ARA: A trading buy?

2,531.02/

-90.38/

-3.45%

2,531.02/

-90.38/

-3.45%

I remember reading an article recently in which Warren Buffet said he has his elephant gun ready and will scoop up undervalued companies if they should present themselves. With so much fear in the air and likely to get worse, we should do the same.

Do not feel fearful when there is so much fear in the air. Instead, get ready to load up on cheap stocks which, by the way, could get cheaper.

One company which I am eyeing is ARA Asset Management. By all accounts, this is a great company to invest in but at the right price, of course.

ARA is in a net cash position and has a net profit margin of 53.6% according to its 1H 2011 numbers! Yes, net margin, not gross! It also has a yearly dividend payout of 4.8c per share which seems sustainable.

NextInsight has two recent articles on ARA Asset Management. So, I shan't say more. Read: ARA Asset Management: resilient earnings, super high profit margins and steady dividends.

We have identified a good company to invest in. The question is what is a good price to buy at or when should we start buying?

On 23 Sep, I initiated a long position at $1.22 per share. Then, I said that although ARA is "a fundamentally sound company, its share price could weaken further from here. It might be a good idea to wait for the dust to settle before adding to my newly created long position." See blog post here.

On 26 Sep, I decided to add to my long position at $1.13 and these shares were divested on 29 Sep at $1.20 for a quick trade. Recognising that price could rebound before weakening again, the long position at $1.13 was more for a trade anyway. I was lucky it turned out nicely. See blog post here.

So, has the dust settled? It doesn't look like it. The MACD has continued its plunge deeper into negative territory as long black candles formed two days in a row on the backs of high volume. However, shares of ARA could be a trading buy. Why?

If we look at the Bollinger Bands and the MA Envelope, we will see that ARA's share price had in the past rebounded if it should break the lower limits. The rebounds tested and broke the 20dMA which acted as a weak resistance. The 50dMA then stopped the share price from moving higher. Could this happen again?

I added to my long position towards the end of the trading session today at $1.04, $1.035 and $1.03. If price should rebound to test resistance, I will offload these shares for a quick trade.  If price should continue to weaken, expect the next supports to be at 98c and 95c.

Looking at the weekly chart, it is clear that stronger support is at 89.5c. This is followed by 61.5c. If these supports should be tested, it will be some way to fall from the current level.

1H 2011 presentation slides here.

LMIR: Will I subscribe to the rights issue?

It is clear that my complaint about the proposed rights issue is that it is not distribution yield accretive. In fact, it seems to me that the distribution yield could suffer quite significantly, post rights issue.

If I were to subscribe to the rights issue, it would be with the believe that the management will acquire more malls which are NPI yield accretive in the not too distant future using only debt. With its improved debt headroom by then, it should not be a challenge to acquire malls with a total pricetag of around S$450m using only debt.

Assuming that the purchases would have similar or slightly higher NPI yields as the REIT's current portfolio, this could improve distribution yield some 30 to 40% based on current estimates (ok, my estimates). So, subscribing to the rights issue would be akin to a confidence vote for the management.

If we believe that the global economy is going into a recession and that European entities could be recalling funds from Asia to address their financial problems back home, it is reasonable to assume that unit price of LMIR could suffer somewhat.

As there is no compelling reason in the present to subscribe to the rights issue, we could sell the nil-paid rights when they start trading in the hope that we could buy more units in LMIR at a much lower price in the event of a sell down.

Indeed, for some, they could even sell their units in LMIR when the market opens tomorrow if they feel that the proposed rights issue is a bad deal and, hence, will have no part in it.

How will Mr. Market react to the proposed acquisitions and rights issue? It is anyone's guess.

Will I subscribe to the rights issue?

Unlike the earlier rights issues of AIMS AMP Capital Industrial REIT and First REIT, it is not a screaming buy.

Unlike the rights issues of CitySpring Infrastructure Trust, it is not raising funds to strengthen its balance sheet which means it is not a screaming sell.

Anyway, it is early days yet. I will stay rational and wait for more specifics, if any. I will see if there is more information forthcoming in the promised circular and at the EGM.

For readers who have the inclination, reading my past blog posts (and comments) on other rights issues might provide a window into my thought processes:

1. CitySpring Infrastructure Trust: Rights Issue.
2. First REIT: Rights Issue.
3. AIMS AMP Capital Industrial REIT: Rights Issue.

Related post:
LMIR: Proposed 1 for 1 rights issue.

Office S-REITs VS Industrial S-REITs (2).

I thought I should share some information which I have taken from CBRE's report in Q2 2011 as I have recently received questions from readers on REITs which derive income from office space rentals in Singapore.

For office space, it is expected that "vacancy levels rises (are) inevitable in the next 6 to 12 months. This is the result of increased levels of new supply coming on-stream in addition to second-hand space returning to the market.

"It is apparent the government has been seeking to bolster office supply to facilitate business expansion and to ensure that operating costs remains competitive vis-à-vis other regional cities. Notably, some 1.84 million sf (GFA) of commercial space could materialise from two newly listed parcels – Marina Bay and Paya Lebar. The quality, quantity and competitive cost of Singapore’s office space over other regional cities positions the city state to attract businesses. With global uncertainty lingering, the test is whether this will boost occupier demand and prove to be a winning formula.

"Looking at the office supply pipeline, approximately 8.4 million sf of space is to be completed from H2 2011 to 2015. The GLS sites awarded in Q2 2011 contributed about 10.0% (834,000 sf) of the total. Along with the confirmed conversion of the Market Street Carpark, a Q2 2011 number of landlords/developers are in the midst of repositioning older office buildings through redevelopment. We anticipate that more supply will emerge in due course with the focus on Core CBD."

Therefore, it is understandable why I am not very sanguine about the prospects of REITs such as Suntec REIT and CCT which are heavily exposed to office space rentals. I am instead more sanguine about industrial space rentals.

"Driven by the limited upcoming supply of hi-tech space in the next few years, monthly rent for hi-tech space rose to $2.75 psf in Q2 2011, up from $2.65 psf in the previous quarter.

"Despite the slowing economic growth, demand for factory and warehouse space remains healthy....

"Monthly rental for factories and warehouses rose during the quarter on the back of continued demand. In Q2 2011, the average monthly rents for factory units rose by $0.10 psf q-o-q to $1.85 psf and $1.50 psf for ground and upper floor units respectively. Meanwhile, the average monthly rent for warehouses also rose by $0.05 psf q-o-q to $1.70 psf for ground units and $1.40 psf for upper floor units.

"During the quarter, the capital values for 60-year leasehold strata-titled factory space increased by about 8.0% q-o-q to $312 psf for ground floor units and $230 psf for upper floor units. The capital values for freehold strata-titled warehouse space increased by a smaller 5.0% q-o-q to $471 psf and $412 psf for ground and upper floor units respectively.

"There is still demand for industrial space. Some companies are scouting for a larger space to consolidate their operations and at the same time expand. As such, we can expect some rental upside in the next half of the year."

I shan't say which industrial property S-REITs I like. I think it is easy enough to guess, is it not?

Read complete report here.

Related posts:
1. Industrial rent forecast strongest for Singapore.
2. Office S-REITs VS Industrial S-REITs.

LMIR: Proposed 1 for 1 rights issue.

I read with great interest the 1 for 1 rights issue proposed by LMIR. As regular readers know, I much prefer rights issue to private share placements as the former allows all unitholders to take part in the enlarged capital base of the REIT.

This rights issue is to raise some S$337m to help fund the purchase of two malls in Indonesia: Pluit Village and Medan Fair.  Pluit Village is to be purchased from the REIT's sponsor while Medan Fair is from an independent third party.

Pluit Village
Consideration: S$234m
Occupancy: 78.1%
NPI yield: 10.8%

Medan Fair
Consideration: $154m
Occupancy: 91.2%
NPI yield: 7.4%

Total purchase consideration is S$388m.  The proposed 1 for 1 rights issue at 31c per unit will raise some S$337m. The balance required for the proposed purchases will be funded by internal resources or debt.

LMIR's current NPI yield is 7.5%.  So, its purchase of Pluit Village is NPI yield accretive while that of Medan Fair is not. However, as the former is of a much larger value, it more than compensates for the latter. In aggregate, the purchase of the two properties is NPI yield accretive.

Now, is this rights issue good for unitholders?

The annualised distribution per unit (DPU) is estimated at 4c per annum currently. At the current unit price of 54c, that is a distribution yield of 7.4%. Subscribing to the rights issue at 31c per unit will give us an average unit price of 42.5c per unit. The number of units in issue will double while back of the envelope calculations show distributable income will increase only approximately 40%.

Therefore, DPU is likely to decrease to 2.8c per annum which will give us a pro forma distribution yield of only 6.59% based on the post rights unit price of 42.5c. So, this rights issue is not a good idea for unitholders who are investing for income. In terms of distribution yield, it is regressive.

Even if the management were to improve the occupancy of Pluit Village from the current 78.1% to 90%, it would not really make a difference.

This rights issue could be good in the longer run as it will probably send the REIT's gearing level to under 10% which will give it more debt headroom for future growth. It is perfectly reasonable to then question, with already such low gearing level in the first instance, why the REIT has to resort to such a large rights issue for these proposed purchases?

I have always thought of LMIR as a bullet proof REIT, a stable passive income generator. However, I have also been unhappy with their hedging policy which to me seems to suggest a mediocre management. I hope this rights issue is not going to prove me right (pun unintended).

Read announcement here.

Related post:
LMIR: Thoughts on partial divestment.