There is a reason some stocks are never to be touched. Stocks that you do not understand what their business is. Stocks that have business subjecting them to risks of losing all their capital.
Global Investments Limited (GIL) is one of them. It exists in 2007 at IPO time as Babcock and Brown Global Management Pte Ltd. Back then if you are chasing for yields, this one yields high together with then favorite Macquarie International Infrastructure Fund (MIIF) (coincidentally both Australian)
The problem of it versus MIIF is that while MIIF then are overpriced assets, at least you know the problem. Babcock and Brown Structured Finance invested in assets ranging from aircraft leasing, various kinds of loans and music copyrights. Its parent which owned the majority stake fell to bankruptcy during the financial crisis and its book value got smashed through the floor as they end up non performing.
Its not a pretty sight as a new dividend investor as you could very well be the one caught in that.
A few months ago we decide to relook at GIL. Since the debacle, a new management ST Asset Management (STAM) have been appointed the new manager of GIL. STAM is affiliated with Temasek (doesn’t mean they will do a good job by their recent records).
We decide to look because of the attractive yield and cash build up through numerous rights issue. Like MIIF this classifies as another Leopard may not change its spots deal, and thus this post is more of a note to myself rather than a recommendation.
GIL declared another round of 1 for 2 rights issue and I decide to write this post to collect my thoughts and evaluation of the rights issue.
1 For 2 Shares Rights Issue
Currently TERP XR Price => S$0.133
Current outstanding number of shares => 550 mil shares
Current market capitalization => S$73.15mil
Rights issue price => S$0.128
No of rights shares issuing => 275 mil shares
New cash injection => S$35mil
Market capitalization after rights => S$0.133 x (550+275) = S$109.72mil
No of shares after rights => 825mil
Change in investment policy
At the SGM on 5 Dec 2011, the shareholders of GIL approved the expansion of the company’s investment policy so that its investments are not limited to the original three sectors.
The company’s strategy is to invest in a portfolio of assets in different sectors through different means which include but not limited to
- direct asset ownership
- credit default swaps
- preference shares
- guarantees of assets and performance
- securities lending
- participating loan agreements
The company will not make any direct investments in
- real estate
- Basically, they changed their terms to have more toys to play with, i.e. more kitchen knives, AK71, MP5s
Total assets before rights issue => S$167 mil = Aircraft (S$31mil) + Loans Portfolio (S$71mil) + Fly Leasing and Avoca Notes (S$21mil) + Cash (S$42mil)
Total liabilities before rights issue => Interest Bearing debts (S$17mil)
Net Asset Value before rights issue => S$150mil
Total assets after rights issue => S$202 mil = Aircraft (S$31mil) + Loans Portfolio (S$71mil) + Fly Leasing and Avoca Notes (S$21mil) + Cash (S$77mil)
Net Asset Value after rights issue => S$185mil
Price to Book => 109/185 = 0.59 times
Net cash after rights issue => S$60mil. 54% of market capitalization is net cash
In addition, 8 months later, in 2014, the 2 Aircraft (S$31mil) will be sold for S$34mil. This will increase the net cash level from S$60mil to S$94mil.
Essentially, the market, by valuing GIL at S$109mil ex rights, is valuing it as S$94mil in cash and the rest of its assets (Fly Leasing & Notes – S$21mil, Loans Portfolio – S$71mil) at only S$15mil.
Rental Income from Aircraft (S$31mil) => S$4.7mil, ROA => 15%
Dividend Income from Fly Leasing (S$16mil) => S$1.054mil, ROA => 6.6%
Interest Income from Loans Portfolio (S$71mil) => S$9.866mil, ROA => 14%
Gain from sale of investments => S$3.6mil
Total Revenue => S$19.22
Management fees => S$0.8mil
Exchange losses => S$0.38mil
Depreciation => S$1.3mil
Finance cost => S$1.325mil, average interest rate (1.325/17=7.8%)
Impairment cost => S$1.772mil
Other => S$1.9mil
Total Expenses => S$7.5mil
Net Profit => S$11.72mil
Net Profit (ex gain from sale of investments) => S$11.72 – S$3.6 = S$8.12mil
As mentioned, the sale of the 2 aircraft will change GIL’s 2014 profit in a very big way. As each aircraft is leased at USD $160k per month, GIL will lose the S$4.7mil in revenue.
I seem to think part of the motivation to sell could be that the loans are tied to this 2 asset. So selling this would enable GIL to pay off the 7.8% interest rate debts.
Then again the equity yield that investor demand is pretty steep as well at > 10% yield.
Selling off for S$34mil will clear off S$17mil in debts, as well as finance and depreciation costs. At the same time the other S$17mil can be channel to cash pool.
Profit(ex sale) => (19.22-4.7-3.6) – (7.5-1.3-1.325) = S$6mil.
The potential to replenish the loss revenue will depend on how GIL make use of the 94mil cash holding.
Different investments (GIL have not state yet) have different risks, costs and potential returns.
We can estimate the potential return on asset (ROA) from 6% upwards, since the prevailing return on assets for most financial instruments seem to be 6% (in absence of leverage and trading at discount)
Based on the current ROA of assets, the ROA can hit as high as 15%
In the following table we compare what are the estimated ROA and its effect to the earnings, return on assets and earnings yield
Some profit caveats:
- A base ROA of 6% will assume that GIL does not invest in highly leverage or risky assets. Assuming PTB of 1 times, these assets would be in the class of SIAEC, PLife REIT, SPH. Relatively safe instruments
- An ROA of 14% is likely to be assets or instruments that have a finite lifespan, that requires adequate compensation. Paying out the full earnings yield and not accumulating cash as retained earnings would more or less result in future fall of NAV
- An ROA of 14% can also instruments that are highly leverage within and as such explains the premium in yield. In times of crisis, it is likely to be negatively impaired
- An ROA of 14% can also be hard to understand instruments (notes, CLO, CDO, swaps) with larger than expected counterparty risks. Thus it explains the higher premium
- Also note that sans the 94mil, the current Loan Portfolio are likely to have valid terms, whereby they may be redeemed at lower if not zero value.
- As the underlying of the Loans Portfolio contains mortgage backed securities and other loans that can be greatly impacted by mark downs and impairments
- GIL may not use up ALL the cash to fund investments, thus a lower ROA.
In this past year, GIL paid a total of $0.015 cents dividend. At my average price of $0.16, the yield is 9.3%. My new average price should be reduced to $0.14. As such the yield is 10.7%.
To pay out this yield, GIL will need S$8.25mil. This amount is equivalent to the net profit sans the one time gain from selling some of the notes.
Obviously the payout will be affected by the sale of 2 aircraft as profit will be dropped to S$6mil, but with a huge capital, they should be able to pay 2.25mil more.
The potential dividend yield is listed in the table above under earnings yield. That is the potential safe payout range.
The Price Earnings ranges from a high 9.3 times to 5.6 times depend on how GIL invests its S$94mil
Although GIL trades at a huge discount to book value (PTB:0.59times), it is only useful if we know how valuable and tangible the underlying assets are.
We know that out of $109mil, $94mil will be in cash, the rest of the $92mil is valued at $15mil.
This is hugely undervalue had the $92mil be hotels, or houses, or functional factory equipment. The underlying are stakes in Fly Leasing and Loan Portfolio and while Fly Leasing is valued at S$16mil, you can make the case that the market is valuing GIL’s loan portfolio to be worthless tomorrow.
The key thing to find out before the right’s issue is how much is that actually worth to you. For instruments like credit default swaps, warrants, options, CLO it is very plausible to see them being heavily impaired.
That is perhaps one of the reason GIL under its old management Babcock and Brown fell from a high of $1 plus to where it is today in the GFC.
If you invest, it is a bet that the underlying portfolio and its risks are actually less than what the market anticipates.
I am likely to subscribe for the rights issue and some excess rights. Even with such an appealing potential yield, I will not go overboard.
At the same time, the yield is tempting enough to invest in potential upside. If the loans portfolio crash totally, I at least know that $0.113 of GIL is in cash potential.
This is not an inducement to buy, as this baby can turn sour overnight. I don’t want to cause too much broken hearts.
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