Yongnam: DPS of 0.6c.

With plans to double the MRT lines in Singapore by 2030 and with more public sector construction projects, investing in Yongnam seemed like a natural choice and I have blogged about this many times over the last couple of years.

Unfortunately, last year was a very bad year for Yongnam and they presented a more or less expected set of nightmarish numbers for FY 2013. To be fair, the management already warned way ahead of time that numbers are likely to be bad. So, no one was caught unaware and Mr. Market seemed to have taken the results in his stride. Yongnam did not see any big plunge in share price.

In summary, the problems were:
1. Significant cost overruns in 3 projects.
2. $8.1 million loss in selling off some steel pipe piles.
3. $5.1 million provision for bad debt.
4. Additional costs from alteration works for 2 projects.

All these meant that net profit fell 87% to $5.5 million, year on year, although revenue rose 20% to $362 million. ROE fell from 15.9% to just 1.3%. EPS fell from 3.45c to just 0.44c.

In an earlier blog post on Yongnam, I said that the question to ask was whether the problems were one off events or recurring in nature. If we believe that they are one off events and that Yongnam's business is still fundamentally sound, then, we should make use of market weakness to accumulate its stock.

Yongnam's order book stood at $340 million at the end of 2013. $185 million will be recognised this year. Of course, Yongnam is also taking part in tenders this year and winning some of these potential projects would bump up revenue figures. Expectations are for project wins with total value of almost $300 million.

As long as nothing like what went wrong last year happen this year, I believe that Yongnam's numbers for 2014 couldn't get any worse. Guidance is for gross profit margins to normalise to 20% this year and even if Yongnam did not win a single contract this year, which is highly unlikely, they would still be able to deliver a similar or stronger EPS.

On 31 October, I said that, "With a 3Q loss, they might or might not pay a dividend for the year although a lower DPS should not be demanding. Without major CAPEX in the year, this is a possibility."

Yongnam declared a DPS of 0.6c which is higher than their EPS of 0.44c. This signals Yongnam's ability as well as determination to reward shareholders despite having had a tough year. I appreciate it and, to me, it also shows that Yongnam is likely to reward shareholders more generously when its numbers improve again in future. Will it happen? Very likely, it will.

Someone told me that with EPS of only 0.44c, if we value Yongnam at 8x earnings, its shares should be worth only 3.5c each. I told him that I am a generous person. So, I value Yongnam at 11x earnings and will buy from anyone who is willing to sell to me at 5c per share. Any takers?

See presentation slides: here.

Related posts:
1. Yongnam: Substantial shareholder increased stake.
2. Yongnam: Profit guidance 3Q 2013.

Croesus Retail Trust: Luz Omori and Niz Wave I.

I really shouldn't be blogging now because I am so sleepy but I just couldn't resist looking at the announcement and, then, I'm trapped. OK, this will be a short one (I hope). Here are some things which got my attention.

DPU Improvement

In an earlier blog post, I said that the Trust would probably use the funds from the MTN they issued soon. Otherwise, we could see a 5% decline in DPU.

Now, with the acquisition of 2 new properties, Luz Omori and Niz Wave I, we will see a 5.7% increase in DPU instead of having to worry about a 5% decline. Good news for income investors!

Borrowings

The two properties are purchased at a slight discount to valuation which is good. However, the total value is still some $176.3 million. This is much more than the $100 million MTN the Trust issued last month.

In an earlier blog post, I was wondering if a placement or a rights issue would happen. Instead, the Trust has taken on more onshore debt, specifically, a 5 year debt facility with Mizuho Bank. They were able to borrow rather cheaply and the effective interest rate for this debt facility and the MTN together is 2.96% per annum.

With these purchases and borrowings, by my estimate, gearing level has gone up from 42% to approximately 55%.

The properties

The information provided by the Trust is mostly clear enough. I really like the fact that the Trust chose to purchase both the properties in Tokyo. These properties are located in areas which have seen growing populations in recent years and are within a few minutes walk to train stations.

What I want to point out is that Luz Omori's land is not freehold but leasehold in nature. This probably explains the relatively small price tag of S$42.7 million which is also at a slight discount to the valuation of S$44 million. The lease on the land expires in July 2059, 45 years from now.

As for Niz Wave I, the situation is bizarre because the building sits on 4 parcels of land of which 3 are freehold and 1 is leasehold and this lease expires in December 2029, 15 years and a few months from now. Would they have to tear down a quarter of the building then and return the land in original condition? Bizarre.

I am inclined to believe that the owner of that particular land parcel would probably allow the lease to be extended when the time comes since that one parcel of land is unlikely to be of much use to anyone if the surrounding 3 parcels of freehold land are owned by the Trust. Then, the question of price will have to be answered but it can only be answered when the time comes.

NPI Yield

These two buildings together have quite a decent NPI yield of some 8.1%. The 4 malls in the Trust's initial portfolio have an average NPI yield of about 7.8%. So, in addition to being DPU accretive, the purchases are NPI yield accretive but it could possibly have something to do with the fact that Luz Omori sits on land with a relatively short lease. Yields for leasehold properties are generally higher since they are usually cheaper to buy.

See Media Release: here.
See Acquisition Announcement: here.

Related post:
Croesus Retail Trust: Cap rates and growth.