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Nil-paid rights and excess rights. (Case study: My strategy in IREIT's 45 for 100 rights issue.)

Friday, July 3, 2015

IREIT's 45 for 100 rights issue is priced at $0.468 per rights unit. Links to the full details of the rights issue have been provided at the end of this blog post. 

So, I will only blog about the more interesting bits and my strategy.





As I am investing for income, I am first and foremost interested in the DPU, post acquisition. It is important to note that the DPU hardly improves, post acquisition.

An important consideration in IREIT's case is the foreign exchange rate, specifically, between the EURO and the Singapore Dollar.

In my last blog post on IREIT in February this year, the exchange rate was 1 Euro to S$1.54. Now, it is 1 Euro to S$1.50. So, the Euro has weakened a lot from 1 Euro to about S$1.70 from the middle of 2014 when IREIT had its IPO.



Read the notes. Read the details in the announcement.


Back in February, I also said that to get an 8% distribution yield, the unit price had to be 75c.
The promised 8% yield based on the IPO price of 88c per unit was no longer possible.

Based on the understanding that the DPU would hardly improve post acquisition and that the Euro has weakened since the REIT's IPO last year, if we believe that 75c per unit now is what makes investing in IREIT worthwhile, then, the theoretical ex-rights price (TERP) has to be 66c or so.





For investors who got in at the IPO price of 88c and participating in the rights issue at $0.468 per rights unit, their TERP is 75.2c, not taking into consideration any successful excess rights application. 

They, most likely, would not get an 8% distribution yield even now.





For those who have yet to invest in IREIT, however, they could get a distribution yield in excess of 8% if they play their cards right. 

This is where I talk to myself about my strategy.

This rights issue is renounceable. This means that nil-paid rights will be traded in due course and there will always be people who cannot or will not take part in rights issues. 

They could sell their nil-paid rights.





If nil-paid rights in this case should be sold at a price of 19.5c or less a piece, buying them would give me a TERP of 66.3c or less when I exercise them by paying $0.468 per rights unit. This will give me a distribution yield which I find more acceptable and, perhaps, more sustainable.

For those who don't know, nil-paid rights are bought or sold in the stock market like regular stocks. 

We could sell our rights entitlement or we could buy from someone who is selling. These are nil-paid rights.









I could also buy some IREIT units while they are still trading cum rights (CR). The motivation is not to be entitled to the rights units as they will not do anything to improve distribution yield. 

The motivation is to be eligible to apply for excess rights.

Only eligible shareholders are allowed to apply for excess rights. Application can be made at ATMs of participating banks before the closing date.





Getting more excess rights will give me a higher distribution yield. This is, of course, due to the fact that excess rights will have the highest yield. 

The cost, in this case, is only $0.468 per rights unit. The yield is estimated at 11% or so.

Specifically, my strategy is to buy enough IREIT units so that the total number of units plus my entitled rights units will allow me to get more guaranteed excess rights units. 

Guaranteed? How so?





For example, buying 2100 units would entitle me to 945 rights units. 

Unitholders with odd lots will have priority to get excess rights units which means 955 excess rights units are in the bag in this example.





The average distribution yield in this example would work out to be approximately 8.3% if the 2100 units were bought at 82c a unit, assuming that excess rights application for anything more than what was required to round up odd lots failed to be successful.

Being opportunistic, with this strategy, IREIT makes a decent enough investment for income although a gearing level of 43.7% after all this is over suggests that this might not be the last time we see some fund raising activity from IREIT.

Full details of rights issue:

1. Announcement.
2. Presentation.

Related post:
IREIT: What is a more realistic yield?

Earlier examples of rights issues:

1. First REIT: A simple way to a double digit yield.
2. AIMS AMP Capital Industrial REIT: XR.

Starhub: A nibble at $3.85 a share.

Monday, June 29, 2015

Friends would remember that I looked at possibly investing in Starhub a couple of years ago but its high level of borrowings frightened me.

Of course, Starhub has chugged along quite nicely since then and it was only later that I discovered how its very predictable and strong cashflow was able to accommodate its high level of borrowings.

So, I have been waiting for a chance to get some since...

Starhub's stock price plunged today, hitting a price (of $3.70 a share) not seen since late 2012. The big movement downwards was unexpected, of course, although the charts show the 150% Fibo line to be at $3.70, a golden ratio and supposedly a strong support.




I was more expecting a slow drift downwards in price and thought I could, perhaps, buy if the share price hits the 200 week moving average (200W MA) which is currently at $3.87. This is a long term support and should be quite strong.

So, looking at the chart when its share price had already recovered from $3.70 to $3.85, I wondered what to do because breaking the 200W MA is a bearish signal.

The widening of the Bollinger Bands indicates increased volatility. The OBV shows selling pressure. The MACD is declining and shows no sign of a positive divergence. These are all on the weekly chart which suggests that continuing weakness in the longer term should not surprise us.

In the near term, however, share price could rebound as they sometimes do. In fact, the higher low on the MACD in the daily chart suggests that this is a distinct possibility. Such a big one day movement in price should have attracted short sellers and shorts have to be covered eventually.




In terms of fundamentals, it won't be wrong to say that Starhub has challenges. Like SingTel and M1, the other two local Telcos, Starhub must deal with loss of revenue from the more and more popular use of apps such as Whatsapp (please pardon me if I did not get the name right as I don't use this) instead of voice calls and SMS.

Fortunately, Starhub has Cable TV but that business has not been growing much recently. Anecdotal evidence shows that more people are watching free online streaming content. I do that too on my iPad. Japanese anime, remember?

Of course, now, the new threat is the introduction of a fourth Telco in Singapore and this is probably "da bomb". How badly would Starhub's business be affected? I don't know. Would Starhub's ability to pay 20c in dividend per share (DPS) annually be affected? I don't know.

I do know that paying 20c per share annually in dividend means distributing almost all of its earnings to shareholders. So, if its business should suffer a decline in earnings per share (EPS) and this is a real possibility, we could see a reduction in DPS.




I could get a 5% dividend yield if I were to invest in SPH now. Of course, Starhub is not SPH. They are different animals but paying out almost all their earnings as dividends to shareholders make them similar in that respect. They could see earnings come under pressure for different reasons but that makes them similar too as the challenges are very real.

I would like to have some buffer in terms of dividend yield buying into SPH and Starhub because I am investing in them primarily for income and not growth. A more or less predictable 5% dividend yield might be attractive to me but to have a buffer means getting in with a higher yield which means a lower entry price.

Anyway, I decided to nibble at Starhub at $3.85 a share. That gives me a prospective dividend yield of 5.19% which provides a very thin cushion. This is really nothing to shout about and, definitely, I am not expecting to make a lot money with this entry price. From here on, I could, however, buy more if its stock should see more price weakness.

Related post:
How much to invest? Nibbles and gobbles.

Is it bad to receive regular dividends and to sit on cash?

Sunday, June 28, 2015

Many times, I have been asked what is the yield on my total portfolio. I have never bothered to answer the question for various reasons and because I don't ever answer such questions, I don't bother to find out what the answer might be.

I know more or less what are the dividend yields and distribution yields of my various investments in my portfolio but I have never really calculated what is the average yield.

A friend recently told me that the average yield of my total portfolio including cash must be much lower and he wondered if I was beating some kind of benchmark. I could see where the conversation was going and I gave a loud sigh.

I know there are some people who are like my friend, who are obsessed with measuring their performance and worried that, if they hold too much cash, they might under-perform the benchmark which in many instances is the STI. 

So, consequently, they are constantly on the lookout for assets to put money into in order to prevent their portfolio's performance from declining. It sounds stressful and I am stressed out just imagining this.




I am pretty simple minded when it comes to investments. I use some common sense and ask some questions which I think matter in that investment. If I am satisfied that I am not overpaying and the stock is likely to do pretty well in future, I buy some. Regular readers would know what I have been nibbling on in recent months.

Yes, some of the nibbles have been poorly timed but we can rarely buy at the lowest prices or sell at the highest prices. We can use some technical analysis to provide insights but if we did buy at the lowest or sell at the highest, we were lucky. I believe in holding on to investments that have good bones. Anyway, I sleep well at night because I "eat bread with ink slowly". Remember?

"When stocks are attractive, you buy them. Sure, they can go lower. I've bought stocks at $12 and went to $2, but then they later went to $30." Peter Lynch.


"I buy on the assumption that they could close the market the next day and not reopen it for five years." Warren Buffett

Frankly, if prices did not come down, I would not have nibbled at anything. I would most probably just be growing my war chest.

Why should there be an urgency to buy something just because cash is going to be a drag on the overall performance of our portfolio? 

Is the overall performance of our portfolio so crucial? 

It could be to some, I guess.




I told my friend I am probably about 70% to 80% invested. So, I have 20% to 30% in cash. I don't know the exact percentage because I don't measure but it is about there. My investments are generating income in excess of $100,000 a year for me. Again, how much is it exactly, I don't know. I will know at the end of the year.

Even if I were to retire from active employment and not have an earned income, I guess I would be quite comfortable living off just a portion of my passive income. The rest, I could invest with when opportunities present themselves. If there should be nothing I fancy, I would just continue to build my cash position. Even if my cash position should be 50% or more of my portfolio, it wouldn't bother me.

AK is the proverbial frog in a well. There are many things in this world AK doesn't understand but AK knows that he feels good when he has more cash in his bank accounts. 

I am not a professional fund manager who has to answer to unit holders who might ask, "Why are we paying you just to sit on so much cash?"




Well, I understand that it could be that my friend and others like him imagine themselves to be pseudo professional fund managers. I understand that but it doesn't mean that I have to be like that. I am just a regular retail investor.

I would like to end this blog post with something Charlie Munger said before but it is probably a bit overused in my blog by now. Hint: It has something to do with some character sitting on something. So, I will end with a couple of quotations from Peter Lynch instead:

"In this business, if you're good, you're right six times out of ten. You're never going to be right nine times out of ten."
"If you can't find any companies that you think are attractive, put your money in the bank until you discover some."


I am not a professional fund manager and thank goodness I am not or I might be kept busy answering calls from irate unit holders. 

"Whose money is it anyway?" 


(Oops, I think that sounded like a question from a member of the opposition in local politics. Getting a bit mixed up in my old age. Cham.)


Related posts:
1. How did AK create a 6 digits passive income?
2. How did STE married with kids retire at age 44?
3. 5 revelations from a regular retail investor.


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