FCOT, CCT and K-REIT.

I got a SMS from the blog master of Time to Huat as I was on my way home. FCOT's volume surged as price action formed at nice white candle, closing at 15.5c, overcoming a many times tested resistance at 15c.

Buy signal seen on the MACD histogram, higher low formed on the MFI, OBV spiked and RSI rose into overbought territory. Momentum is positive, demand is strong, accumulation is strong and buying momentum is positive but it could be overdone.

Any reason for the optimism in FCOT? I did not see any announcement by the management which could have resulted in such an upmove in price today. Should we buy some? Could it go higher in price?  From a technical perspective, it does look promising.  Volume is, after all, the fuel that drives rallies and today's volume was impressive.

Let us look at the fundmentals:

FCOT's NAV/unit stands at 26c.  If all the CPPUs were converted, NAV/unit would be 25c. So, at a price of 15.5c, FCOT's units are trading at a 40% discount to NAV.  That's pretty steep.

Gross borrowings as a percentage of total assets (aka the gearing level) is at 40.4%. This is rather high and there is limited room to leverage up for any yield accretive purchases.  However, the 342,500,000 CPPUs have a conversion price of S$0.2369 per unit.  This would bring down its gearing level marginally and give FCOT more capital (S$81.138m) to fund yield accretive purchases in future in case all CPPUs were converted. 

The 3Q DPU was 0.25c. So, the annualised DPU should be about 1c. Based on today's closing price of 15.5c, the yield is 6.45%.  This is not very attractive if we were to compare to what we could get from AIMS AMP Capital Industrial REIT, for example.  Of course, these two REITs are in different real estate sectors.  Let us compare FCOT with CCT and K-REIT instead. 

CCT closed at $1.47 today. NAV as of 30 Jun 10 at $1.36. CCT is trading at a 8% premium to NAV. Gearing ratio is at 32.8%.  Plenty of room to leverage up for further yield accretive purchases. 1H DPU was 3.9c.  So, the annualised DPU should be about 7.8c.  This means a yield of 5.3% based on today's closing price. The yield might be lower than FCOT's but CCT has a much stronger balance sheet.

K-REIT closed at $1.31 today. NAV as of Jun 10 at $1.47. K-REIT is trading at an 11% discount to NAV. Gearing ratio is at 15.2%.  This is very attractive to me as it gives the REIT plenty of room to leverage up for potential yield accretive purchases. 1Q 2010 DPU at 1.33c.  Annualised DPU should be 5.32c which means a yield of only 4% based on the current price of $1.31.  K-REIT has, arguably, the strongest balance sheet amongst the three office property REITs discussed here.  The low yield might put off investors but its low gearing paves the way for future acquisitions which could bump up its DPU.

I have told my friends before that for me to buy more units in FCOT, it has to offer me a much higher yield. The much higher gearing and lower quality assets compared to CCT and K-REIT are justifications. There is also greater safety in CCT and K-REIT as their interest coverage ratio (ratio of year‐to‐date earnings before interest, tax, depreciation and amortisation to interest expense) are at 3.8x and 3.6x respectively while FCOT's ratio is at 2.74x.  There is little doubt that FCOT's fundamentals are the weakest of the three. So, naturally, a higher yield is necessary to compensate for higher risk.

See FCOT's presentation slides here.
See CCT's presentation slides here.
See K-REIT's presentation slides here.

Saizen REIT: Emphasis of matter.

Emphasis of Matter
 

Without qualifying our opinion, we draw attention to Note 1 of the financial statements. As at 30 June 2010, the Group has interest-bearing borrowings of JPY7.8 billion, which are due for repayment within the next 12 months from the balance sheet date, of which the Group expects
to repay JPY0.7 billion with cash generated from operating activities. The Group is currently in negotiations with financial institutions to refinance JPY7.1 billion of these borrowings, which are held by a subsidiary Yugen Kaisha Shintoku (“YK Shintoku”) and have been in default since November 2009. The Group has also implemented a plan to divest some properties of YK Shintoku to reduce the borrowing amount with approval from the lender.
 

In accordance with the loan agreement of YK Shintoku, the lender has the right to take control of YK Shintoku in the event of default. As at 30 June 2010, the net asset value of YK Shintoku amounts to JPY2.0 billion, which approximates 8.6% of the net assets of the Group.
 

The subsidiary’s ability to continue as a going concern is dependent on the successful outcome of these refinancing negotiations with financial institutions and support from the lender by not seeking foreclosure of the assets of the subsidiary within 12 months from the balance sheet date. These conditions indicate the existence of a material uncertainty, which may cast significant doubt on the subsidiary’s ability to continue as a going concern. If the subsidiary is unable to continue in operational existence for the foreseeable future, adjustments would have to be made to reflect the situation that its assets may need to be realised other than in the normal course of business and at amounts which could differ significantly from the amounts stated in the balance sheet. In addition, the subsidiary may have to provide for further liabilities which may arise. The Group’s financial statements do not include the adjustments that would result if the subsidiary was unable to continue as a going concern.

PricewaterhouseCoopers LLP
Public Accountants and Certified Public Accountants
Singapore, 22 September 2010

Saizen REIT's manager has reiterated that the loan of Yugen Kaisha Shintoku (“YK Shintoku”) is non-recourse loan and is not cross-collateralised, and there is also no cross-default in respect of the loans of the other subsidiaries of Saizen REIT. Given its non-recourse nature, the decrease in the net asset value of Saizen REIT and its subsidiaries (the “Group”), in the worst case scenario of a foreclosure of YK Shintoku, will be limited to the net asset value of YK Shintoku (which amounted to JPY 2.0 billion, or 8.6% of the Group’s net assets, as at 30 June 2010).

In some of my earlier blog posts, I looked at what would happen if YK Shintoku should suffer foreclosure.  

In one blog post, I mentioned: "If YK Shintoku were to suffer foreclosure, the nett effects would be a 22% decrease in nett property income, a 10% reduction in NAV and its gearing level would decline from the current 36.9% to 27.4%.  

"Based on the current number of units in issue, the DPU would reduce from 2c to 1.56c giving us a yield of 9.45%.  The NAV would reduce from 39c to 35c approximately.  With the proforma foreclosure gearing at 27.4%, Saizen REIT would emerge unscathed and, in my opinion, stronger in its balance sheets. So, if YK Shintoku goes through a foreclosure, Saizen REIT remains a great investment as it has high yield, a big discount to NAV and low gearing."

Related posts:
Saizen REIT: 3Q FY2010 Results.
Saizen REIT: Better than expected DPU.

Golden Agriculture: Unable to break out.

Golden Agriculture was unable to breakout of resistance at 60c which was presented by the resistance line of the symmetrical triangle identified some time ago. On 20 Sep, I mentioned that "the MFI and RSI are both bordering on overbought and OBV is flat. Technically, the picture is not strong."  Today, price closed at 57.5c which is the immediate support provided by the rising 50dMA and it is also a many times tested support.

What is consoling is that the decline is on the back of lower volume.  However, if 57.5c should give way, I expect the next support at 55c which is provided by the merged 100d and 200d MAs and the support line of the symmetrical triangle. The MACD has completed a bearish crossover with the signal line and price could move lower.

With the latest bad press that the Roundtable on Sustainable Palm Oil (RSPO), an industry body of planters, green groups and consumers, had written to Smart and Golden Agri censuring the firms for the breaches uncovered by an audit, the share price of Golden Agri could face downward pressure and a retest of support at 55c is probable.

Related post:
Golden Agriculture: Which way would it go?

Sustainable palm oil body censures Indonesia’s PT Smart
Thursday, 23 September 2010

© 2010 - The Edge Singapore

Hope this helps to refresh your "A" Level Economics!

The title of this blog post is exactly the same as the title of an email sent to me by a reader, Paul.  I like how it neatly encapsulates his good intention with a dash of cheekiness. I try not to take myself too seriously most of the time. Haha... I have reproduced his email with his permission:

Ways to Boost National Income

As we have learnt in basic economic theory, C+I+G+(X-M)=Y, I will now discuss issues which are restricting the major economies such as US and the EU to grow, and some of the policies which have been undertaken by them.

C stands for domestic consumption. In recessions, consumption is usually hit badly. As the consumers are busy deleveraging to pay off their debts, they cut down on their income elastic consumption which is normally the luxury goods.

I stands for investments, aka private sector. During recessions, there is a lack of incentives for investment by the private sector due to excess capacity therein. Furthermore, margins could thin due to lack of pricing power in times of recession. In addition, due to consumers deleveraging, there could be a lack of demand from consumers.

G stands for government spending. In normal recessions, a country's government is able to execute expansionary fiscal policies through spending in sectors such as infrastructure, education, health or military. These deficits could be financed by previous budget surpluses (which many of these big countries do not have), or borrowings through issuance of government bonds. Most countries adopt the issuance of government bonds approach to finance their government spending. However, as mentioned in an earlier post, governments in major economics like the UK, Japan and the USA have been incurring budget deficits for the past few years, which limit their ability to borrow more money. In the case of the US, the government debt is expected to double over the next decades, with majority of the debt caused by interest payment. The austerity program adopted by the major economies limit the governments' ability to prop up growth.

(X-M) is net export. One of the most basic ways to boost the (X-M) component is to have a weaker currency, which would make a country's exports relatively cheaper compared to other countries. Currently, governments worldwide are turning to this as a solution. Instead of focusing on productivity to boost exports, governments take the easy way out, by “manipulating” the strength of their currencies. For example, USA forced the revaluation of the Japanese Yen in 1985 to boost their exports. Currently, USA is trying to do the same to the Chinese RMB.

In this world, there is never a case of a balanced trade accounts, there will always be imbalances, some countries having surpluses, some having deficits. Trade account surpluses and deficits are not a problem in economic studies. But for political reasons, it has been a problem. Recently, Japan central bank also intervened in the FOREX market to weaken the yen. This has led to what is called "competitive devaluation", a race to the bottom, where countries will try to make their currencies relatively weaker to boost exports.

Another method to boost (X-M) is the implementation of trade barriers, which would again result in trade wars. Already, there are signs of protectionist measures in the USA through the “Buy Made in US” campaign. Trade wars would hamper global economic growth, especially those of emerging markets which are reliant on exports.

When there is a recession caused by a financial crisis, it takes longer than usual to recover due to the freeze in credit lines and financial system. Actually, US is doing comparatively better than the recovery from previous financial crisis led recession.

In the case of Singapore, we are fortunate enough to have a good public financial system. Any sales of Singapore assets such as land are being kept in the “treasury” under the care of the President and not the government. 50% of the returns from investments such as those from GICs are also channeled into this “treasury”.

Hence, when the Singapore government want to tap into this reserve in 2008 or 2009, it had to seek permission from the President. The budget surpluses which are usually stated by the government, do not include the increase in the reserve funds. Therefore, “short term pain, long term gain” has served Singapore well in saving for the rainy days and having the fiscal policies to help the economy. Most western economies do not have this privilege due to the asymmetrical nature of fiscal policies. Easy to cut taxes, hard to raise taxes, which sort of validate Singapore government's stand on retaining the GST even during the economic hard times.

Related post:
USA, a rock and a hard place: Paul opines.