Singapura Finance: 1 for 1 rights issue.

I have been a Singapura Finance shareholder for a few years. If you have not heard of Singapura Finance, well, it is not surprising as it is one of those sleepy stocks that don't really shout out for attention.

Why did I become a shareholder a few years ago?

1. They have a good track record of rewarding shareholders with meaningful dividends.

2. The stock was trading at a big discount to NAV. (It still is.)

Nothing exciting, really. Just the usual stuff I look out for.

In the last few years, however, earnings came under pressure. EPS declined and dividend per share (DPS) also declined.

The reason really is due to the low interest rates environment and the Chairman said:

"The Singapore Dollar interest rate, which closely tracked the US Dollar interest rate, remained at an exceptional low level throughout the year. As a result of the continual low interest environment coupled with the relentless market competition, interest margin was subjected to immense pressure and deteriorated further during the year. Against such challenging external backdrop, and the need to provide additional collective impairment for the loan allowance, the Group profit after tax for the current year declined 21.2% to $5.3 million." (Taken from Annual Report 2013.)

How are things looking now? Results improved in 2014 and profit after tax rose 10.2%.

Now, with interest rates likely to rise next year, it seems that Singapura Finance might do much better again in future. To ready themselves, they are strengthening their capital base by having a 1 for 1 rights issue at an issue price of $1.00 per share. This rights issue is renounceable which means that shareholders could sell nil-paid rights in the open market if they do not mind having their shareholdings diluted.

I know that some readers might be thinking about possibly buying Singapura Finance's stock now to participate in the rights issue. If you are one of them, you might want to consider the following first:

With a theoretical ex-rights price (TERP) of $1.275 per share, nil-paid rights selling at any price lower than 27.5c (when they start trading) would be "cheap". At a NAV/share of $2.10, a share price of $1.55 is cheap (26% discount to NAV) but, post rights, NAV/share becomes $1.55 or so. So, the TERP of $1.275 is less cheap (17.75% discount to NAV, post rights issue). Of course, rights shares at $1.00 each represents the best value for money (35.5% discount to NAV, post rights issue).

Expect EPS and DPS to half as well, ex-rights. 3.5c and 2.5c, respectively, perhaps? Of course, this is assuming that everything else remains equal and that there is no improvement in business performance in future which seems unlikely to me.

For existing shareholders to subscribe for the rights allotted to them is, ultimately, to show confidence in the management that they will be able to improve earnings by more than 100% in due course. It has to be more because even if earnings should improve by 100%, it would mean that business performance has not improved one bit on a per share basis. Then, it would be better not to have had the rights issue.

I will subscribe for my rights as I am confident that interest margin will improve in future although the business environment is likely to stay competitive. I will apply for excess rights too but I will give the nil-paid rights a miss.

Taking part in the rights issue is to believe that the additional funds will generate a much higher EPS in the medium term. In the short term, business performance could continue to be lacklustre and whether this would put downward pressure on the share price or not is hard to say.

See announcement on rights issue: here.
Visit Singapura Finance's website: here.

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Saizen REIT: Sell the entire portfolio or find a larger partner.

One of my more successful investments in the last few years is probably in Saizen REIT and regular readers who have followed the story would be quite familiar with it. So, I shan't repeat the narrative.

In the past issue of The EDGE, it was reported that a major investor in Saizen REIT is unhappy with the lack of growth in the REIT. Well, actually, the fact that Argyle Street Management (ASM) is unhappy isn't anything new and I blogged about my view in November last year.

Now, the CIO of ASM is suggesting that "we either sell the entire portfolio or find a much larger partner." There is quite a bit of frustration but it is probably justifiable.

This is because Saizen REIT's NAV/unit is $1.22 and it is trading at around 90c a unit. If all the REIT's properties were to be sold at valuation, shareholders would receive $1.22 a unit or a 35% gain from the current market price. So, if there should be a willing buyer, selling the entire portfolio at valuation makes sense.

In fact, I am inclined to believe that Saizen REIT's properties are worth much more since they managed to sell a property in May at 19% above book value and another one in August at 12.8% above book value. This suggests that the book values of the REIT's properties are rather conservative.

The REIT's NAV could be about $1.35 to $1.40 per unit. This means a potential capital gain of 50% to 55.5%. It is, however, I believe, harder to find a buyer for the entire portfolio at such high prices.

Well, whether or not the current managers of Saizen REIT are replaced, for me, is less important than how my investment in the REIT could be impacted.

I have examined before the sustainability of the current day DPU and, if I remember correctly, I said it should be sustainable for the next 8 years. Could we see the Japanese economy and currency strengthen in the next 8 years? I don't know but I do know that there is enough resources to maintain the current level of distributions for a few more years. Beyond that, I expect DPU to reduce, everything else remaining equal.

A DPU of 6.3c translates to a distribution yield of about 7% at a unit price of 90c. If I should be paid $1.22 per unit for my investment in the REIT, I would liken it to collecting many years of income distributions in advance which is not a bad thing. A bird in hand is worth two in the bushes, as the saying goes.

So, am I going to increase my exposure to the REIT? No. Why? Isn't it a good investment for income? I believe it is but my exposure to the REIT is already quite large and I estimate it to be some 12% or 13% of my entire portfolio. My only other two investments which are bigger are AIMS AMP Capital Industrial REIT and First REIT. I don't see any need to increase the weighting of any of these REITs in my portfolio.

What if I did not have any exposure? Well, if I should be happy being paid a 7% distribution yield buying into rather undervalued freehold Japanese residential real estate, I might initiate a long position. Then, all that is left for me to do is to wait.

Related posts:
1. Saizen REIT: Good investment for income?
2. Saizen REIT: Undervalued.
3. Saizen REIT: Is the dividend sustainable?