Sunday, 8 December 2019

Strange Encounter on Pricing of Kaya Toast Set at HDB Kopi Tiam

Apparently, the Kaya Toast set is quite unique in Singapore and Malaysia. It consists of (i) 1 coffee or tea, (ii) Kaya Toast and (iii) Eggs (half boil/hard boil). I have an interesting story from a colleague who went on board Cruise ship for a short holiday. While doing breakfast in bed, he requested the kitchen to bring him toast and also half boiled eggs. When the room service staff delivered the breakfast set, he took out a small knife and cut the hard boiled egg into half. Then he said to my colleague: "Sir, please enjoy your half boiled egg."  Needless to say, my colleague was flabbergasted. He took a long time to try to explain to the non-local room service staff but to no avail. Even the chef in the kitchen came to his room as he wanted to learn more about what is an actual "half boiled egg". My colleague had to ask for hot water and new eggs to demonstrate to the kitchen staff how to prepare "half boiled eggs".  
Every weekend, my kids will request Kaya Toast for breakfast. I have thus always been getting 2 sets of Kaya Toast from family cafes such as Ya Kun, Toast Box or Kaffe & Toast. Normally, I will upgrade the drinks to Milo by topping up 20 cents and also change the "half boiled egg" to "hard boiled egg". A typical breakfast set at these classier outlets will cost around S$4.80 to S$5.80 per set.

This morning, I jogged past my neighbourhood HDB Kopi Tiam and saw a banner outside proclaiming "Breakfast Kaya Toast set for only S$3". I decided to give it a try and start ordering from the Kopi Tiam Aunite.

Kopi Tiam Auntie: " What do you want?"

Me: "Auntie, can I have 2 sets of Kaya Toast? Dun wan Coffee or Tea. Please help me change to Milo. Also the eggs I would like hard boiled eggs."

Kopi Tiam Auntie: "Set only has coffee or tea. No Milo with the breakfast set. Also, the eggs are half boiled only. Take home and boil yourself if you want hard boiled egg."

Now, taking home and boil the half boiled eggs will defeat the purpose of ordering outside, right? Deep in my mind, I was wondering whether the Auntie is trying to be funny.

Me: "But Auntie, the cafe I went to can change to Milo by topping up money and also got hard boiled eggs."

Kopi Tiam Auntie: "Then you go back to your cafe to buy lor. Here cannot top up money to buy Milo de."

Sensing the Kopi Tiam Auntie getting pissed off, I decided to maintain my composure (good thing about getting older is one tends to have mellowed down compared to younger days when dealing with obnoxious and unreasonable people.) 

Me: "No worries Auntie, no need to be upset. I do not need the eggs then."

Kopi Tiam Auntie: " That will still be S$3 per set without eggs. Total S$6 for 2 sets."

Me:" Auntie, then I do not want set breakfast. Please do ala carte. Milo and Kaya Toast."

Kopi Tiam Auntie:" That will be S$2.70 per Milo and Kaya Toast. Total S$5.40 for 2 sets."

I was simply stunned when I heard that. Initially, the Kopi Tiam Auntie wanted to charge me S$6 for 2 sets even without the eggs and also cannot choose my Milo drink. But if I opted for ala carte instead of set, I got to upgrade to Milo and at an overall cheaper price of S$5.40, which is a 10% savings. I smiled back at the Auntie and paid her S$5.40 for 2 sets. Then I waved goodbye to her after collecting my toasts and Milo. The Kopi Tiam Auntie was surprised by the goodbye wave and smiled back at me and bid me goodbye too. It was a strange morning encounter indeed for both the kaya toast breakfast set seller and the buyer. 

Thursday, 5 December 2019

Profiting from Pricing Abnormalities- Merger of Frasers Commercial Trust and Frasers Logistics & Industrial Trust

Ever since the announcement of the upcoming merger between Frasers Commercial Trust ("FCOT") and Frasers Logistics & Industrial Trust ("FLT"), it gave rise to the strange situation of an arbitrage forming due to wide pricing fluctuation between the 2 REITs. Arbitrage is the process of exploiting differences in the price of an asset by simultaneously buying and selling it and in the process, the arbitrageur pockets an almost risk free return. For example,  On 3rd December 2019, the price of FCOT suddenly shot up to S$1.72 when the offered price for the merger exercise valued it at S$1.68.

Extract of Merger Scheme for FCOT and FLIT
1. Market apparently is trying to price in who received the shorter end of the stick
Now, this is a matter of differences in perspectives that lead to the see-saw pricing of both FCOT and FLT ever since the merger announcement. Some view that FCOT got the shorter end of the stick as the deal did not take into account the improving signing rents at Alexandra Technopark post AEI. FCOT also have a much lower gearing relative to FLT. Valuing it at S$1.68 from the merger thus undervalued the fair pricing of as high as expected S$1.76 per unit.

As for FLT supporters, they view the earnings of the REIT as more resilient and have annual rental escalations in its leases as well as a steady proven organic growth profile. Pricing the exchange of shares at S$1.24 per unit to FCOT unit holders thus severely underpin the fair value of at least S$1.30 per unit.

2. The pricing offered in the exercise are actually quite fair
Frasers Property sweeten the deal by also throwing in the proposed acquisition of the remaining 50% of Farnborough Business Park based in UK conditional to the completion of the merger. This acquisition will be yield accretive and I reckon it is thrown in to incentivise the unitholders of both FCOT and FLT for them to support the merger deal. As such, personally, I would think that the pricing of S$1.68 per unit for FCOT and S$1.24 per unit for FLT are supported and fair.

3. Opportunity to make small profit out of the merger exercise
One good example as mentioned above is on 3rd December. The pricing of FCOT shot up to S$1.72 from S$1.68. Those who managed to get a unit at S$1.68 per unit can simply sell off at S$1.71 to S$1.72 per unit and then buy FLT which is being priced at S$1.24 per unit. Of course, one have to be careful on which price to enter into for FLT which is also similarly going up and down like a yoyo. 

Another example would be on 4th December, prices for FCOT at one point dropped to S$1.65 to $1.66 per unit range. One could purchase and then hold on till completion of the exercise. Alternatively, one can chose to just do a simple sell off of FCOT when it rebounded to S$1.68 per unit.

On 3rd December 2019, I have sold off all my FCOT positions at S$1.71 per unit and used it to buy up FLT at S$1.23 per unit during the pricing mismatch at different times of the day. In addition, as I was on annual leave for the past 2 days and have nothing much to do, I decided to monitor the daily fluctuation in price and do a quick buy and sell and lock in some small profits of a few hundred dollars. The downside is that this is not entirely risk free and you maybe forced to hold on to the units but I believe in the long term prospect of FLT and market pricing shall revert to its fair value eventually.

Parting Thoughts
The entire merger exercise will probably take another 3 to 4 months to complete. I do hope that the deal is completed as soon as possible as the new business entity will enjoy better diversification in terms of its property portfolio and also better leverage during negotiation with bankers on financing.

Friday, 29 November 2019

Surprising Upcoming Merger between Frasers Commercial Trust and Frasers Logistics & Industrial Trust

In a surprising twist of fate, both Frasers Commercial Trust ("FCT") and Frasers Logistics & Industrial Trust ("FLIT") announced a trading halt. According to the Business Times, their ''secret sources" revealed that both REITs will be joined in holy matrimony and merged into one entity. The "secret sources" identity also cannot be revealed as the information is still private. As always, news seems to have leaked ahead of the trading suspension and the unit price of both REITs increased suddenly above their normal trading range for no apparent reason over the past few days. FCT and FLIT seems to have jumped onto the bandwagon of Capitaland and OUE Group by suddenly deciding to just merge the 2 REITs. 

I am currently holding on to both FCT and FLIT with almost similar weightage in terms of quantum in my margin portfolio. So the question of whether one particular REIT's shareholders will benefit more from any bias or favorable pricing over the other REIT in the new entity will appear to be non-relevant to me. As I intend to hold on to Frasers REITs for the long term for their dividends, the post merger will not increase the distributions automatically. It does make it more financially stable and probably be able to obtain cheaper re-financing by virtue of its mammoth size. If these are the good points, then Frasers Property can probably do a merger every year by injecting its other REIT and business trust, that is, retail and hospitality arms into one super giant stapled Business Trust. But then, it will make it murkier than mud and take away one's freedom to choose the business that one specifically wanted to invest. 

The only other benefit in my view will be the reduction of statutory compliance cost from one listed entity instead of the current two entities. Will await further details from Frasers Group regarding their upcoming plans for these 2 REITS. 

Wednesday, 20 November 2019

US Senate Unanimously Passes Hong Kong Human Rights And Democracy Bill- More Harm Than Good To Hong Kong

I was flabbergasted by some folks from Hong Kong who seem extremely pleased with the passing of the Hong Kong human rights bill by the US Senate. The bill if executed will be mostly detrimental to Hong Kong’s economy. It will lead to economic slowdown and also job losses for the Hong Kong people. Under this weird bill, the US Secretary of State would have to certify at least once a year that Hong Kong retains enough autonomy to qualify for special US trading consideration that bolsters the status of Hong Kong as a world financial centre. Losing the privileges of being treated as a separate trading entity from China will lead to many unfavorable restrictions and disadvantages being imposed on Hong Kong.  

Also, I find it ironic that the US Senate is criticizing China and Hong Kong governments for being brutal and violent to the Hong Kong people when the US government did nothing much to implement gun control measures to curb domestic gun violence from killing innocent US citizens. Nothing was ever done despite frequent mass shootings in US shopping malls and schools. Apparently, the US has an extremely high tolerance for violence.

Now if the US has such a penchant for violence, then do they have other ulterior motive in passing the bill?

If the Hong Kong people have no jobs, will the US government be giving them monthly allowances to help them buy house, food and medicine?

If the Hong Kong protesters got jailed and blacklisted such that their future are ruin, will the US government undertake to take in all of them into the US without cherry picking?

Instead of encouraging dialogue and communication between the Hong Kong government and protesters, the US government simply passes some weird bill that is designed to stir up more domestic unrest in Hong Kong. While it is perfectly fine to fight for liberty and freedom, destroying MTR stations, shopping malls and other properties are just simply senseless violence that achieves nothing. Surely, such drastic moves are similar to employing the nuclear option where people are misguided that to win liberty, one should destroy everything including the economy and one’s own livelihood. I hope that common sense will prevail and order restored as soon as possible in Hong Kong so that it will continue to prosper and be business as usual.

Saturday, 16 November 2019

Singtel Share Price Resilient In the Face of Billion Dollar Impairment and 2nd Quarter Losses of S$668Mil

Singtel is a very weird stock. In late December 2018 to early Jan 2019, the share price dropped below S$3 per share when it was making quarterly profits of over S$680Mil. However, when it was announced recently that Singtel had made a huge loss of <S$668Mil> for its second quarter results, its share price dropped only slightly from S$3.30 to S$3.18 which is a mere decline of only <3.64%>.  I am not sure whether shareholders of Singtel recalled that in March 2019, Singtel had just subscribed to a rights issue of S$730Mil  worth of additional shares for Bharti Airtel for working capital purpose to assist the Indian Telco to fight a bruising price war with Reliance Jio.

The current losses was due to the adverse ruling by Supreme Court of India over the government's computation of "Adjusted Gross Revenue (AGR)" whereby license fees and spectrum usage charges are payable. The result of the ruling was a US$ 4.3 billion due within 3 months. So, it may mean another rights issue coming of over S$1 billion for Singtel. In such  a terrible scenario, shareholders should ask themselves whether Singtel can afford to sustain the current dividends payout to them. Of course, most of the stakeholders (from Singtel's CFO to retail investors) seems very confident that despite the adverse court ruling, the India government will come out to save the telcos by either waiving off the amount payable or giving a huge discount to it. 

As for me, I do not share such bright optimism that Singtel will remain totally unscathed from this adverse court ruling.

Thursday, 14 November 2019

Eagle Hospitality Trust Q3 FY2019 Performance- Is Hurricane Dorian the only main reason for the underperformance against IPO forecast?

The release of the Q3 FY2019 financial results for Eagle Hospitality Trust (“EHT”) turns out to be neither reassuring nor promising. EHT missed forecast by <10.6%> and <2.7%> for revenue and net property income respectively. Since EHT did not display a convincing set of superb performance, it will lead to persistent lingering doubts over the quality as well as fair valuation of the hotel assets being injected into the Trust. Without a strong performance to quell the rumors, the share price will probably languish on for the next 3-6 months albeit some short term upside.

Q3 FY2019 financial performance- Is Hurricane the main reason for poor performance relative to IPO forecast?
During the previous Q2 FY2019 results announcement, the performance had already missed forecast and the reason given were that some of the hotels are just coming off the asset enhancement completion and thus will take time now to ramp up bookings.

For Q3 FY2019, the press release seems to give more emphasize with regard to disruption of demand at one of its main asset, that is, EHT suffered “unforeseen demand dislocation” at its largest asset, the Holiday Inn Resort Orlando Suites (“OHIR”)- Waterpark driven by a category 5 Hurricane Dorian which threatened the South Atlantic. As a result, Q3 rental from OHIR was down approximately US$0.6Mil from forecast. It is interesting to note that Mr Howard Wu, Founder of Urban Commons commented that “Eagle soared through the storm and delivered DPU amidst a Category 5 hurricane impacting its largest asset”.

However, a closer look at the released financial analysis revealed that “macroeconomic headwind” is the main cause of the under performance. From the total drop of <US$2.5Mil> in Q3 revenue against forecast whereby US$0.6Mil as aforesaid mentioned was attributed to Hurricane Dorian, it seems to suggest that the larger remaining US$1.9Mil decline was due to worsening macroeconomic factor. Hence the entire hotel industry may be headed into a downward economic cycle with weakening demand and overcapacity. That maybe why some substantial shareholders of EHT who are themselves specialist in the US hotel business have been busy unloading millions and millions of their units into the open market.

Other highlights for Q3 FY2019 results and silver lining
Overall, EHT benefitted from a less than proportionate decline of <2.7%> in net property income against the <10.6%> drop in revenue mainly due to savings from property tax and lower professional fees than forecasted.

As of July 2019, interest rate swap was concluded and effected thus locking in US$1.36 Million of savings per annum (this seems already built into the IPO forecast hence no material upsides from financing costs). The swap also means that 93% of borrowings of EHT are now fixed interest and with a 3.9 years average debt to maturity.

In addition, potential upsides from 5 hotel assets that just completed asset enhancements are expected to drive up future operating results in Q4 FY2019. Please see attached main Operational Performance KPIs of W-I-P assets vs Upgraded assets.

I am wary of the assertion by the management of EHT of “upsides from ramping up of the hotel assets that have just been renovated” being used so many times to give hope to investors. If the Q4 FY2019 result announcement is again an under performance with this being recycled as a future beacon of hope, then most likely, it means that there are truly some grave fundamental issues. This is similar to Asian Pay TV Trust which keep repeating stabilization in its average revenue per user (ARPU) key metric but then we know what happened after that fateful day where its unit price melted down to the abysmal level of S$0.127 per unit.

Lack of market confidence in Sponsor, Urban Commons, is a major crisis for EHT
The main challenge faced by EHT is the lack of confidence in its sponsor, Urban Commons, with regard to the injection of assets during IPO process and also the financial strength of Urban Commons to weather any major economic downturn. In other words, many investors are viewing EHT as mere financial engineering tool by Urban Commons to make it look good for IPO only and are pricing in a probability that it will meta-morph into a going concern disaster with either sub-par revenue generating performances or in a worst case scenario, breakout of further bad news which will confirm that the assets valuation and projection are grossly inflated.

The good news here is that Urban Commons has undertaken not to sell off their shares in EHT even after the expiry of their lock in period from IPO. This should provide much needed support on the unit price which has been heavily sold off by the other substantial shareholders in particularly, the Yuan Family members, which own ASAP Holdings that was involved in the enigmatic sales of hotels assets to Urban Commons and subsequently marked up in price and sold to EHT eventually, just 2 mths to 3mths before the IPO in May 2019.

Parting Thoughts
The trending of missed forecast for 2 consecutive quarters is worrying and may point to an incoming downturn in the US hospitality industry. But then, the unit price has slumped by 40% from IPO. Notwithstanding the Queen Mary issue, the significant decline in unit price relative to the slight decrease in financial performance seems overdone. However, it would be best to further observe the 4th quarter performance and of course, most importantly, whether there are actual physical cash on hand from the said net property income earned by EHT for paying out the 2nd half final dividends to investors by March 2020.

Sunday, 10 November 2019

Singapore Press Holdings and SPH REIT Review- Media Segment Continues to Worsen But Bright Spot From Property Segment

Singapore Press Holdings ("SPH") continues to face headwind in its Media Segment. The media  business faces decline in print advertisement and circulation revenue. Worse still, the bloodletting from technological disruption has not reached the trough and its operating results is expected to deteriorate. Media revenue dropped from S$ 656Mil in FY2018 to S$ 577Mil in FY2019 which is a 12% decline. Media profit plunged from S$98.7Mil in FY2018 to S$54.7Mil which is a shocking 44.6% decline. At one point in time, its share price dipped below S$2 per share. Another round of retrenchment exercise has been announced by SPH to shave off 5% of staff in its Media Group. It has since recovered to S$2.34 as at 8 November 2019.
Extract of Business Segment Performance-Profits before taxation
Despite the pessimistic outlook for its Media Segment, there is a bright spot in SPH, that is, their Property business segment which continued to grow from strength to strength,. As overall outlook of SPH is not stable and no one knows exactly when the bottoming out of the Media business will occur, my preference is to invest only in SPH REIT until there is more clarity to SPH future projections. 

A delightful piece of good news was announced by SPH this week. 

SPH REIT Revealed Another Major Surprise- Acquisition of New Australian Super Regional Shopping Mall in Adelaide
SPH REIT announced on 7 November 2019 that it has acquired a joint venture stake from Lendlease Real Estate Investments Limited Group in Westfield Marion Shopping Centre, Adelaide, South Australia for S$637Mil. This was a major surprise to many investors and myself who thought that the recent fund raising via S$300Mil of perpetual securities was to fund the purchase of Seletar Mall from SPH. While I have previously posted  that the last December 2018 acquisition of Figtree Grove Shopping Mall would give SPH REIT management team invaluable management exposure and networking into the Australian market, I never expect that the next Australian retail acquisition to come so quickly in less than a year. 
Extract of Westfield Marion Shopping Centre Details
SPH REIT still no fate to be with Seletar Mall
I can't help but feel a tinge of sadness as Seletar Mall once again escaped from the clutch of SPH REIT, notwithstanding the surprise acquisition of a good quality Australian freehold asset. But the good news is that Seletar Mall is still in the future pipeline of SPH REIT. So too is the Woodleigh shopping mall which is under construction which bodes well for the future growth of SPH REIT.
The Seletar Mall
Parting Thoughts
SPH has been building up its Property division for a number of years to diversify away from its traditional media business and this strategy is bearing fruits. Besides the property development and retail REIT portions, another superb sub-segment is its student accommodation business which is widely viewed as extremely defensive with strong resilient earnings even in economic downturn. Unfortunately, to get a piece of student accommodation action, one would need to invest in SPH as this is not available on SPH REIT. Perhaps SPH may start another REIT in future that focuses on student accommodation.