SGX Listed Fu Yu Corporation No Longer A Cash Cow- 3 Things To Be Wary.

Recently, I had a review of some of my existing holdings in my portfolios and I was disappointed that Fu Yu Corporation ("Fu Yu") share price performance has been slipping. Its unit price has dipped from its S$0.210 average to S$0.178 per share. The worst aspect is that its key manufacturing performance, post the buy-out of the old management team, seems to be sliding from bad to worst. Management has also slashed the usual dividends payout in May'23 relative to prior years. I have already commenced cutting down the majority of my stakes in Fu Yu Corp (87% reduction) after taking a deep dive into its latest 2023 Q1 operation updates as well as its most recent full year financial statements and will only keep a tiny stake of 20,000 units (approximately S$3,580 @S$0.178 per share as at 1 June 2023). There are 3 points that is currently giving me a jittery vibe with regard to the current Fu Yu Management team albeit the common understanding that the global economic situation has slowed down drastically and affecting their business.

1. Fu Yu previous CFO Ms Hee Siew Fong (aged 51 years old) has resigned in Q4 2022

This event has always been lingering on my mind with regard to Fu Yu. Ms Hee was only 51 years old which is still a relatively young age for a CFO to want to leave. She has been with Fu Yu Corp and the previous management for 7 years. Within a short span of the new management taking over, Ms Hee has resigned. It was announced on 7th October 2022 that the Company and Ms. Hee have "agreed to part ways mutually" by a settlement agreement.

Personally, I think that the enigmatic resignation may have been a clash in terms of vision or direction such as future business strategic growth differences. It may also have to do with clash in financial resource allocation. Also, I have seen in some cases the resignation of key accounting and finance personnel (except for genuine old age retirement) does not bode well for an organization.

2. The new supply chain management service segment by the new Management sucks big team with very tiny net profit margin percentage- as good as not doing.

Initially, I thought that Fu Yu has got a new growth engine with this supply china management services segment introduced by the new management team. For FY2022, this business contributed a staggering S$100Mil in terms of revenue to Fu Yu but only contributed a tiny net profit of S$1.9Mil which is a mere 1.9% net profit margin.

I have no idea how this business works and also the risks associated. Initially, I thought that this is like a back to back consolidation of trade in physical commodities with minimal risk but I was totally wrong. For Q1 2023, this new business turned into a net loss of <S$2.4M> on revenue of S$9.7Mil. 

I think that it is a waste of management time to be devoting resources & efforts to this business and that the management team should just sell it off and focus on its core manufacturing business and transformation map 2.0. The risk and reward ratio does not align or make sense to me personally especially in view of the Q1 2023 business updates.

(Note: Also, from the AGM queries, apparently, I am not the only shareholder expressing concern about this "new supply chain management" business).

3. Close to 50% cut in dividends as well as changing to a cheaper auditor Baker Tilly relative to KPMG LLP

The May 2023 dividend payout has been cut drastically by the management. This seems to imply that either the Company is losing sales of existing customer fast or that its cost control is inadequate to address further potential decline in its business. 

I also do not like the part that Fu Yu made a cryptic statement that its "board and audit committee believe that it is timely to change auditor (KPMG LLP) for the forthcoming financial year ending 31 Dec 2023 considering that it is an opportune time to benchmark the audit fees and realise cost efficiencies".  To put it bluntly, Fu Yu is desperate enough to do cost cutting by doing away with the Big 4 audit firm and instead uses a small mid-size audit firm (Baker Tilly). I would not be too worried if they had instead change to any of the other three Big 4 audit firms (it is the hard truth that the best talent in public accounting are in the Big 4 audit firms) but by such a move, this seems to be insinuating that Fu Yu management are troubled by their firm's future business performance.   

Parting thoughts

While I was initially excited at the venture into precision medical devices manufacturing as well as the unleashing of the upcoming newly built SMART factory in Singapore, my optimism for Fu Yu under its new management has eroded. I sensed that something is not going well with the current business as well as its future outlook with the above events occurring hence I am selling off most of my stakes in Fu Yu Corp and re-investing the proceeds into a SGX listed blue chip company that is similarly undergoing a business transformation that I have more conviction under a proven management team.  

AIMS APAC REIT Announced Fund Raising For Asset Enhancement And Property Redevelopment- Important Timelines To Take Note.

AIMS APAC REIT ("AIMS") has just announced on May 31, 2023 that it is raising equity of S$100Mil to fund asset enhancement initiatives ("AEI") and property redevelopment. AIMS has an excellent track record of successfully executing AEIs and redevelopments to unlock value organically. The most wonderful aspect is that on top of private placement, AIMS has also included a preferential tranche for existing unit-holders to take part in the additional investment. 

1. Currently Identified Properties for AEI and Redevelopment:

AIMS still has over 500,000sqft in terms of Gross Floor Area that it can utilised for development in Singapore and up to 1.5million sqft of GFA available for development in Australia. The redevelopment of 3 Tuas Avenue into a modern ramp up 4 storey facility from 0.92 plot ratio to 1.40 plot ratio will boost GFA by 52.5%. AIMS management has also secured a 10 years master lease agreement with its tenant upon the building's completion. 

2. Use of S$100Mil from Equity Fund Raising Exercise

(i) S$32Mil will fund the AEIs of the 2 properties of 29 Woodlands Industrial Park E1 and 23 Tai Seng Drive;

(ii) S$65.2Mil will be used to partially or wholly fund any other potential AEIs (on top of above mentioned properties in point (i) )  as well as redevelopment of 3 Tuas Avenue and

(iii) S$2.8Mil to pay off professional service fees and expenses related to the equity raising exercise.

3. Aggregate Leverage Will Be Lowest Among Industrial S-REITs peers after fund raising

The aggregate leverage will drop from 36.1% (as at 31 March 2023) to 32.8% post completion of the equity raising exercise. This will give a debt headroom of S$275Mil (assuming internal target maximum leverage of 40%) for AIMS to exploit on any opportunistic acquisitions or further re-development opportunities 

AIMS Optus Australia Warehousing Facility

4. Important Timelines Not To Be Missed

Do take note of the key timelines so as not to miss any subscription (for those interested) for the preferential placement. It will commence on June 14, 2023 and end on June 22, 2023.

Between 34 New Units for every 1,000 existing Units to be held as at the Preferential Offering Record Date and 35 New Units for every 1,000 existing Units to be held as at the Preferential Offering Record Date. The allotment ratio for the Prefential Offering will be announced later.

Parting thoughts

As AIMS management team has a solid track record of executing organic growth opportunities via AEIs and redevelopments, I will most probably be deploying additional capital and taking part in this preferential offering.  

Manulife US REIT Divest Major Property To Bring Itself Back from Existential Crisis.

The best news for me this week is the unexpected announcement from Manulife US REIT ("MUST") that it has entered into a letter of intent with its Sponsor (The Manufacturers Life Insurance Company) in relation to the sales of its major property Phipps Tower that is worth US$210Mil (at its last valuation exercise as at 31 December 2022). Amidst the various twist and turn of the MUST saga that is more exciting than the TV drama series, I actually do not mind (i) the fact that MUST had previously mentioned that divestment of properties is almost impossible in light of increasing interest rate environment and the weak commercial office market, or (ii) the fact that the Sponsor did not step in with such strong support at the start of this crisis which led to the current calamity facing MUST- anyway these points are no longer relevant. 

I am actually more than happy that Manulife Life Insurance Company suddenly had a change of heart and decided to step up to its moral obligation as a good sponsor to avert the existential crisis of MUST and a massive dilution facing loyal unit-holders if the Mirae deal is the only financing option left on the table. 

1.Aggregate leverage expected to be down to 43% after sales- existential crisis temporary averted.

It was reported that Phipps Tower is below market rental rate by 20%-30% and that the major tenant, Carter, has renewed 209K sqft of space with 18% rental reversion from 2025 while giving up 69K sqft. MUST manager expect the untaken up space to be easily rented out due to healthy tenant interest for bite size space that are 10K to 20K sqft. Assuming a 10% downward adjustment of the current valuation, this would imply a haircut of <US$21Mil> off its previous financial year end valuation of US$210Mil for the disposal exercise. This would bring gearing down to a more manageable level of 43.1%. 

2. The Mirae deal "exclusivity period has lapsed"- so what does this enigmatic statement mean?

This part of the recent announcement seems to be rather cryptic but is actually a tactful way to state that the Mirae deal has collapsed. Also, with the announcement of fervent Sponsor support as aforesaid mentioned, MUST can now negotiate from a position of strength instead of accepting a super dilutive proposal from Mirae or other prospective partners.

Parting thoughts

With MUST trading at a mere 0.3 times of its book value, the current meaningful divestment of a significant property will hopefully stem the tide against the plummeting unit price and shore up investor's confidence. A subsequent rights issue on improved sentiment will be most appropriate in its next strategic growth path.

The One Thing That Sucks Big Time With Mapletree Industrial Trust Latest Japan Data Centre Acquisition.

Mapletree Industrial Trust ("MIT") just announced on May 25, 2023 its maiden acquisition of a data centre in Osaka, Japan for a consideration of S$507.9Mil with cash outlay of S$196Mil funded by a private placement and S$310.2Mil from JPY loan. While the 20 years long lease from the data centre operator for the this acquisition brings upon much stability and visibility to earnings, the fund raising at a proposed price range of S$2.16 to S$2.212 per unit represented up to 5.2% discount of the last traded unit price of S$2.28 as at May 24, 2023. I have to lament the fact that existing unit-holders of MIT are left high and dry by this private placement without an opportunity to take part in acquiring more MIT units at a discounted price. This is extremely disappointing. 

1. Good News: New Data Centre Acquisition Expected to be DPU and NAV per Unit Accretive.

2. Osaka Data Centre Fully Leased to Established Data Centre Operator For 20 Years
The long WALE of about 20 years offers much stability as well as visibility to MIT. Moreover, it will further reduce concentration risk of existing major tenants via income diversification with the new acquisition. 

In addition, the property to be acquired is a fully-fitted data centre, which was substantially completed in November 2022. It is leased on a net lease structure with minimal landlord operational obligations. Such lease arrangements thus minimises operating risk for MIT, which will ease MIT’s entry into a new geographical market of Japan.

Parting Thoughts

Overall, I quite like the new acquisition which was well crafted out by MIT's acquisition team. Even the JPY loan taken functions as a natural forex hedge against the overseas asset being acquired. MIT is growing well with its original strategic vision to expand data centres to about two-thirds of its "Assets under Management". The latest acquisition bumps its data centres portfolio to 56.3%. Hopefully, MIT's management will remember existing unit-holders in its next major acquisition and not place out units privately to external parties while MIT is trading at close to a 52 weeks low during this bear market period.

Manulife US REIT Shocking Price Collapse and the Mirae Deal.

Manulife US REIT ("MUST") is currently facing an existential crisis and precariously close to breaching its statutory debt ceiling. For those retail investors who thought that they have got a good bargain by entering at US$0.285 per unit at the beginning of the year, they would have found themselves catching a falling knife. MUST just kept plummeting non-stop to hit US$0.141 per unit as at 22 May 2023 which is a whopping -50% loss in valuation. Worst hit are those who have held MUST for a longer period. I have no doubt that the "Mirae Deal" to recapitalize MUST will be presented soon in June'23 as I have seen the public relations team of MUST contacting "rogue" blogger like myself to be kept in their mailing list in order to indirectly influence any overly-negative postings (which is part of their PR job I suppose). 

1. Existential threat to MUST does not end with the presentation of the "Mirae Deal".

The hard truth is that the existential threat to MUST unfortunately does not go away with the announcement of the Mirae Deal which the management of MUST had clearly mentioned previously that this will be put up for a vote for all unit-holders at an Extraordinary General Meeting. Bear in mind that a lot of existing unit-holders as aforesaid mentioned are probably going to get seizures upon seeing the massive dilutions to their holdings- the only question is how massive is this dilution. Make no mistake here: Mirae is not a charity organization- they will be getting their capital injection priced in to an average of recent market pricing which is no difference to a fire sales of properties of MUST. 

Basically, the essence is that MUST management and PR team must be able to convince the majority of unitholders to vote for the Mirae re-capitalization deal. This will not be an easy feat.

2. Problem with a publicly listed entity is that everyone got their own "better" solutions/alternatives.

Given the massive dilution, there will be many angry folks. There maybe bound to have some groups of unit-holders fighting against the Mirae deal and opting for example to have a rights issue to all or insisting on selling 2 or 3 properties at fire sales price rather than letting Mirae in. 

Looking at how combative Quartz Capital is (please see my previous postings), the re-capitalisation plan for MUST may hit a wall. 

3. MUST Management need to strategize and craft appropriate backup plans into the next EGM in event that the Mirae deal fails.

I hope that MUST Senior Management team is able to craft out various alternative solutions such as resolutions for rights issues to all equity holders (and also find a backer for the rights exercise) and everything can be sorted out in one EGM instead of multiple EGMs. 

The senior management and PR team also need to market out the consequences clearly for all unit-holders in the event that irrational group of unit-holders rejected all capital injection proposals- this is what happened to the infamous Eagle Hospitality Trust whereby the only clear winners are the lawyers and professional consultants who made big bucks out of rehabilitating entities in financial duress. 

Parting thoughts

The current pricing of MUST seems to be extremely pessimistic and pricing in the risk of self implosion such that no rescue deal or capital injection materializes. While I frown upon the entry of Mirae due to the anticipated massive dilutions to my existing unit-holdings, I do see some benefits in terms of the other category of investment properties pipeline (other than office commercial buildings) which the new entrant can bring onto the table for further strategic growth and diversification. Looking forward to the announcement and more details from MUST. 

Portfolio Updates- 2023 Quarter 2 Dividends of S$9.7K (1st Half Dividends of S$34K) and Recession Fears.

I am surprised that my 2023 Q2 dividends is projected to come in higher than initially expected at S$9.7K. This thus brings my entire first half dividends contribution to be approximately S$34K which if annualized, will be S$68K and is way higher than my original annual forecast on 30 April 2023.

ComfortDelgro announced a special dividend recently and Hong Leong Finance also benefited from the higher interest rate environment albeit its traded market price remaining at a huge discount to its NAV. Netlink Trust also announced a higher distribution to unit-holders for their first half results.

Upcoming Economic Recession Crisis and What I Intend to Do?

I have seen some fellow bloggers preparing to take up a larger cash position (there was one who mentioned 50% of assets in cash) while anticipating the global economic turmoil to worsen drastically in the 2nd half of 2023. I intend to leave my current investments as it is as I do not like to time the market. For all we know, the current stock market may already be factoring in the economic recession- that is why the usual adage goes that the stock market is moving ahead of the actual economic climate by 6 months.

Parting thoughts

I think that the era of dirt cheap financing (at close to 0% interest rates) after the last major Global Financial Crisis in 2008 is over. The Feds may cut a tiny bit next year to stimulate the US Economy but high interest rates environment maybe here to stay for the next decade. The greatest risk for Singapore is whether our "invincible" property market will crash one day from such high mortgage rate and this may have a tsunami domino effect on our stock market should this day comes.

Personal Updates- Finally Found A "Miraculous Cure" For Irritating Non-Stop Hiccups.

Wow, seems like globally, stock markets are generally super bearish again with stock price dropping like flies with many folks anticipating a world wide upcoming recession. Not much time to blog for the past week as I am simply too busy with my "extra role" doing business development on top of looking after accounting and finance function of my company (for those interested in my tragic career development can read this previous post). Anyway for today, I would like to share this gadget that helped improved my life greatly. I used to suffer from long hiccups episodes at least once or twice every month- it can last for 6-12 hours or even up to 2 days. I have tried various old home remedies such as holding your breath, drinking gulps of hot water or massaging your own diaphragm area but none of it ever worked. 

1.Hiccup and suffering
The worst thing about having hiccup episode is that it makes life unbearable especially when talking to your colleagues at work whereby one suddenly emits a "Hic" shriek at various point of a conversation- it is totally embarrassing. The other irritating aspect is that it can affect quality of sleep as I find myself unable to turn in with the repeated spasms or sudden movements of the diaphragm that you can't control.

2.The surprising solution that WORKS  for me

I was desperate for something that can cure the hiccups fast and began researching. Besides medication on certain muscle relaxant, there are a lot of "cures" listed online such as holding your breath or special massage exercises-but alas, these are just disappointing and never worked. One interesting thing that caught my eye was a device invented by Dr. Ali Seifi, M.D who is an Associate Professor of Neurosurgery and Director of the Neurological Intensive Care Unit at University of Texas. The origin of this device, known as the "HiccAway" was that it was invented to help patients suffering from hiccups due to neurological injuries. Dr Ali Seifi soon realised that this device would not only be beneficial for medical use but also for the common men on the street.

3. The science behind how it works

The HiccAway device works by stimulating 2 key nerves (the phrenic and vagus nerves) responsible for the hiccups thus allowing our brains to reset and stop the hiccups by generating enough pressure to lower one's diaphragm and for the nerves to signal the brain to stop the spams. All one needs to do is to sip some water using this device and one will get nearly instant hiccup relief. It is something like a straw but with huge pressure inside that created resistance when one tried to suck in the water from a cup. Sounds too good to be true right? But then it worked for me miraculously and I am super impressed by it given my long time suffering from hiccup episodes.

Personal experiences using this product

I have been using this device for 1 month plus. There are some exaggeration from the marketing that the hiccups will go away instantaneously after 1 sip of water from it. This is not true. Rather, it may take up to sipping and swallowing 1 cup to even 5 cups of water (depending on the severity of your spams) using this device to gain full relief from the hiccups. There was one time my belly felt like exploding after downing 5 cups of water. I considered this a miracle already given that my usual hiccups timing went down from 6-12hrs to relief in just under 15mins. Anyway, this is just from my personal experience after trying so many home remedies that does not work. Personally, I would think that the success rate of 90% using this device as asserted by the inventor seems to be a fair statement based on my own experiences. For those interested, this interesting "HiccAway" device is available online eCommerce platforms such as Amzon.sg. 

That's all for my sharing today. Thanks for reading!