Tuesday, November 25, 2008

Bought more Cambridge

Bought 15 lots at 21c. Now holding the maximum I care to be exposed to, for a company of this risk profile. Now waiting to see if/how their financing issues are resolved.

Monday, November 24, 2008

CIT again

Quick update. Two points:

First, outlook from S&P downgraded from 'positive' to 'stable'. Dependent upon:

"(1) CIT’s strong business profile; (2) the expected strong support from the local banking community; (3) adequate liquidity in the domestic credit market; and (3) the significant progress that CIT has made in achieving Sharia-compliant status, which would further diversify its refinancing sources."

Basically no effect. But everything depends on them obtaining credit.

Second, 3Q DPUs were down because management took their fees in cash, instead of shares. I should have accounted for this when calculating the yield in my previous post. The new calculations for 3Q08 are:

Rental revenue: 18.3m
Non-finance costs: 3.8m (includes the new management fees)
Borrowing costs: 3.1m
Operating Profit 11.4m

Excludes profits/loss from revaluation and interest rate swaps, as this is not counted in DPUs.

After cutting revenue by 10% (due to SMEs going bust in a recession) and doubling the future finance costs (to 6.2%, due to credit crisis), we get 6.5m. Annualise (times 4) to get 26m. Divided by 800m units issued, gives 3.25c per share.

At a price of 22c, thats almost a 15% yield.

The assumptions are very conservative:

  • 1 in 10 businesses going bust: even if it does happen, they should be able to rent the buildings out again.

  • Doubling the interest rate (to 6.2) is also on the high side. A 14th Nov Phillip's report has estimated their interest rate cost at 4.78%. From an Oct report by DMG on Fraser's CT looking for financing: "management cited spreads of 200 – 250 bps over SIBOR", which in Sept (the height of the credit crisis) was 5.5-6%.

Wednesday, November 19, 2008

Sold Keppel, Bought A-Reit

Sold 1 lot Keppel at $4.58 on 17th Nov. Keppel was a mistake because I have not had time to study it properly.

Bought 3 lots A-Reit yesterday at $1.30. By my calcumations, this should give at lease a projected 10% yield.

Saturday, November 15, 2008

Value hunting #5: Wheelock Properties

[Edited 24th Jan - too many mistakes - the values of the developments re-estimated, also take development costs into account. Changes in italics.]

  • Develop and sells high end luxury homes (4-5m price range).
  • Rents retail properties (Wheelock Place, from 2011 onwards: Scotts Square retail).
  • Owns some of SC Hotels, a construction company. I am ignoring this.
Wheelock has 1.2bn shares issued.

1) Business Model

Buy property when cheap, develop, sell when hot. Gotta time the market successfully, Singapore property market is like a yo-yo. Interesting commentary on that. Wheelock did a great job selling property at the peak, now it has to collect its payments - build fast then collect debts. We concentrate on its balance sheet....

2) Revenue recognition

The income statement less relevant as earnings are not recurring - it is just realizing the revenue/income from the past sales. Wheelock recognizes based on (estimated) percentage of total construction costs (07AR, footnote 2.19). However, actual *payment* would be based on URAs standard payment scheme. So their cost/revenue recognition may be ahead of the payments.

Wheelock did not sell any properties under URA's deferred payment scheme.

3) Balance Sheet (as of Sept 08):
  • Abt 8.3c per share cash (100m), taking after subtracting all their debt and tax liabilities.
  • Investment property of 790m (65c per share). This is wheelock place, 99yr tenure from 1990. Last revalued Dec 07. Their operating revenue from this (excl. revaluations) are abt 2c per share (footnote 19 in 07AR). Don't know how the hell this valuation is justified.
  • Development properties, whose costs/revenue are gradually recognized as they are completed. See the notes on revenue recognition above.
  • I've estimated cash per share owing, listed red in the table below.
Table below is for 3Q08 results (30th Sept). Next results should be out mid-Feb.

(the whole table is modified - 24th Jan)

Property Description
and price estimate
% sold and completed (based on URA's payment scheme, not Wheelock's revenue recognition)
% Payment collectedPayments owed
The Cosmopolitan and The Sea View
Both 100 sold.
Both 85% completed in 3Q08 results.
60% (as of Sept 08)
But 25% totaling at least 62m.
was paid in Oct. This is not counted here, and is still included in receivables.
Add 192m (16c/share) to cash.
Ardmore II
118 4 bdrm units. Priced 4.2m-5.5m. So revenue conservatively is 500m.
Assume 200m development costs. Gives 300m.

100% sold.
Building 20+th story. So 30-40% complete by URA's definition.

TOP scheduled 2010.

Assume all 30-40% collected as part of the cash, since the foundations were already finished before 2Q08 (30th Jun)
60-70% awaiting, assumed not recognized so not in receivables. Translates to 180-210m or 15-17.5c per share.
Scotts Square
388 1,2 and 3 bdrm units.

ASP $3,994 psf (3Q08 results, Sect 10).

From floor plan(Apartments-->floor plan): scotts wing has at least 150,000 sq ft, orchard wing 72,000 sq ft, total 222,000 sq ft. So 620m for the 70% sold. Deduct development costs of 168m. So 452m for the 70% sold.

70% sold.

Piling work in progress, so 20% complete.

Expected TOP 2011.
Assume only 20% collected
80% unrecognised, so not in receivables.
Gives 361m (or 30c per share).

At least 30% of the development's units sold to Singaporeans. So up to 40% may be sold to foreigners.
Orchard View
30 4-bdrm units.

No idea what it can sell for.
Expected 2009.
To be launched for sale upon completion, so no URA payment schedule.
Ardmore IIIWait till next property cycle.

4) Conclusion:
  1. After selling The Sea View and The Cosmopolitan, they should have 300m net cash (abt 25c/share). Confirm this in 4Q08 results.
  2. At least 15-17.5/share owing on Ardmore II. Since buyers should have already paid 30-40%, they probably will not walk away.
  3. Biggest risk is the 30c/share owing from Scotts Square. Only 20% payment was collected, and it will not be completed until 2011. Do not know how many of the buyers will walk away, especially if they are foreigners.
  4. Orchard View and Ardmore III. Dont know how to value them.
  5. (80+ yr lease for) Wheelock place, with its 2c/year revenue.
What price would I buy?

5) Another way to play this....

Wheelock's David Larence has been very shrewd in the past buying property when it is cheap. You may wait a few years for him to make another purchase, in anticipation of the property market improving - which would be a catalyst for property counters (Wheelock included) to go up. It would be interesting to look at a graph of Wheelock's share price over the last few property cycles and see if share price appreciation was preceded by their property acquisitions. Alternatively, buy your own property, though the freehold stuff is too expensive for me and the 99yr depreciating-crap is too risky to touch....

Sunday, November 9, 2008

Value Hunting #3: Frasers Centerpoint Trust.

REIT that owns several shopping malls, located next to MRTs in S'pore. It owns Northpoint (expires 2089) (excluding Northpoint 2), AnchorPoint (freehold) and CauseWay Point (exprres 2094).

Approximately 625m shares issued.

Majority of FY08 profit/revenue (65-70%) comes from Causeway Pt., abt 25% from Northpoint, 5+% from Anchorpoint.

Listed on SGX as "FrasersCT". Not to be confused with Fraser Commercial Trust (formerly Allco), which is "FrasersComm".

1) Business Model
The usual stuff for a REIT: Borrow money, buy over and lease building, pay the difference as dividends.

2) Cyclical Aspects:
30% of their tennant's leases are due for renewal in 2009.

3) Financing:

28% geared. Financing takes up only a small amount of their profit. In FY08, borrowing costs were only 12m of out of revenue of 84m and profit of 37m.

Their total debt is 260m, due for refinancing July 2011. All debt is at fixed rate of 4%.

In Mar 07, was assigned A3 rating with stable outlook by Moodys.

4) Risks:
  • Tennancy renewal, in a declining economy. Smaller tennants can just go bankrupt and walk away. They should have no problems re-leasing due to the prime area, but I will not expect their rentals to increase.
  • FCT holds a 31.06% stake in Hektar Real Estate Investment Trust (“H-REIT”), is a pure listed retail REIT in Malaysia with properties in Selangor, Melaka and Johor. I am wary of this. I have seen many retail peoperties in Penang start out as cool, hip and happening places, and slowly degrade over the years to become ghost malls. People in Malaysia have cars or motorcycles, so their malls in Malaysia are not 'protected' agains obselesence by their location. Malaysia is very different from Singapore.
  • Woodlands MRT has a lot of empty surrounding land.
5) Future growth

Long term, can grow from the properties fed by their Parent, Fraser Central Ltd, which owne 54% of FCT. Would need to wait for the finance costs to come down or share prices to rise in order for this to happen.

They have a 5 year right of refusal over Northpoint2, Yew Tee, Bedok, CenterPoint. Not sure when the 5 years starts from? They also have a put/call option to buy Northpoint2 expires July 2010. These contracts are probably meaningless, since they are controlled by their parent anyway.

Will not factor this into calculations due to the economy.

6) Valuation:
FY08 DPU was 7.3c. Yield of 10.4% at a price of 70c. I will not factor in any increase in rental due to the current economy. Assume it remains constant.

7) Conclusion:

First remove the 3.4m distributions from Malaysia.

I will assume that long term (after Jul 2011), their borrowing costs go up from 4% to 5%. This is a wild guess, it may go up more or less.... but should be quite safe since the banking crisis (not economic crisis) should be over by then. This would add 2.4m to their borrowing costs.

Altogether, this reduces their profit by 12%, giving approximately 6.4c DPU per year. For a yield of 10%, I need a price of 64c.

Friday, November 7, 2008

Value hunting #4: Boustead

Attracted by this company's net cash position of 20c, with a share price of 71c. The company has been growing profit at least since 2003. FY08 EPS was approx 9c/share (accounting for share split and extraordinary item) or 58m total.

Note for calculations: the share split in Aug 08. Pre-split had 260m shares, post split 520m. Mkt cap @70c will be 364m.

Historically the company was a mish-mash of unrelated businesses, owning among other things, a sushi deli. Management sold off the unrelated business and started concentrating on their core competencies in 02/03.

1) What does it do?

Boustead has two business segments:

  • The smaller one (15% of revenue, 21% of profit)is from Geo Spatial (Provision of geographical mapping IT services). 90% of their clients are government, and 60% of the revenue is recurring.
  • The larger one (70% revenue, 60-80% of profit) is engineering services, divided into 3 parts: a) energy, consisting of oil and gas projects and solid waste conversion, b) real estate solutions: building industrial and residential facilities, and c) water and waste water: small new segment, not yet profitable.
2) Balance sheet
Negligible debt. Small operating lease commitments, roughly 3m a year.

In 1Q08 (June 08) results, they have 140m cash. Subtract 28m for taxes and some more for working capital, as a rough guess, I get 100m, which equals about 19c/share nett cash.

Boustead's 40% owned associate GBI has confirmed the 200m sale of an industrial property to SEB Asset Management (the investment arm of a European bank). Slated for completion end of the year. Fingers crossed the cash actually comes through... in these wild times. When it does, this will add another 15c/share cash to Boustead's balance sheet.

3) Cyclical Aspects
Common sense suggests their engineering business is cyclical, and risky:
  • Large amounts of money/credit are required to fund infrastructure.
  • Revenue is project based, not recurring. The products they produce are not consumable.
  • Revenue and profits are recognised for as % of project completion, however there may be credit risk. It isn't over till the cash actually changes hands.
How does a recession affect their profits? From their FY02 AR (March 02), which nicely covers the 4 quarters of negative growth in that recession: For their construction projects:

"However, gross profit margin was eroded from 29.7% of FY 2000/2001 to 19.8% of FY 2001/2002 because of the generally soft construction industry that was weakened by excessive competitive pricing."

Applying these same gross margins to their entire FY08 profit I get a profit of 17m. Blending it with an unchanged profit for Geo Spatial (taking it as 20% of the profit) gives 25m, or approximately 5c a share.

The above is guesswork for a bad but realistic scenario. A worst case one would involve losses, which I cant model because too many factors.

I have not been able to find their results way back from from the Asian Financial crisis.

4) Conclusion:
At 70c per share, minus net cash of 40c, and with a EPS of 5c, this would still give a PE of 6.

If we ignore the Engineering Services completely (because it is too hard to model), and just take the Geo-Spatial profit (2c/share), their PE at 70c would be 15, and at 60c it would be 10.

There are too many unknowns to be certain, but my gut feeling is that this is OK..... Cash only, no CPF due to the cyclical and risky nature of their business. Definite buy at 60c. Mabye 70c, not sure....


“If you can keep your head when all about you are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you, but make allowance for their doubting too,
If you can wait and not be tired by waiting…Yours is the Earth and everything that’s in it.”

- Rudyard Kipling

Sunday, November 2, 2008

Value hunting #2: Cerebos

Got interested in this when wifey wanted to buy me some Brands Essence of Chicken when I was sleepy on the weekend. And I thought "$20 for squashed chicken. Who makes this....?"

Cerebos (80% owned by Japanese company Suntory) makes it, among other things.

1) What do they do:

A breakdown of their 3Q08 results by product and region:

- 89% of their profit comes from 'liquid health supplements', mainly BEC. Most of that profit comes from Thailand (82m), a little from Taiwan (15m), neglible amounts from S'pore & Malaysia (<4m).2) Balance sheet:
From 3Q08 results: About 130m surplus cash on the balance sheet (approx 20c per share).

3) Cyclical Factors:

You would expect that demand for health products would be resilient in bad economic times. You would be wrong. From digging through old Netresearch-Asia reports (subscription required):
  • 3rd Dec 01:"The 1998 crisis already showed us that Brands, although a premium health supplement, was not immune to economic downturns and the consequent decline in consumption."
  • 26th Jun 2000: "Margins for BEC had collapsed from more than 20% to less than 8% at the height of the crisis".
  • 20th Jan 2000, talking about their subsequent recovery: "Brands was operating at close to 50% capacity utilisation in FY98 is now back at close to 70%"
4) Valuation:

The current low PE of about 9 (excluding their surplus cash) seems a value trap, given that sales are expected to fall in a recession.

When the trough comes, the PE may not be low as this is a cyclical stock. As an example, in Dec 01 it was trading at $2.12, with a PE of 12 (excluding the 66c cash/share).

5) Conclusion

This is a cyclical stock. Wait for a year or two, to see the effect of falling sales on their share price. Buy when we are in the middle of a recession. If we have a rapid and sustained recovery, we should see (cyclical) 20-30% profit growth for several years afterwards.