If I were to hazard a guess, I would say that the lukewarm reception by Mr. Market stems from concerns about Hock Lian Seng's JV condominium development with King Wan and TA Corp, The Skywoods, which has seen a very slow take up rate. From what I know, it is less than 20% sold and it has been half a year since it was launched.

With the recent action by CapitaLand to implement a 15% discount on prices for its hard to sell Sky Habitat in Bishan, it is possible that more developers with hard to sell condominiums for various reasons might follow suit.

Analysts have estimated that The Skywoods has an average breakeven price of some $1,100 per square foot. Hock Lian Seng et. al. reduced the launch price to an average of $1,300 per square foot in September 2013, taking into consideration the more difficult conditions. So, the margin is less than 20%.



Source: www.stproperty.sg

However, given that things could get worse, prices could be dropped again. If it should be a 15% drop like what happened at Sky Habitat, then, average price falls to $1,105 per square foot. This is at break even price which means that Hock Lian Seng would spend a few years being busy on the project for nothing. In my opinion, this is an optimistic scenario and I hope that it would not get any worse than this.

So, if we think of The Skywoods as a zero contributor but, at the same time, being able to cover its own development cost (i.e. able to break even), then, we just have to focus on the rest of the business and see if Hock Lian Seng is still a good investment.

With the recent big contract wins, the civil engineering segment now has earnings visibility till 2020.  I have said a few times before that Hock Lian Seng, like Yongnam, is a natural beneficiary of the increased spending by our country on infrastructure development till 2030. So, more wins are likely in future. A stronger order book over time will overshadow Mr. Market's concerns about The Skywoods, perhaps.

Hock Lian Seng also has two development industrial properties which are mostly sold and these are due to obtain their TOPs sometime in late 2014 and early 2015. In the latest annual report, it has been stated that these will contribute significantly to Hock Lian Seng's results then.

The Skywoods is the burr in the side for Hock Lian Seng but even with a 15% reduction in asking prices, it could turn out to be a non-issue. Hock Lian Seng's business is more than just The Skywoods.

EPS, which has been declining, is likely to improve again with a healthier order book and with the obtaining of TOPs for its two development industrial properties in the next 12 months. Although a special dividend could be declared then, I would be quite happy if the conservative management continues to pay a dividend of 1.8c to 2.0c a share, which I believe is sustainable. NTA per share could increase by another 3c or so which would bump NTA per share to above 30c.

Hock Lian Seng is a sound investment for income although not a very exciting one for growth. For me, it has been a good investment so far and looks like a reasonably good investment for the future. The last time I bought more was in February this year at 25.5c a share. If share price should decline by 10% or more upon the counter going XD, I would probably add to my long position.

A 7% dividend yield? An investment that is likely to grow to be more valuable in future as NTA per share grows? Sounds good to me.

Related post:
Hock Lian Seng: DPS of 1.8c.

FSL Trust: An Asset Play with 80% discount to NAV?

Sunday, April 27, 2014

FSL Trust was an investment in my portfolio that I considered to be a mistake and I blogged about it a few times before. I collected quarterly dividends when I was vested and I also made some money by using technical analysis to trade the stock but, overall, the investment performed badly.

However, always bearing in mind what Peter Lynch said, I looked at FSL Trust again as its unit price plunged to about 6c a unit before recovering to about 10c recently after its trading suspension was lifted. All investments are good at the right prices. So, the question is whether FSL Trust is now at the right price.

Going through the latest annual report with numbers correct as of 31 Dec 2013, there seems to be plenty of optimism with a dose of caution on the part of the management. They took on more impairment to more accurately reflect the values of the assets held by FSL Trust and they also bought units in the open market as the price plunged, believing that the future of the Trust is now brighter.




Looking at the numbers, however, I believe that FSL Trust, at the moment, is attractive only as an Asset Play. With a NAV/unit of US$0.41 and a unit price of about S$0.10, it is trading at more than 80% discount to valuation. However, we have to bear in mind that ships are depreciating assets. So, their values have been and will continue reducing.



Click to enlarge.


When Peter Lynch invested in Asset Plays, he asked:

1. How much debt is there? This is important because creditors are first in line.

2. Is the company taking on new debt, making the assets less valuable?

3. Is there a raider in the wings to help shareholders reap the benefits of the assets?




To address the questions:

FSL Trust's NAV/unit of US$0.41 suggests that if the ships were to be sold at 20% discount to their book values now, after paying off all debts, we could see S$0.25/unit distributed to unit holders. This is a huge 150% premium to current unit price.

FSL Trust is not taking on new debt. In fact, it has been paying down its debt.

In recent months, we have seen some analyses on how the shipping cycle could be bottoming although conditions are still difficult. If these analyses are correct, then, could there be a corporate raider or two who might be eyeing a possible Asset Play like FSL Trust?


With revenue already in decline and with more charters expiring, possibly not to be renewed, FSL Trust is unattractive as an investment for income at the moment or even in the next 12 to 24 months.




Even if FSL Trust were to resume a quarterly distribution of US$0.001, at S$0.10 a unit, we will get a distribution yield of about 5% only. For an investment with assets depreciating at about 5% per annum and with useful life of 25 years when newly acquired, a distribution yield of 5% per annum is sorely inadequate.

Without any improvement or deterioration in revenue, FSL Trust will take about 16 years to pay off the bank loans. 16 years is a long time and given the relatively short useful life of ships, as income generating assets, they would be more or less spent by then.

Of course, one could argue that it is unrealistic to assume zero improvement in economic conditions in that same period. Indeed, FSL Trust could become a compelling investment for income again if its revenue were to improve significantly.

To continue, at the end of the hypothetical 16 years, taking into consideration depreciation and if we are somewhat conservative, FSL Trust's portfolio of assets could still give us a NAV/unit of US$0.20. So, if no corporate raider came along, for someone who decided to invest in FSL Trust at 10c a unit today, he could possibly see a capital gain of 150%, all else remaining equal, if the ships were to be sold away at book value then. Is this realistic?

This leads us to another question we have to answer and that is how realistic are the valuations of the assets? FSL Trust has already taken on more impairment but will there be more to come? More impairment could happen if shipping rates were to decline again. Experts are of the view that this is unlikely to happen as the global economy improves ever so slowly.




For investors for income, FSL Trust is a rather poor choice now and in the near future. As an Asset Play, however, it could be rewarding. However, we wouldn't know whether the unit price will reflect more closely the value of the underlying assets and, if it should happen, when.

Remember that the assets are depreciating in nature. So, the longer we hold, the lower their values. As I would like to be compensated adequately while I wait, I will need a much higher distribution yield than 5% from FSL Trust before considering re-initiating a long position, all else remaining equal. What about 10% which was what Rickmers Maritime Trust offered a year ago during its 1 for 1 rights issue, all else remaining equal?

Bearing in mind that all else will not remain equal and that things could get worse with expiring charters, investors attracted to FSL Trust as an Asset Play should demand an even higher distribution yield. Therefore, without any chance of revenue improving in the near future, as an Asset Play, FSL Trust will become attractive only at a unit price that is much lower than what it is today.




Suggested reading:
"One Up On Wall Street"
by Peter Lynch.
The last I checked, they have 7 pre-owned copies left at US$6.98 each. Free shipping worldwide.

Related posts:
1. Rickmers Maritime Trust: 1 for 1 Rights Issue.
2. FSL Trust: Sold some at 48c.
3. FSL Trust: Reduced DPU to US 0.10c.


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