Monday, 22 July 2019

One Pearl Bank Averge Selling Price At 2400psf And Sold 160 Units At Weekend Launch!

One Pearl Bank and its close proximity to 3 MRT lines and other amenities say a lot about its superb location. The two curved towers design of One Pearl Bank is simply grandeur and will no doubt become the new iconic landmark of Outram and Chinatown area in 2023. Capitaland has once again shown why it is one of the top developers in Singapore.

One Pearl Bank has 774 units spread over two magnificent towers and the developer will raise it 21 metres above the ground level to elevate the greenery flow from Pearl’s Hill City Park in order to merge the continuity flow with the iconic building. Lush landscaping of 135,000 shrubs, plants and flowers will be planted throughout the development and a footpath will be built to directly link it to Pearl’s Hill City Park. Also, based on URA’s Masterplan 2019, Pearl’s Hill City Park will be connected to Fort Canning Park through the Singapore River. 

The facilities available are also impressive with 2 swimming pools and a children’s pool among the lush landscaping. There is also the standard gym an 24 hours security. Concierge service is also available for residents. This is truly awesome and I am very impressed by the dazzling level of architecture that integrates all elements into this entire development.


Personal thoughts:
How I wish I could grab a unit at this luxurious & iconic development but alas, the price tag is at around S$ 2,400psf on average. Capitaland managed to sell an eye-popping 160 units over the recent weekend launch (considered a magnificent feat relative to the sales figures of other newly launched projects). Out of these, 87% of units sold are one bedroom and two bedroom probably due to the lower price quantum. The 3 bedders and above made up only 13% of sales. So I am not sure whether this points to an overarching weakness in the overall local property market. However, one thing is for certain, even if the price does drop 20% or 30% in the event of a recession, I will still not be able to afford it…haha. I still think that private property prices in Singapore are super expensive. 

People kept comparing Singapore to Hong Kong and some even remarked that Singaporeans are a lot luckier than Hong Kong residents as, at least, our local properties are so much more affordable. Well, I do not really agree, I think that it is crazy that Singaporeans need to work 25 years to 30 years to pay off the mortgage. We are more of a slave to the banks.

So do you think that the launch of One Pearl Bank and its sales of 160 units reflect the beginning of an upbeat property market or the sales will splutter with the emergence of more bad news from the Singapore economy? Will you rush in to buy a unit for investment before all the 1 bedder and 2 bedders sell out?

Saturday, 13 July 2019

3 Reasons Why I Am Not Taking Part in Prime US REIT IPO


The recent talk of the town is the upcoming Prime US REIT IPO. Prime US REIT is a US-based office REIT that offered an attractive yield of 7.6% at the offer price of US$0.88 per unit. The other plus points of Prime REIT are that its office properties are freehold and have long WALE of 5.5 years. The public offering will end on 15 July 2019 (Monday). Despite the many star attributes, I will not be taking part in this office REIT IPO due to 3 main reasons.

1.   The US economy is weakening with the ongoing trade war
James Powell just gave an indication of a possible Federal Reserve interest rate cut in view of weak US economic fundamentals. Global economies are in the doldrums. Singapore is already facing technical recession due to the close association with external export.

Deutsche bank worldwide 18,000 job cuts in investment banking, clearly shows that not all is good in banking these days. The bulk of the axe is believed to be falling on Wall Street (US) and Europe. Such grand-scale layoff closely resembled the loss of banking jobs in the aftermath of the failure of Lehman Brothers during the Global Financial Crisis days in 2008.

The increasing amount of bad economic news is worrying and will definitely dampen investors and consumers sentiment. I prefer to take a wait and see approach on upcoming quarterly/mid-year financial reporting of major companies first. There is no need to rush in to grab any IPO as if they are selling hotcakes at this juncture.

2.    Long WALE of 5.5 years does not mean that the profits of Prime US REIT will not drop.
The theoretical point here is that the WALE of 5.5 years is an “average”. If the recession kicks off next year and drag for another 1 to 2 years, chances are some of the tenancy of units in the portfolio will be expiring. Given the possible bad state of the economy and lack of business activities in the event of such a pessimistic scenario, most of such tenants will either be reducing their office sizes or closing down offices. Any successful rental reversion will also most likely be negative for the landlord.

3.   Prime US REIT is denominated in USD- Forex exposure for Singapore investors
Forex is always a double-edged sword. If you believe that the US economy and widening annual deficit will lead to an eventual weakening or even possible collapse of the USD, best to stay away. However, if one believes US economy is ever innovating and have sufficient resources such as shale oil to fund the deficit and recover, then it should appreciate steadily.

Summary
I actually like Prime US REIT a lot for its many good attributes as well as good geographical diversification for my investment portfolio. However, in view of all the bad news emerging in the global economies as well as locally, I thought I will give this interesting IPO a miss for now and see whether there are better opportunities opening up in Q3 2019.     

Monday, 8 July 2019

Will SingMedical Group Opt For Privatisation By Following The Footstep Of Thomson Medical Centre And Health Management International?


In order to unlock the undervalued business of SingMedical Group (“SMG”) which I mentioned briefly in my post on 9 June 2019, I have suggested the possible option of privatization using the example of Thomson Medical Centre which had previously been acquired by the local business tycoon Peter Lim before doing a “future relisting” on the SGX 6 years later. Thomson Medical is close to my heart as I used to be involved in part of its accounting and financial work many years back. Also interestingly, another medical group, Health Management International recently announced a privatisation initiative after years of languishing share price performance amidst good financial results.   

1. Acquisition of Thomson Medical Centre by local business tycoon Peter Lim and eventual privatization and “relisting” it on SGX.
To recap, Thomson Medical Centre (“TMC”) was founded by Dr Lim Cheng Wei Chen in 1979. It was listed on SGX in 2005 and was the fourth healthcare services provided on SGX after (i)Parkway Holdings, (ii) Raffles Medical Group and (iii) Health Management International. In 2010, Peter Lim made an offer to buyout TMC based on a valuation of approximately S$513 Mil which was a whopping 60% premium over the last traded price. TMC was subsequently delisted from SGX in January 2011.

Of course, there were some critics then who thought that Peter Lim might have overpaid for TMC by paying such a colossal premium over the business. It turns out that the astute businessman Peter Lim had the last laugh as he sold the TMC business (along with TMC Life Science) in 2017 to Rowley shareholders for S$1.9 billion which is multiple times (3.8 times) the amount he paid initially. Peter Lim’s bet on the aging population and booming healthcare services via the building up of healthcare portfolio was simply right on the spot and brilliant. Also, by injecting the assets into his public investment vehicle Rowley, Peter Lim looks set to participate further in its future growth. Rowley later changed its name to Thomson Medical Group.    

2. Health Management International partnership with private equity firm EQT and proposed privatization offer of S$0.73 per share
On 5th July’19, Health Management International (“HMI”) had also announced a proposed privatization by offering S$0.73 per share via a partnership with private equity firm EQT. This represented a premium of 24.8% over the volume-weighted average price of HMI over the last 1 mth. Existing shareholders of HMI can choose to sell their shares directly or swap them for new shares in the offeror.

One of the main reasons cited by HMI management for privatization is due to the challenges in raising capital is because it is highly dependant on the market conditions. This draws a similar parallel dilemma to what SMG is facing too, that is, rights issue at an ever declining prices due to the undervalued business by the market.

After privatization, HMI will build up the current business with new funds of up to S$150Mil from EQT for investments and acquisitions. The target is to work towards another IPO within 18 months after the initial 4 years of repackaging at a higher valuation. This is clearly another business plan that resembles the billionaire Peter Lim’s strategic investment into TMC in 2010 and the partial exit in 2017.

3. Is there the possibility that SingMedical Group will also be privatized and shareholders offered a premium to last traded price?
This is only a remote possibility at this juncture as CHA Medical Group had just provided an equity convertible loan of S$10Mil to SMG to fund new acquisitions.

However, if share prices still languish as it had been over the past 2 years despite the turnaround of its business and better financial performance by Dr Beng, future capital raising exercises will be detrimental to the shareholders of SMG as only a very low amount can be raised which forms a vicious downward cycle on the share price. The substantial shareholders will not be happy with such perpetual share price spiraling downwards after every rights issue.

SMG can choose to either work with the Korean CHA Medical Group or partnered with a private equity firm (just like HMI) to buy out the current shareholders and then do an IPO or business injection into a shell company already on SGX to realise its intrinsic value.

 4. Will retail shareholders of SingMedical Group benefit from such privatization attempt?
The answer is actually a resounding “NO” based on its past few years of excellent financial performance and also rapid business expansion. The offeror can make a low ball offer of just a token 25% more (say S$0.50 per share) than the last traded price of S$0.395 per share. However, many retail shareholders may have no choice but to take up the low offer as once the firm delisted, they may be stuck with the shares on hand with no buyers since it is no longer trading on the stock exchange.

The last valuation of SMG business was just recently concluded by CHA Medical Group valued the business at a price of S$0.605 per share. Hence “privatization offer” may not necessarily be a good thing for retail shareholders but it does enable investors to cash out at some premium if the undervaluation in market price situation has been prevailing for many years.

5. Summary
Summarising, I hope that Dr Beng and his management team will consider the implementation of a Group dividend policy as a mean to try to narrow the current significant gap between market pricing and the intrinsic value (current earning multiple benchmarking to the other medical players on SGX is way too low). If this still does not work, a strategic review of options such as privatization should be considered to unlock the intrinsic value of the SMG business.  

Please also see my previous postings on SingMedical Group:

Thursday, 4 July 2019

Frasers Commercial Trust Finally Snagged Google as Major Tenant

The much anticipated Google deal at Alexandra Technopark finally went through and was formally announced on 25 June 2019 by Frasers Commercial Trust (“FCT”). Since my last posting on 19 January 2019, there has been no more news after the Business Times announced that FCT and Google Asia Pacific Pte Ltd were discussing taking up space at Alexandra Technopark. For the past few months, I thought that Google Asia Pacific had walked away from the lease negotiation and was very worried over how FCT would fare should the global economic downturn happen by end of this year. When I saw the price hitting a record high of S$1.66 per unit last week, my sixth sense tells me that FCT must have announced some major news on the Google deal and quickly checked their SGX announcement. True enough, Google had signed up with FCT.

It is simply wonderful that Google Asia Pacific has decided to expand further into Singapore and to take up 344,100sqft of space which represents 33.3% of the current total net lettable area of Alexandra Technopark to drive the committed occupancy rate to 93.7% as at 25 June 2019. What sweetens the deal, even more, is that Google has committed to a 5 years long lease term. It is widely believed that the average price achieved is around S$4psf which translates to an annual contribution of S$16.5Mil and a total contractual value worth a staggering S$82.6Mil. FCT Management team has scored a major victory in winning this major tenant. The tenancy agreement will commence in the 1st quarter of 2020.

With such a high-quality tenant win in the portfolio of FCT, its earning sustainability will be greatly enhanced even in the event of an economic downturn. As such, its share price may continue to soar and hit S$1.70 per unit as the market should re-rate it closer to the yield spread by other commercial REITs such as Capitaland Commercial Trust. Anyway, I will not be selling away FCT anytime soon unless there are significant changes in its earnings visibility and business fundamentals. 

Wednesday, 26 June 2019

Threat to Singtel and other Telco Profit Margin- TPG Offering Unlimited Data Roaming in Malaysia and Indonesia

Singapore’s 4th Telco TPG wasted no time in firing a fresh salvo against the telco big boys (Singtel, Starhub, and M1) by offering free unlimited data roaming in Malaysia and Indonesia as part of its many innovative services to its current subscribers. To prevent the potential loss of customers, Singtel and its brethren may very well be forced also to match the new service offering. In 2018, around 10.2Mil Singaporean visits were recorded by the Malaysia Tourism Board. Most Singaporeans would have activated the special promotional package of S$5/GB for such trips across the causeway. There is thus a potential total revenue loss of at least S$51Mil which used to flow directly into the Net Profit Margin of the current 3 telco players that have been dominating the Singapore market for close to two decades.

On the topic of overseas data roaming, many colleagues and friends that I know of, have often found themselves in the predicament of paying for exorbitant data roaming charges while in Malaysia or Indonesia (Batam or Bintan in particularly) as most would have forgotten to activate the promotional package beforehand. A typical situation would be that once you reached Malaysia or Indonesia, one would then switched on the phone or switch off the “Plane mode” and the SMS and emails would then have “flooded” your phone before you can activate the S$5 promotional offer package for the data roaming via SMS. Hence a few dollars would have been wasted and most folks would not have bothered to appeal for a waiver. This is actually quite a common and irritating problem. Hence TPG’s move to implement the free data roaming for Malaysia and Indonesia will definitely be appealing to price-sensitive consumers. 

I do look forward to more innovative products and services offering from TPG to disrupt the local telco market to benefit local consumers. There is no doubt that Singtel, Starhub, and M1 are going to face intense competition and downward pressure on their profit margin over the next 2-3 years. While “market experts” have frequently asserted that the local market cannot sustain more than 3 telco and the industry will eventually consolidate, the fact remains that the telcos still have a fat profit margin and are not in a loss position. I believe that there are still enough fats to be trimmed off and passed on to TPG and consumers. Well, at least this is good news for consumers albeit bad news for investors of Telcos.

Thursday, 20 June 2019

Investment Portfolio Updates- 19 June 2019 (Market Rally In the Face of Imminent Global Recession?)



The see-saw ride in the global markets continues since my last portfolio update in April’19 with no clear end in sight. The US levying of tariffs on China and a swift retaliation from China leads to a tumbling of many blue-chip companies listed on the Singapore Stock Exchange. However, over the past 2 weeks, the market had rallied strongly despite weakening macroeconomic fundamentals. “Defensive stocks” such as Singtel and REITs have also seen their prices shooting up like a rocket. The surprising aspect of this is that while the Federal Reserve has given some indication of halting of interest rate increase, this does not mean cutting of interest rates but more of mere hinting. Still, the global market rally on optimism that interest rate cuts are definitely coming which will save the global economies.

One point to note, as per the last global financial crisis in 2008, is that defensive REITS or telecom companies will also be adversely impacted by a global recession and their price will also drop drastically albeit at a slower pace than the blue chip counters. The current trade war has already led to slowing down of trade and also higher goods and services prices in US and China. We are already seeing more and more bad news emerging with regard to the status of the global economies. To side track a bit, this time round, I am not sure whether we can still classify Singtel and Starhub as defensive in nature in view of the declining profit margin of their telecom and Paid TV business segments.   

The bulk of my investment portfolio is held in the form of REITs (approximately 69%). However, I am not particularly excited about the current June’19 general rally in REITs prices. I do not have a crystal ball that can peek into the future to know whether this is the perfect time to sell and then wait for the prices to plunge if the global economies really sink into a global recession in the 2nd half of 2019 in order to re-enter into the market to exploit market timing. I have seen too many cases over the past few months whereby a lot of enthusiasts exited most of their REITs investments while waiting for the calamity to befall the human race but sadly, they would have missed out on the quarterly dividend stream and also recent rally in prices. My preference would be to collect the dividends and if the market really tanked, to aggressively raise cash level to buy up any undervalued assets.

Also, I decided to put in my small amount of NTUC Income shares- which I kept forgetting previously- into my portfolio tracker to handover to my next of kin for further action if I ever get into an accident. The only regret which I had was not buying more of the NTUC Income shares before the management call for a halt in new shares issuance to policyholders. The bad thing about NTUC Income shares is that its unit price is always fixed at S$10 per share in the event of resales to another party. 

Some quick highlights of the main adjustments I made over the past 2 months:

(1)        Participated in the rights issue of Fraser Centrepoint Trust
Got my 589 units off the non- renounceable preferential rights issue and on top of that, I found myself lucky to be allocated a further excess rights subscription of 1,511 units. Hence total 2,100 units @S$2.35. Compare to the market price of S$2.59, this is an effective S$500 discount to the current market valuation.

(2)        Accumulated additional units of Netlink Trust and Keppel DC REIT
Netlink Trust has shown good earning capability while Keppel DC REIT has very long leases with its tenants (WALE 8 years).

(3)        Sold off part of Starhill Global REIT
Took profit. Orchard Road concentrated malls are exposed to higher recession risk due to dependence on tourists instead of local consumers. This is to reduce my exposure as I already have significant exposure from Paragon via SPH REIT in view of the worsening economic conditions. My preference is on suburban malls due to local high-density living and relatively controlled supply of retail spaces.

(4)        Sold off most of my Perennial Holdings
This is currently my worst performing investment. I think it is severely undervalued as most of its China concentrated projects are still work in progress and the market slapped it with a super high-risk premium. The recent financial results announced in 2019 is also horrendous with high financing cost of City Hall Capitol buyout of stakes from another major shareholder (to end longtime partnership dispute) as well as slow ramp up in occupancy. Redeployed the cash from disposal into the rapid growing SingMedical group.

(5)        Accumulated additional shares in SingMedical Group
Please refer to my recent posting here. In addition, I noticed that a number of directors have either purchased more shares directly or purchase additional shares via exercising their share options.

(6)        Purchased additional units of FIRST REIT
Accumulated additional units of FIRST REIT when its prices dropped below S$1 per unit. Sponsor Lippo Karawaci has already completed rights issue to raise cash. Also, once the divestment of the shopping mall from Lippo Karawaci to Lippo Mall REIT is completed, it should further shore up the financial position of Lippo Karawaci to avert rental default of FIRST REIT at least till end of 2020.

Thursday, 13 June 2019

New Lease Accounting Rule Impact On Companies and Investors- Making Something Out of Nothing


The new accounting standard FRS116 on leases came into effect on 1st Jan 2019. The “right of use” asset model basically attempt to plug the loophole of off-balance sheet liabilities. Basically, for operating lease assets, companies are now required to capitalize the present value of future lease payments of such arrangement as a direct fixed asset and also to recognize a theoretical liability. This gives rise to a strange phenomenon whereby an arbitrary financing cost is also created monthly for the right of use of the asset during the unwinding of the interest component in the lease liability. From the cash flow statement perspective, companies now have to account for the monthly lease payments into (i) repayment of principal portion and (ii) the cost of financing the “right of use” asset. From a retail investor perspective, it does lead to massive confusion over the understanding of the traditional Statement of Comprehensive Income (Profit and Loss statement) as well as cashflow statement.

Majority or only a minority of companies affected?
Majority of companies are being impacted by this change in accounting. For example, most business would definitely have an office lease or industrial premises lease. Since the lease of premises is one of the huge cost components of business, this impact can be very significant on the financials.

To illustrate this, a company may have signed for a 5 year industrial lease for S$120K per month. Total contractual obligation thus amounted to S$7.20Mil over 5 years. Under the new accounting rule, the present value (assuming the benchmark incremental borrowing rate is 3.5% and the landlord requires prepayment on 1st day of month) of future lease payment will be S$6.62Mil. The differences of S$584K is deemed as the financing cost over the 5 year period.
Key parameters to work out the present value of lease payments
What are the differences between the new profit and loss impact relative to previous method on lease accounting?
Instead of recognizing rental expense in a straight line over 60mths under the old method, the new accounting rules does not have any rental expense for operating lease with the exception of low value or items less than 1 year. The new accounting rules recognizes (i) depreciation and the theoretical (ii) finance cost of liabilities unwinding into the profit and loss consideration.

The mind blogging aspect is that the new rule loads up expenses upfront at the onset of the first few periods of the lease period whereas the previous method has a simpler approach of constant and equal lease expense every month. This is illustrated in the screenshot from period 1 to period 60. The fluctuating figures make it hard to do an accurate forecast of the future business performance with the declining profit and loss impact especially towards the end of the lease whereby the liabilities have been significantly lowered hence very little finance cost at this juncture.
 
Screenshot of monthly profit and loss impact of new recognition method vs previous method
The experts who implemented this new rule rationalize the fluctuation by justifying that this is the realistic application of the time value of money concept.

Further confusing aspects of new accounting rule
1.   As mentioned above, the new accounting rule stipulates the recognition of operating lease has exceptions for low carrying value lease contracts or contracts for less than 1 year. What this meant is that the rules still allow one to use back the old method for such “immaterial” lease contracts to cater to complaints from commercial practitioners on the practicality of implementation for every operating lease in their business which will be too onerous.

2.   If the operating lease contract comes with an option to renew upon the end of the contracted lease (which is actually very common), the new rule requires one to use a judgmental estimation of the probability to decide whether the contract period should take this additional option into consideration to derive the total value of future payments for lease liabilities. Once you leave things to judgment, hell breaks loose eventually and leads to big fluctuation in future financial results.

Summary
I do not like the new accounting rule as it makes an assessment of current potential businesses identified for investment more complex due to the monthly fluctuation and the additional mental acrobatics during analysis. It also makes the overall profit and loss weird with front-loading of expenses and then a favorable impact towards the mid to end point of the lease. But it does have added transparency to potential investment company statement of financial position by bringing in contractual lease obligations into the gearing ratio.