Investment Moats

Search Results for: hph

Lippo Malls Indonesia (LMIR): Not yield accretive acquisitions

by 10 Comments

I have to do a double take because I thought yesterday’s announcement that Lippo Mall Retail REIT’s purchase of 2 Indonesian shopping mall was the acquisition they made sometime ago. My friend have to inform me that these are more acquisitions.

Announcements here and here

In total, LMIR bought up 6 malls totaling SGD $307 mil. They will be funding the acquisitions by SGD $200mil Notes with interest at 4.88%, SGD $50 mil Notes with interest at 5.875%, new notes under the EMTN program, new loan facilities and cash reserves.

Rational of acquisitions:

  1. Discount to NAV
  2. Enhance Earnings of LMIR Trust
  3. Properties located at strategic locations with high retail traffic
  4. Economies of scale
  5. Diversification of Portfolio

LMIR was yielding 6.7% and have a net debt to asset of 2.8%.

The positive thing about the acquisition is that they are made at discount to latest valuation.

However there were many negatives.

Leveraged Purchases

Usually leverage purchases are good for a stock. In these deals, you borrow cash and you buy assets hoping to earn a spread.

Say you borrow 100 mil at 3% interest and buy a 100 mil asset earning a NPI of 5%. After paying the interest, you get to earn 2%.

As long as debt servicing is not a problem (which many REITs found out the hard way in the great financial crisis of 2008), you can boost your portfolio return.

You can even borrow to do asset enhancements if the internal rate of return is worth it.

Taking a look at LMIR, they will be borrowing at a high interest rate of 5% ++ and the average NPI is around 6% ++ and we haven’t add in the expenses.

No wonder LMIR are indicating that dividend per share will go down!

Distribution yield will fall from 7.75% to 7.37% (strange the figures are higher than my Dividend Stock Tracker figures which are based on historical data)

I have written in a past article that no all placements and rights issues are yield accretive and this is an example. (Read here)

Possibly increase in income potential

In such non yield accretive purchases, one speculation is that the management thinks they can improve the malls just like what Capitamall did.

In such a case, under better management, there could be potential to enhance income through improved occupancy. I don’t see any indication that occupancy is low except for one of the malls at 51% occupancy.

The management might see that certain areas are in infant stages of growth and with development, there can be income potential.

Asset Dumping By Lippo

A more likely scenario Is that parent Lippo Group, which are the property developers, are just dumping these malls to LMIR.

In that case, this is very negative for shareholders.

Conclusion

LMIR have one bug bear that is common with Ascendas India, HPH Trust and the recently listed Religare Health Trust in that they face the home currency depreciating against Singapore dollar, therefore dragging down the DPU.

The trusts will say that they are effectively hedged, but we have seen in the past for LMIR and Ascendas India you cannot effectively do that.

I really hope that this is not the case of Lippo Group dumping stuff to gullible investors. I am getting very cautious on another Lippo affiliated trust First REIT.

Lippo looks like they are destroying value both here and at Auric Pacific. I wonder will they do the same for First REIT and OUE.

To get started with dividend investing, start by bookmarking my Dividend Stock Tracker which shows the prevailing yields of blue chip dividend stocks, utilities, REITs updated nightly.

Make use of the free Stock Portfolio Tracker to track your dividend stock by transactions to show your total returns.

For my best articles on investing, growing money check out the resources section.

Religare Health Trust–a good buy?

by 14 Comments

In an environment where everyone seem to be reaching for higher yield, an India Healthcare business trust looks to be an easy sell.

Its even a better sell if its marketed as 8-9% yielders.

The prospectus can be [view here]

This business trust invest in 11 healthcare related establishment and earned income by leasing them to their Sponsor Fortis.

In the future they would like to invest in Asia and Australia healthcare assets.

Positives

Plus points are that the lease terms of healthcare assets are long term 15 years with the view of renewing for another 15 years. Healthcare is a defensive sector that should be cash generating in all times.

Most of the assets are free hold or long term lease hold. So the lifespan is long. A targeted 20-30% leverage is a comfortable range to boost the income but not over commit.

Negatives

However, there are many downsides. There are currency risks involved. Unlike First REIT, the majority of the earnings are in Rupees. Rupees have not been doing well for some time.

Think it doesn’t matter? Look to Ascendas India Trust. Although, Ascendas did a swell job managing it, the losses due to the strong SGD vs Rupee have limit the income earned.

Another example will be LMIR.

The 8-9% yield looks appealing but there could be some financial engineering involved. The sponsors are forfeiting their share of dividend for the first two years. Thus they can pay out more.

From page 99, the yield is based on DPU due to waiver by sponsor of their entitlement for FY13 (Mar) and FY14 (Mar) + 100% payout ie. inflated by ~2.5% due to this waiver. From FY15 onwards, no more sponsor waiver + 90% payout – that means earnings have to grow to give similar yields.  -valuebuddies

8-9% looks high but if you think about it India 10 year government bond yield is around 8%. Which would be the better buy?

Conclusion

I got really scarred by HPH Trust IPO. As much as I like a hospital operator (vested in First REIT), the currency risk and the spurt of IPO recently seems to indicate this would not be priced cheaply.

For any REIT or Business Trust, the management is very important. MIIF have shown how incompetent management cannot risk manage or take advantage of opportunities. Perhaps the same for GIL.

This company may eventually proved to be a good buy just like HPH Trust at USD 50-60 cents. At IPO not so much.

Price is what you pay, value is what you get. Give time to assess the management. At this moment if you look at 8-9% yield, HPH might be a more worth while target to investigate.

To get started with dividend investing, start by bookmarking my Dividend Stock Tracker which shows the prevailing yields of blue chip dividend stocks, utilities, REITs updated nightly.

Gambling Stock Sports TOTO Malaysia Trust (STM-TRUST) to IPO in Singapore: A Good Buy?

by 6 Comments

Want to own a ToTo business? Your chance may be here! But is it worth it?

Malaysia’s BTOTO would like to spin off their subsidiary Sports ToTo Malaysia SDN BHD into a business trust to be constituted  and registered in Singapore to be known as Sports TOTO Malaysia Trust (STM-TRUST)

STM is principally engaged in the business of operating Toto pool betting under
Section 5 of the Pool Betting Act, 1967.

STM is licensed to operate its Number Forecast Operation (“NFO”) nationwide.
It currently offers seven (7) games which are drawn  three (3) days in a week, namely Toto 4D,  Toto 4D Jackpot,  Toto 5D, Toto 6D, Mega Toto 6/52, Power Toto 6/55 and Supreme Toto 6/58. STM also offers the most number of games in Malaysia and has the largest domestic network of 680 outlets in Malaysia.

This sounds great.

The reasons for IPO

This IPO serves as a way for initial investors into this venture to exit the investments by way of special dividends.

I believe that this move will effectively dilute the new shareholders, since money is removed from the trust to pay a special group of investors.

It should be seen that the majority shareholders would want to maintain control of the company that they list it as a business trust to continue to earn management fees

Valuation: PE of 17 times and EV/EBITDA of 12 times

STM-Trust did a competitive analysis on listed gambling businesses and came to the conclusion to list it at a PE of 17 times and EV/EBITDA of 12 times.

Compare them against the other REITs and Business Trust listed on my Dividend Stock Tracker.

Then against the other listed gambling establishments in the world.

The revenue and profit are very consistent although they have shown signs of tapering down. However, we do not know what are the non-cash items within the profit.

It would be best to see the EBITDA before making any judgment.

Debt Levels

Unlisted, the current debt to asset is 56%. After listing, the debt to asset will fall to 25%. That looks conservative. Certainly not as bad as MIIF.

The debt looks a large amount but compared against the most recent profit after tax of 345 mil it looks very safe. Like Singtel, Starhub safe.

Earnings and Potential Dividend Yield

A PE of 17 times translate to a 5.88% earnings yield. STM-Trust intends to pay out 100% surplus operating cash flow as dividends annually. As said we do not have the operating cash flow figures, so we are not sure how conservative this is.

As this should be listed at 1 times PTB, 5.88% yield looks average compare to the REITs. Remember, most of the REITs listed on SGX are either geared 30% to 40% on average and trading below book value.

Peer Comparisons

The closest to compare to is CapitaRetailChina, CapitaMall Trust, Frasers Centerpoint, Cache Log Trust, Ascendas REIT, Sabana REIT.

All these are trading almost at 1.0 times book value and having a 25% to 30% gearing.

Except for Cache and Sabana, this trust may not yield as much as them, unless their free cash flow is much higher than that.

EV/EBITDA is very low compare to this selected group which may indicate undervalue (or that these REITs as a whole are overvalued)

Typically, I would buy an investment with a EV/EBITDA close to 10 times and PE of 12 times. This looks tad expensive, but not as expensive then this selected group of REITs.

Business Risk: Tangible assets versus the lack of it

Now the difference between this business trust and the REITs is that REITs you have tangible assets.

What does STM Trust have? Not really much tangible assets. I believe the major asset to amortize is the limited right to operate lottery in the country.

  • How long is this right? Is it limited?
  • How much will STM Trust need to pay to renew it?
  • About our dividend payout, do  they pay out after amortizing the rights over the duration? Amortizing it is a more sustainable model ( Think of this as industrial REITs have 30 or 60 year land lease that you need to renew)

A Good Buy?

Honestly I do not have enough information to make a decision.

My original thoughts were:

  • If this lottery, which we all say is a damn good business, why the heck would they want to spin it off?
  • Is it due to the falling profitability?
  • If it is so cash generative, why take on those debts?
  • IPO’s are never cheap
  • My last business trust IPO (HPH Trust) really stung me

As I invest in more of these assets, I began to look at the clues off balance sheet:

  • 17 times PE puts future earnings close to that of Ascendas REIT, Capitamall Trust and Frasers Centerpoint trust. These trust have a certain premium to their price, either due to strong sponsors, good track record and lower propensity to collapse. What does STM Trust have that matches close to it?
  • The section on business risk is a main consideration. It tells us the sustainability of the business trust itself. Valuing a perpetual or potentially perpetual asset versus one that have a limited lifespan is different.
  • It would be good to see the performance of this in 2007-2008 period. Hell if they have data in 2001 to 2003 it will be great as well

To get started with dividend investing, start by bookmarking my Dividend Stock Tracker which shows the prevailing yields of blue chip dividend stocks, utilities, REITs updated nightly.

Make use of the free Stock Portfolio Tracker to track your dividend stock by transactions to show your total returns.

For my best articles on investing, growing money check out the resources section.

Identifying the Business Model of your Dividend Income Stock

by 3 Comments

When investing in stocks for their dividends it is important to know what you are getting yourself into.

Some stocks on my dividend stock tracker looks to be screaming at you with 8%, 9% or 10% yield.

You may fall into the trap that you will tell yourself:”If I purchase this stock no matter rain or shine, its going to give me around 9% forever.”

The bad news is that this is not always the case. Some companies will operate in a way that they will be able to do that, some would not. Why is that?

How assets generate cash flow

A typical company operates by having say $100 million in assets. This $100 million in assets are able to produce a net profit of $10 million per year on average.

Now we know from my past discussions on net profit, operating cash flows and free cash flows that the amount of cash actually left to pay for dividends can be higher than the net profit.

(A) – Assets depreciate but does not mean cash outflow

The $100 million worth of assets do not go on forever. They wear and tear. They become obsolete. They basically depreciate. In your financial statements they do account for that by deducting a pre-determined amount every year, up until the asset is not useful any more.

So say this $100 million asset is productive for 10 years, we deduct $10 mil every year to come up with net profit.

However the cash is not an actual outflow but an accounting one, so essentially we have $10 +$10 per year as operating cash flow (under cash flow statement).

This means that this company actually has $20 mil per year to work with.

Do note that depreciation and amortization is not only done on physically equipment that wear and tear but also on rights to operate (concessions) or patents (rights to sell)

(B) – Assets need to repair, renew and invest upon

During this 10 years, the company will sometimes need to put $3 mil to ensure the assets can continue to churn out that $20 mil cash flow per year. Things break down.

The long term question is after 10 years, this company will not have assets to make $20 mil per year.

So the company may spend that $10 mil under depreciation to invest in more assets, better assets, or more technologically efficient assets.

This repair, replenishment and renewal is called capital expenditure and is found in your investing cash flow in your cash flow statement.

Subtracting away this capital expenditure from operating cash flow in ( A ) will give you what is known as free cash flow. So

$20 mil – $10 mil in capital expenditure will give you $10 mil in free cash flow again.

(C) – What is left you payout or keep

The company can then pay out this free cash flow as dividends. They may elect to pay out half or a portion of it.

Out of this $20 mil the company can:

  1. Pay $20 mil as dividends.
  2. Pay $10 mil as dividends and retain $10 mil in their cash holdings.

The more they retain, the more they have for expansion.

Self Renewing Business Models

So now we make sense of how assets generate cash flow and keep going we can then identify which companies have models that keep going.

Most of the businesses fall under these categories. This includes your Breadtalk, Challenger and Keppel Corp.

They put their depreciation amount (A) back to work as capital expenditure (B) and retain part of what is left and pay out a portion of what is left as dividends. That way they can go on operating for long.

It does not mean that a company pays a hefty dividend it is not self renewing. Do note that capital expenditure does change and could vary from industry to industry.

Starhub

The case for Starhub is most compelling. We discussed in the past that a lot of folks are not comfortable with Starhub paying more than net profit out as dividends.

If Starhub pays out its depreciation (A) as dividends does that mean Starhub will have a finite lifespan?

A look at Starhub’s financial statements shows that, yes Starhub is paying out a portion of (A) as dividends. But they are investing in (B) as well. It may be that the cost of assets are much lower today compare to last time, hence they require less capital expenditure.

Essentially Starhub still have cash left over to pay down its debts!

Singtel

Singtel is a more conservative telecom company. It pays a 5% yield compare to 7% for Starhub but its paying out only 70% of its net profit for that.

It tends to invest in (B) more than Starhub by investing in regional telco. That’s why it is seen more as a growth play, where its operating cash flow may grow faster than Starhub.

CMPacific

We talked abit about this toll road company recently (read here & here). Toll roads typically work with a 10 to 25 year concessions. So it means that after this period they cannot operate that toll road anymore.

CMPacific at the toll road level pays out all their depreciation to CMPacific so essentially each toll road at the end of their 16 year concession is zero in value.

Hence, at CMPacific’s level they do not have (A) to pay out additionally. All they have are the net profit distributed from the toll roads.

However, out of their net profit, they only pay out 50% of their income. The rest of it goes into paying down debt or saving to buy more assets.

This means that CMPacific do not need to rely on getting more debts or rights issues in the future to fund future acquisitions to replenish these assets which will eventually run down to zero value.

Pacific Shipping Trust

Shipping trusts as business trusts got of on a very bad foot with investors in Singapore. They were wacked with a double whammy when the economic cycle and credit crisis ensures that people question whether they can be a going concern.

It also raise the question whether a model of taking on debts and paying out all their operating cash flow as dividends is the right model to go.

Pacific Shipping Trust kind of learn from that ordeal.

Right now, you can see that their yield is much lower than FSL Trust’s yield (8.6% versus 16%).

If they were to pursue a strategy to roll over debts or ask for investors to bail them out, they can pay a 14% yield.

However, Pacific Shipping Trust paid out part of their free cash flow, saved a portion to pay down debts and retain a small part of it for future use.

Liquidating Business Model

At the other spectrum is the liquidating business model. In this model, the company pays out its net profit + (A) which is its operating cash flow as dividends.

On occasion they may choose to perform only very minor of (B) or pay down debts.

In this model, unless there is a change in model to something like the self renewing model previously, they have a finite life span.

Essentially, you need to know that when you invest in them, part of your dividends is essentially your own capital in the first place.

Typically, in Singapore businesses that falls within this category are

  1. Business Trusts
  2. Utilities
  3. REITs

Basically most of them are trusts!

Sabana

Industrial REITs have assets that are leasehold. In Singapore, industrial land lease is typically up to 60 years.

As REITs they typically pay out 90% to 100% of their profits as dividends.

All this means that Sabana, with an average land lease life of 40 years is a finite asset. As they pay out all their cash flow, it leaves little for Sabana to replenish assets, buy new assets at (B). It also leaves little for them to pay off debts which is currently at 35% of assets.

For REITs, they have 2 ways to grow perpetually

  1. Take on more debts, which is limited.
  2. Do a cash call (rights issue) to get more money to buy new assets.

K-Green

This on paper looks really good when I took notice of it at $1.13 yielding 7% with zero debts.

But the underlying have varying concessions that lasts for about 18 years on average.

K-Green pays out their full operating cash flow as dividends. This essentially means that they are liquidating and have a finite life span. Same as Sabana.

Know the kind of business model for your stock

Whether  your stock has a self-renewal business model or liquidating one what is important as investors is to know which they are in and whether they are transiting from one model to another.

Both can be equally good investments. What matters is not the model but

  1. Good Management. Pacific Shipping Trust and FSL Trust shows that given shitty outlook, choosing the right execution strategies, risk management and operation methods can make much difference. Similarly, not all REITs do well when recession hits and when the bull market runs.
  2. Valuation. Most of these assets I realize have a yield on asset of around 6%. What makes a difference is how much debt the company leverage up to and how much below the net asset value you buy at.  If you buy HPH at 40 cents, even though it could be a liquidating concession, your yield on investment could still present good value.

An XIRR valuation here would tell you the yield on asset or yield on investment depending on your input of original purchase value and the sum of discounted cash flow received.

I run a free Singapore Dividend Stock Tracker . It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.