Monday 20 April 2020

Potential Cures For Coronavirus Amidst Worsening Macroeconomic Conditions

There is a silver lining in the midst of all the fatalities and economic lock-down all over the world from the dreaded coronavirus outbreak in the form of many new drugs coming onboard for treatment. In Australia, scientists are working on testing an existing head lice anti-parasitic drug known as Ivermectin against the coronavirus which has been yielding great results in medical trials. In USA, a couple of anti-viral drugs are also being evaluated.

The most promising candidate that emerges recently from USA is Remdesivir developed by Gilead Sciences, Remdesivir was an Ebola drug that is being put on clinical trial. According to a report by The New England Journal of Medicine, Remdesivir, when administered to a coronavirus patient in the US, it appeared to have improved the clinical condition. Remdesivir is a nucleoside analogue that works by inhibiting viral reproduction. Dow Jones and S&P 500 stock indexes rallied 2% with the news last week along with Gilead Sciences stock price jumping 10%. The bad news is that this appears only for a small sample of 113 intensive care patients under a "compassionate" trial and most medical experts find the results inconclusive. Results from bigger trials are expected to be available in May 2020. 

While more effective treatments and vaccines are being developed to overcome the current coronavirus pandemic, widespread economic damages have already been inflicted among the major economies around the world due to the lock-down. It is interesting to see the stock markets rallying non-stop in the face of an increasing unemployment (last count was 22 Milllion people filing for unemployment benefits) as well as more and more businesses facing prospect of bankruptcy in the leading economy of USA.

Friday 10 April 2020

Clarification from Investor Relation Manager of Lendlease Global Commercial REIT

Lendlease Global Commercial REIT ("LREIT") price collapsed in March 2020 was a real disaster in the face of the COVID-19 crisis. It plummeted swiftly from S$0.90 per unit to a low of S$0.465 per unit which is a plunge of almost 48%. Holding just 2 properties of Somerset 313 in Singapore and Sky Complex in Italy in its IPO portfolio, LREIT has the potential to grow further due to the many properties in the portfolio of its main sponsor, Lendlease Group, which is a leading international property and infrastructure group listed on the Australian Securities Exchange.

In addition, the Singapore Master Plan 2019 has formalised the increase in permissible plot ratio for 313@Somerset from 4.9 to 5.6 resulting in a potential increase of up to 10,846sqft of gross floor area via organic growth route. Based on Commercial Guru, the rental psf for retail is S$20.90. This works up to be potential upside of S$226,681 per mth and S$2.72Mil annually.

Anyway, the focus of this posting is to look at the free cashflow available for distribution as apparently, some retail investors in investment forum are speculating that LREIT has hidden financial problem since it was strangely paying out distribution for the Oct'19 to Dec19 period in excess of its free cashflow.

Insufficient free cashflow to pay distribution
LREIT derives around 66% of its property income from 313@Somerset and 34% from Sky Complex in Milan.

The distribution to unitholders are S$15.01Mil. This is further broken down into distribution from (i) operations (S$10.33 Mil) and (ii) capital returns (S$4.67Mil). The free cashflow can be extracted out from the cashflow statement (see below). Since there are no capital expenditure, the whole cashflow from operations during the Oct'19 to Dec'19 period is only S$10.1Mil. There is thus a gap of approximately <S$5Mil>.
Statement of Distribution

Cashfllow Statement
The huge gap in free cashflow is whereby some retail investors begin to suspect that something is not in order with its operations and that LREIT maybe hiding the fact that it is in financial trouble.

Reply from Investor Relation Manager of LREIT- Just Timing Difference
Recently, I dropped a note to LREIT to clarify and inquire the reason for requiring a capital distribution component to top up the total amount available for unitholders distribution. I was pleasantly surprised that LREIT Investor Relation team replied promptly by the next working day-the prompt response also reflects the dynamic culture in LREIT and reflects well on their whole organisation. Ms Ling Bee Lin, Manager of LREIT Investor Relations, replied that it was due to timing difference between distributions received from Italy and pay out to the Unitholders.

I went on to suggest to LREIT that a more prominent display of footnotes in future should be released during the results announcement on such “timing difference” so as to rest assure investors that there is no going concern issue. Bee Lin reassured that LREIT Investor Relation team do monitor investment platforms to take note of the various feedbacks.

Parting Thoughts
The dramatic plunge in unit price for LREIT that is more than proportional to the percentage drop in Starhill Global REIT and SPH REIT maybe attributable to concerns over the free cashflow status. Italy is currently undergoing a lockdown that has pushed the country into an expected severe economic recession. Investors maybe expecting a default of the tenant in Sky Complex. However, given that the single tenant is Sky Italia (owned by Comcast Corporation) which is the largest broadcasting and cable television company in the world by revenue, I think that the risk of default is very low. LREIT appears to have been oversold and is being priced ridiculously low. 

P.S: I am vested in LREIT and currently hold around 93,000 units.

Saturday 4 April 2020

STI Looks Set to Go Below 2,000 pt mark- Prepare for the Eternal Night!

The age of eternal night is coming! What an exciting week it had been. Singapore REITS continues its free fall. The other Blue Chips counters also decline. But the rate of decline is no longer as crazy as the first 3 weeks of March 2020 but unfortunately, the worst does not seem to be over. There is no need to have the fear of missing out the boat by rushing and pumping all the money one has into stocks right now. As a matter of fact, the next few quarters is going to get worse with many companies going bankrupt and more workers losing their jobs. The STI looks set to eventually crash below the 2,000  mark despite herculean effort by the Singapore Government to rescue companies and save jobs. 

From the historical STI performance chart above on major crisis, we can see that STI once hit around the 1,600 low point during the Global Financial Crisis (GFC). I am sure that everyone agrees by now that the current crisis is unprecedented since World War 2 with many major economies undergoing shutdown which are extremely disruptive to economic activities and that it appeared to be similar if not worse than the GFC in 2008. Some are even calling this an economic "depression" instead of recession. 
Our STI is at around 2,389 points as at 3 April 2020 (Friday). Based on the last GFC recession of 1,600 points, we maybe looking at another crash of 33% if we are lucky and assume government intervention by major economies will be sufficient to save us from the Great Depression. This is shaving off another one third of whatever is left on one's current portfolio valuation.  The recent announcement of closure of businesses from 7th April 2020 to 4th May 2020 deals another severe blow to the Singapore economy. A final nail into the coffin perhaps?

However, not all is lost. The United States of America has already invested another USD 1 billion in Johnson and Johnson to prepare for vaccine production capacity of 1 billion vials upon successful testing. Hence, this is not a situation whereby global economies have to shut down for years with no hope in sight. Many vaccine developers are rushing to complete safety and efficacy testing work by next year. I am optimistic that 2021 will be whereby the green shoots start appearing while we try to survive the crisis this year. Stay united and we should eventually overcome the dreaded COVID-19 induced economic crisis.