Marco Polo Marine, Mermaid Maritime and Jaya Holdings.

Someone asked me recently why didn't I buy into Mermaid Maritime or Jaya Holdings which are in the same industry as Marco Polo Marine?

He suggested that I look stupid now that Marco Polo Marine's share price is still languishing while those of Mermaid Maritime and Jaya Holdings' have shot through the roof.

Well, like I always say, I don't have a working crystal ball, only a working bowling ball and I am not even a very good bowler. Sometimes, my bowling ball ends up in the gutter. OK, ok, frequently, my bowling ball ends up in the gutter. So embarrassing.

Anyway, if you had bought shares of Mermaid Maritime or Jaya Holdings' and made a bundle, congratulations. Celebrate! Always good to make money.

I have said that fundamentals look strong for the offshore and marine industry, supporting buoyant demand in the oil and gas industry. Prospects look good for the next couple of years at least.

I haven't studied Mermaid Maritime or Jaya Holdings in detail but with Mermaid Maritime now trading at about 23x earnings and Jaya Holding's stock price at a 5 year high, Mr. Market has to be very optimistic indeed.

For example, he must be expecting the earnings of the former to at least double in the next 12 months in order for a 23x PER to be reasonable now. Is this possible? I suppose anything is possible. What is the probability? Anyone?

There could be explosive growth in business in the future for both Mermaid Maritime and Jaya Holdings but I cannot tell if it is going to happen. So, I rather prefer to buy cheaply.

If I am able to buy a company's stock at a PER of 8x in the same industry which has earnings growth visibility over the next 18 to 24 months, isn't that a better deal? Well, I think so.

Now, which stock could this be?

Let me ask my bowling ball.

Related posts:
1. Marco Polo Marine: Exciting times ahead.
2. When to BUY, HOLD or SELL?

OUE C-REIT.

OUE Limited is spinning off OUE Bayfront in Singapore and Lippo Plaza in Shanghai into a REIT. Seems like OUE Limited is actively recycling capital and trying to catch whatever remaining interest investors might have in a REIT IPO. Just barely half a year ago, they listed OUE Hospitality Trust and I blogged about that here.

OUE C-REIT is the name of the latest offer. It will be priced at 80c a unit and will offer a distribution yield of 6.8% or a DPU of about 5.44c.

I believe that this IPO is a plus for OUE Limited shareholders just like the listing of SPH REIT was good for SPH shareholders. However, I don't think OUE C-REIT is attractive as an investment for the same reason that I thought SPH REIT was not attractive compared to SPH as an investment. You might be interested in that blog post. Read it: here.

I like the fact that OUE Limited has given a commitment to support the REIT by offering assets at a discount to valuation in future. This is something that the Lippo Group has done for LMIR and First REIT as well. After all, it is the same family that is in control of OUE Limited. Yes, OUE Limited is a 55% owned subsidiary of the Lippo Group.

I also like the fact that OUE Limited will retain a 45 to 50% stake in OUE C-REIT which will see their interests more aligned with those of minority unit holders in the REIT since any action taken which might hurt minority unit holders will hurt the sponsor, OUE Limited, most.

Having said this, we have to remember that the sponsor would have reaped most of the benefits from the IPO and the higher distribution yield is a result of income support given by the sponsor. If there were no such support, the distribution yield is actually 5.56%, almost 20% lower.

Over the next couple of years, if the REIT manager is able to fill up all the vacant space in the two initial properties and achieve positive rental reversions in re-leasing, the REIT could deliver a yield of 6.8% without any support.

However, with interest rates set to increase, we could see a heavier debt burden come 2017 when most of the REIT's debt mature. This could wipe out any hope of maintaining the relatively attractive distribution yield now unless unit price of the REIT declined.

The REIT could grow DPU through accretive purchases from its sponsor, of course, but with gearing ratio relatively high at 41% or so now, it would probably have to resort to equity fund raising either in the form of a rights issue or private placements. Unit holders should be prepared for this.

All investments are good at the right price and to invest in OUE C-REIT for income, I would only be interested if it should offer a much higher distribution yield, given the considerations above.

Related posts:
1. A strategy to grow wealth and augment income.
2. 2013 full year income from S-REITs.