Monday 29 June 2020

China Approved COVID-19 Vaccine For Military Use- Economic Impact And Upcoming Global Double Dip Recession?

This is earth shattering news. China is so far the fastest country that has released promising results from its Phase 2 clinical trial. CanSino Biologics reported that its vaccine developed jointly with the Beijing Institute of Biotechnology in the Academy of Military Medical Science, is safe and somewhat efficient. China has approved the use of this vaccine for its military personnel for 1 year. Of course, for mass commercial use by the general population, Phase 3 larger scale clinical trial will need to be concluded. From July'20 to Sep'20, we would also expect release of some results from the phase 2 and if lucky, phase 3 clinical trials results from USA Moderna and UK Oxford AstraZeneca. 

I think that the World Health Organisation and many government authorities repeated message that a successful vaccine will only be out in another 12 months time is too conservative an estimate. The main reason I reckoned is to temper expectations and keep nations on their toes to continue drastic preventive measures against COVID-19. Once the news of more and more successful vaccines development is announced possibility within this 2 to 3 months time, it will effectively mark the turning point in the fight against COVID-19 and a guarantee certainty to the end of prospective devastating economic lock-downs for 2nd COVID-19 waves. It will be back to the usual rule book on ensuring sufficient liquidity while the recession turn around into eventual economic recovery. 

I known of friends who have sold off most of their stock portfolio and are holding on to a few hundred thousand dollars since March'20 while waiting for the stock price to plunge even lower than the sharp decline in March'20 as they subscribed to the belief of a double dip recession. While I personally believe in another upcoming dip, at least we know that the global economies will not be sinking into a Great Depression if there is an upcoming working vaccine against COVID-19. The US government has poured around US$2.9 trillion into its economy which is a staggering amount that is substantially more than the US$2.1 trillion during the Global Financial Crisis (GFC) quantitative easing program spread over 3 main stages from late 2008 to 2010. Even in Singapore, the S$93 billion injected into our economy in 2020 is unprecedented relative to S$20.5 billion Resilience Package in January 2009.

The key question that I am pondering right now is whether the market has factored in the news of a successful vaccine development for commercial use? I believe that the next 3 months of July'20 to Sep'20 will be crucial and may bring about injection of further liquidity by global investors sitting on the sideline while awaiting more certainty about the COVID-19 situation and vaccine status.

Sunday 28 June 2020

Eagle Hospitality Trust- Updates On Projected Salvageable Hotel Properties Value from Fire-sales (End June'20)

This is an update on the forced liquidation residual value projection for Eagle Hospitality Trust ("EHT") based on the latest SGX announcement on 21 June 2020. As long as the Monetary Authority of Singapore has not given any green light to the change in hotel manger to the White Knight, Far East Consortium International Ltd ("FECIL"), the basic assumption of an eventual forced liquidation by bankers and creditors will remain unchanged.  Also, with US tax authority jumping in to file liens over some of the hotels, the entire restructuring operations by FECIL and Urban Commons may be abandoned.   

As per recent announcement on 21 June 2020:
1. There is an increase of another US$6.1 Mil (US$44.6Mil to US$50.7Mil) from the Non-Disturbance Agreements signed by Howard and Taylor which transferred liabilities of the lessee onto EHT unfairly based on the latest announcement.  

2. US tax authority and US State Agencies filed a total of US$8.26Mil against the hotels. Assuming that the relevant Master Lessees will not be able to settle the liens that they would be responsible for and assuming that the relevant Master Lessors are found liable, the potential financial impact of the liens on EHT amounts to approximately US$8.26 million, being the aggregate amount claimed by the various third-party service providers and delinquent tax assessments under the above mentioned liens.

3. The City of Long Beach also filed a default of lease agreement with regard to the Queen Mary- no adjustment in the projection has been made for this as the announcement mentioned that they will be able to cure the defaults. However, we have to take this with a pinch of salt from the EHT management and sponsor with such a bad track record. If things turn further south, we will have to remove the entire Queen Mary valuation from the EHT hotel portfolio in the next projection update. 

Parting Thoughts:
I am wondering how long will the Queen Mary issue re-surface as Urban Commons certainly does not have the financial resources to cure further defaults but is just dragging its feet and barely keeping its head above water. The Queen Mary if adjusted out will lower the investment properties valuation by US$168 Mil in event the City of Long Beach took over possession due to defaulting of terms of the lease agreement. 

In addition, my thoughts are that MAS should be giving out further notice on whether it is agreeable to the change in hotel manager to FECIL within July'20 and we will see whether EHT can continue forward as a going concern. I am optimistic that there will be release of good news at the end of Q3 2020 on the phase 3 clinical trials results for US Moderna and UK Oxford COVID-19 vaccines safety and efficacy which will bring about much needed relief and hopes of gradual recovery of the US hospitality industry.   

PAP Contestant Ivan Lim Gone With The Wind

Am I slow or what? Yesterday, social media and my What's App group of friends were all discussing about the numerous criticism directed at the PAP newly unveiled candidate, Ivan Lim, being an elitist, lack of compassion and his arrogant behavior in the army and at workplace. At first, I was asking everyone who is this Ivan Lim and what did he do as I was very loss on the big hoo-ha going around and then did a "Google search" on it.  

There was even a PAP statement made by Ivan Lim on 27th June 2020 (Saturday) afternoon that he is determined to stay the course and to serve if elected despite the allegations. Then suddenly when I woke up this morning, Ivan Lim was gone. He has decided not to contest in the upcoming general election due to the controversy over his candidacy. 

The criticisms were not made by anonymous keyboard warriors- the identities of the people who posted were known. At the back of my mind, I am wondering how come these folks dare to post on Facebook at the risk of facing defamation suits from Ivan Lim. They must have felt strongly to come out like that against Ivan Lim. To offend a number of people during NS reservist and at work is remarkable. Anyway, we will never know the truth behind the allegations now that Ivan Lim has gone with the wind. I do wish Ivan Lim all the very best for his future endevours and hope he does not get too badly affected by these incidents.  

By the way, do you all believe in karma?

Friday 26 June 2020

A New Beginning Soon In Singapore- The Departure of the Giants Among Us

Wow...the upcoming Singapore General Election is going to be quite unpredictable. PAP Giants Goh Chok Tong and Khaw Boon Wan will not be running for parliament. Opposition Workers' Party also announced that its veterans Low Thia Khiang, Chen Show Mao and Png Eng Huat will not be running. Anyway, what I mean by unpredictable will be how many opposition can get into parliament- PAP will definitely form the government as always due to the in-depth  talents and capabilities among their candidates being fielded.

What will happen to Aljunied GRC now that Mr Low Thia Khiang and Chen Show Mao have decided to step down from their MP position? I think that without the star powers of Low Thia Khiang and Chen Show Mao, it will be a very tough fight. My personal thoughts are that most likely, this stronghold of the Workers' Party will fall soon due to the last court case on mismanagement of the town council and also the departure of two super stars from the GRC team. The PAP will reclaim back this given that the last team fielded did extremely well in the polls.

Also, the residents of single ward Hougang had performed their national service for many decades. You can see a very clear distinct over the precincts which are Hougang and which are PAP controlled GRCs. Will the residents of Hougang accept another new Workers' Party MP or will they elect the PAP as MP? Hopefully, Workers' Party survive this General Election with their new face Nicole Seah.

Tan Cheng Bock and Lee Hsien Yang looked like a formidable duo. It will be interesting whether the Progress Singapore Party will combine the 2 together into a GRC to maximize their chances of entering parliament or split into 2 GRC contesting teams. My guess is the former which is similar to the strategy used by Low Thia Khiang when he stepped out of the single ward Hougang and into Aljunied GRC with an all star team previously.  

I am feeling an air of melancholy after Mr Khaw Boon Wan decided to end his political career. He has served Singapore diligently for 19 years. From housing issues to transport issues, the lion-hearted Khaw Boon Wan was not afraid to jump into the hot soup to do the best for the people. I will miss him a lot. Similarly, Mr Low Thia Khiang has contributed so much and taken so much beating as an opposition voice that stands up for the common people. Anyway, changes is the only constant in life and a new beginning in Singapore political landscape will be inevitable. 

As the late Mr Lee Kuan Yew had said: "There is a glorious rainbow that beckons those with the spirit of adventure. And there are rich findings at the end of that rainbow. To the young and to the not so old, I say, look at the horizon, follow that rainbow, go ride it!" 

Thursday 11 June 2020

Stock Price Declined Sharply- Is It The End Of The Recent Stock Market Rally and Back to Recession Reality?

Stock market prices declined sharply today since the US Federal Reserve pessimistic announcement  on weak economic outlook. It seems to have burst the euphoria stocks bubble that has been defying gravity since May'20. The Fed expects US unemployment level to stay high and will be keep interest rate the same till 2022. Will this be the start of the second market crash predicted by many experts and the end to the feared "Sucker's Rally"?

Well the truth is that no one really knows. I have remained mostly invested in the market despite taking heavy beating from the COVID-19 pandemic that lead to huge losses during the dreaded month of March 2020. But I took the opportunity to diversify some of my portfolio into stronger counters such as Mapletree Commercial Trust, Suntec Reit, DBS and OCBC which presented rather attractive entry price. 

Some misadventures in my investment journey happens along the way- the receding tide caused by the pandemic induced recession ultimately revealed who has been swimming naked.

Eagle Hospitality Trust- Investment Write Off
News of the suspension of Eagle Hospitality Trust due to rental default of the sponsor was unfortunate but worse news of picking up additional USD44.6Mil due to conflict of interest of two of the sponsor's directors by signing agreements (prejudicial to the interest of unit-holders as per the Audit and Risk Committee) to transfer financial liability from lessee to the landlord, was like being struck by an armor piercing grenade. The Trust is currently under investigation by MAS and the Singapore Police Force. I was prepared to write off this investment totally but seems that a white knight had entered into the picture to save the business from forced liquidation and fire-sales during the pandemic.     

First Reit- Good bye to high  dividend yield counter due to Lippo Family dispute and pandemic
More recently, I was rather disappointed at having to bid farewell to most of my high yielding First REIT holdings due to the Indonesian Lippo family internal dispute that leads to huge plunge in valuation of the REIT when an uncoordinated release of a call for rental agreements restructuring in Lippo Indonesia was not communicated to the Singapore Manager under Lippo OUE beforehand. The sponsor Lippo Karawaci has its rating downgraded by Fitch Ratings again in April 2020 as it is unable to market and sell properties during the worsening pandemic. This is despite the US$1 billion rights issue that was recently completed in the prior year. To cut the story short, the sponsor subsidizing 80% rental income of underlying hospital properties in view of pandemic and depreciating Indonesian Rupiah (whereas rental is pegged to SGD and fixed) makes the overall charging mechanism no longer commercially viable anymore since IPO inception of the REIT. The good old days are over for First REIT.

Best story of the year so far that I heard about COVID-19
The most dramatic story I heard about COVID-19 came from my workplace. My Boss at work told me not to worry about COVID-19's impact on business. Just before the lock down earlier, my boss had played golf with his high net-worth good buddies (猪朋狗友) in pharmaceutical & medical businesses. So my Boss confidently told me that according to his trusted golf buddies, vaccine development are nonsense as the virus will mutate so fast that all vaccines will fail. However not to worry,  the virus will mutate and go away by itself in 6 months time just like SARS and all economic activities will be back to normal.

I am not sure whether vaccine development is nonsense or my boss perhaps placed too much trust in his golf buddies (猪朋狗友). Next thing I know, my Boss asked me to take voluntary pay-cut of 10% which he subsequently increase to 30% for the entire company as it seems the virus will not go away in 6 months time and even lead to devastating economic lock-downs everywhere.

Parting thoughts on economic outlook
While the stock-market will play an extreme game of "yoyo" for many months to come during this pandemic, the future outlook remains bright. I am optimistic that at least  2 to 3 vaccine trials will turn out successful within this year itself. The UK Oxford team are already going ahead with mass production of their vaccine with the 1st batch for release in September 2020 once the phase 3 trials results are in. US and China side also offers good chances of developing a successful vaccine. In addition, governments across the world had quickly took out their playbook for GFC back in 2008 to quickly inject liquidity into financial market during this new crisis. With these 2 factors in place, the stock market will eventually recover. 

Monday 8 June 2020

White Knight Appears for Eagle Hospitality Trust And MAS & Singapore Police Force Commenced Joint Investigation

A white knight seems to have appeared for Eagle Hospitality Trust ("EHT") and are in serious discussion with the Sponsor Urban Commons, special restructuring firm and directors of EHT for a deal to take a 70% control of EHT Hotel Manager, that is, the Far East Consortium International Ltd group ("FECIL"). Never-mind that Howard Wu and Taylor Woods had again acted smart on their own to award exclusive negotiation with this new potential white knight instead of doing an open request for proposal from other eligible and reputable suitors which is a more transparent approach and introduced competition for the best deals from the bidders (that would  have best served the interest of unit-holders). Well, at least, the talk with FECIL has gone on for almost 2 months now.

1. White knight enters into picture
Howard Wu and Taylor Woods had signed an agreement with FECIL for a non-binding conditional proposal for an exclusivity period which will expire on July 14, 2020. FECIL is a leading regional conglomerate listed on the Hong Kong Stock Exchange with property development, hotel operations, car parking ventures as well as gaming and entertainment businesses. It has been developing and operating hospitality assets for more than 15 years and is currently developing 13 hotels, owns 29 hotels and holds a minority stake in two hotels, all of which are spread across eight countries. Most of its hospitality assets are internally managed by FECIL. In addition, it has been listed on the Hong Kong Stock Exchange since 1972. A reputable and experienced group with strong financial background as compared to Urban Commons.

2. Implication on EHT if the deal with FECIL goes through and concern that FECIL working in cahoot with Howard Wu and Taylor Woods
The good thing here is that if the deal goes through, then unit-holders can heave sigh of relief that they will get to recuperate part of their original investments instead of a high possibility of not getting a single cent back from their investments into EHT. Please refer to my previous post on the different scenarios of a forced liquidation of EHT hotel assets- "Eagle Hospitality Trust- Updates On Projected Salvageable Hotel Properties Value from Fire-sales".

There were talks by other retail investors that FECIL maybe under the influence or control of Howard Wu and Taylor Woods hence no difference at all to the current situation. I will disagree on these unsubstantiated assertions. FECIL is an established group that has been in business and listed on the Hong Kong stock exchange since 1972. Hongkongers are astute businessmen. They will not be blindly doing charity rescue work and then follow whatever Howard Wu and Taylor Woods wanted. Other main reasons are as follow:
(i) I believed that FECIL is taking this opportunity to expand and venture into the US hospitality market;

(ii) FECIL had asked for a 70% controlling stake in the hotel manager; 

(iii) They also wanted 80^% of the seats on the board of directors managing the hotel manager;

(iv) FECIL develops hotel assets. Gaining control of a REIT will be akin to gaining a backdoor listing for capital asset recycling strategy which adds further synergy to the FECIL conglomerate group. Hence FECIL will de facto became the new sponsor for EHT.

3. New negotiation on Master Lease Agreement and highly probable financial equity dilution faced by Eagle Hospitality Trust Unitholders.
After solving the daily operational issues of running the hotels, the next 2 issues to settle would be (a) the terms and conditions of the new Master Lease Agreement and (b) re-capitalisation of EHT to meet the working capital of running the Business Trust.

3(a) New Master Lease Agreement
 Do not expect the usual high fixed rental component in view of negotiation being done right in the midst of the COVID-19 pandemic. The bargaining power would rest mostly with FECIL. Chances are a high weightage on variable revenue component and even partial rent-free period needs to be given out. This is unfortunately the price that needs to be paid by EHT unitholders for the White Knight to take-over while COVID-19 is still rampant in the US.

3(b) Re-capitalisation of EHT to meet working capital of running the Business Trust.
First and foremost, I do not think that there is sufficient time to do a rights issue exercise. Furthermore, even if there is a rights issue at huge discount, I doubt there will be many takers. Also, most bankers will not dare undertake the rights issue. Most probably, EHT will need to do a private placement of units to FECIL for them to take up a stake in EHT in return for cash injection (the deal maybe also to paydown some of the bank loans). I reckon that there will be a dilution in value for unitholders which can't be help. Will need to keep your fingers crossed that the issuance price is not at the last closing price of US$0.137 per unit. However, the general rule of thumb will be the last 1 mth of last trading price to get the benchmark issuance price. 

Nevertheless, having direct stakes in EHT aligns the interest of FECIL with all parties. With the completion of the above points, the bankers will be willing to accept forbearance of the syndicated bank loan.

4. MAS and CAD of Singapore Police Force commenced investigation into Directors and Officers of EHT
On 5th June 2020, MAS and CAD announced that they have launched a joint investigation into the current and former directors as well as officers responsible for managing EHT. The investigation is in connection with the suspected breaches of disclosure requirement under Section 203 of the Securities and Futures Act. It is interesting to note the statement made that the scope of the joint investigation will be widened if the evidence obtained reveals that other offences may have been committed. I also hope that CAD will dig into the email of the previous CFO and Vice President of Finance on how much they know about the conflict of interest deals done by Howard and Taylor. Personally, I am skeptical on the reasons which they had announced for resignation is due "to personal reasons" and "that there is no matter in relation to the their cessation that needs to be brought to the attention of the shareholders of EHT".

Key questions on the exact time whereby the directors and officers (such as CFO) know of the deficiency in rental deposits and upcoming default as well as the inking of the Non-Disturbance Agreement that transferred US$44Mil of liabilities from lessee to EHT, remain unanswered.

5. Civil lawsuit should be initiated against Howard Wu and Talyor Woods for breach of fiduciary duty and signing Non-Disturbance Agreements on behalf of EHT that are prejudicial to the  unit-holders as per the Audit & Risk Committee of EHT- Claw back US$44.6 Mil from Howard and Taylor
With the White Knight, FECIL, stepping into the picture and resolving the going concern issue, the management of EHT can now consider filing a civil lawsuit for damages from the breach of fiduciary duty of the previous non-executive directors, Howard Wu and Taylor Woods. Directors owe fiduciary duties to their company under common law subject to section 157 of the Companies Act.

Whether to proceed with this aspect will very much depend on how the FECIL deal turns out. I also suspect that Howard and Taylor may have inked a pact to get FECIL to resolve the transferred liabilties of US$44.6Mil from lessee to EHT.

Also, I hope that FECIL is smart enough to get Howard and Taylor to agree to not selling off their stakes in EHT for at least 6 months after the trading suspension as part of the restructuring deal.

In the event that this is not resolved, EHT management team can commence the lawsuit for damages immediately after the conclusion of the FECIL agreements. Howard Wu and Taylor Woods still owns units in EHT that can be sold off  under court order after the trading suspension to compensate unit-holders.

Final thoughts
Hopefully, a deal materialise by the end of the exclusivity period of 14th July 2020 with FECIL. Even if no deal is reached, the Special Restructuring Committee of EHT has reported that they actually have received from a number of parties non-binding, preliminary and indicative expressions of interest ("EOI"). These EOIs were reportedly from credible and reputable asset management companies and institutional investors. My initial fear in my last post was getting the rich buyers, to come out for bidding in the face of the pandemic, will be the most challenging part. Hence the fact that there are now lots of potential buyers willing to take over the running of the US hotels means that the survival-ability of EHT is actually rather high now. The issue is only a matter of how much residual value is left to unit-holders after the completion of the restructuring exercise.

Saturday 6 June 2020

Buying Singapore Airline Shares on Behalf of Your Colleague? How Strange Can It Get?

Last Friday afternoon, I received a strange call from my colleague Donald. Donald does not normally invest in stocks as he does not like to speculate. Stock market is a very dangerous place he once told me. The last SGX stock he held was Hyflux whereby he decided to "play with a little bit of money". Of course, the current tragic fate of Hyflux further reinforced his mindset that the stock market is an extremely dangerous and evil place that sucks out your money like a black-hole. I was thus rather surprised to receive his phone call.

The conversation went like this:

"Hey BK, how have you been?" Donald asked. 

"Hi Donald, I am good! Thanks. What's up?" I replied.

Donald excitedly responded, "BK, what do you think of Singapore Airline? Got potential to go up further a not? I think I want to play some of my money in it as the price is at an all-time low." 

 "Oh, I see. It should be ok lah. Temasek will come out save SIA no matter what. This is the rice bowl that creates job for many Singaporeans." I remarked casually.

Next, Donald added, "Great minds think alike man. BK, do you mind helping me buy 1,000 shares for SIA using your internet trading account? Very long time since I last bought shares. I forgot my own user ID and password for my online trading account. Worse still, I also can't recall which brokerage I had an account with. I hope to get some SIA stocks while it is on an uptrend to make some money. After price goes up further next week, you help me sell away and then just transfer the profit to me lah."

Deep in my mind, I was wondering what the heck is this guy talking about? Alarm bell started ringing in my head. Was Donald asking me to be a banker and finance for him the Singapore Airline stock purchase on behalf using my trading account? What if instead of "uptrend" SIA price dropped drastically next week? Will he pay me back then? Was this guy serious?

In a joking tone, I immediately closed him off, "Bro, you know our stupid Boss increased our pay cut from 10% to 30% recently and that I am rather short of cash now and even have to apply to defer my monthly housing mortgage payment with the bank till end of the year. If you really need me to use my brokerage account to buy for you, please do a PayNow transfer to my bank account fast. Also, I give you friendly discount of only S$100 for custodian service fees.....haha. By the way, you trust me with holding thousands of dollars for you meh?"

Upon sensing my reluctance (and probably the S$100 custodian service fees), Donald said that he will try calling his stock broker's customer service support to resend him his user ID and password.  I heaved a sigh of relief after that. Guess I was lucky and managed to get the message across to him to back off his weird request. By the way, I am not even close knit to this colleague so it was really a strange encounter akin to the Chinese classic "Strange Tale of Liao Zhai".

Thursday 4 June 2020

Singapore Press Holdings Stock Crash in May 2020- Buy More Or Worst Yet To Come?

Singapore Press Holdings (“SPH”) seemed to be plagued with bad luck recently and its stock performance had dropped to an all-time low level towards the end of May 2020. As at the beginning of FY2020, SPH price was still at S$2.20 per share. On 29 May 2020, its price declined sharply again (yes, another sharp drop since the March 2020 price collapse) to a price of S$1.25 per share and a 52 week low from the day before price of S$1.46 per share. This represented a spectacular loss in value of 43.2% relative to the beginning year’s price. The million dollar question on every investor’s mind is whether the price will decrease or crash any further to less than S$1 per share.

1. So what had happened to cause a 12.3% decline within a day? 
On 28 May 2020, SPH price was still hovering at approximately S$1.46 per share before the sharp decline one day later to a miserable S$1.28 closing price on the fateful day of 29 May 2020. This represented a 12.3% price decline in a single day. Apparently, SPH was one of the 4 counters that was officially deleted from the Singapore MSCI index on 29 May 2020. This triggered off a wave of mass selling by mutual funds that are pegged to the MSCI Singapore index and thus switching out of SPH in order to reorganize their investment basket portfolio. 

The main reasons for the removal by MSCI were that (i) SPH Media business has been gradually declining over the last 5 years and that the (ii) COVID-19 measures implemented by the governments of UK, Australia and Singapore were hurting the Purpose Built Student Accommodation (“PBSA”) and retail mall operations of the real estate segment.

2. SPH- Is it worthwhile to invest now or prices will drop even further?
While I agree that the Media business is in doldrums and will never recover to its previous splendid days, the same cannot be applied to the real estate business segment whereby the current downturn due to COVID-19 is only temporary and not permanent. Yet strangely, the market is now pricing in COVID-19 frequent economic lockdowns on a perpetual basis without consideration of eventual vaccine or antibodies drug development.
Exhibit A: Quarterly Trending of SPH Different Business Segments (Profit B4 Tax)
Exhibit B- Chart of Quarterly Trending of Business Segment (Profit B4 Tax)
The Media business segment of SPH is on a steep decline since 1st Quarter FY2019 (please refer to Exhibit B) and approaching almost zero. Most importantly, take a look at the most recent 1st half financial year results ending 29 Feb 2020 of the net profit by business segment. The contribution by Media is only 5.1% to 13% (please refer to Exhibit A) in the 2 quarters of FY2020 out of total net profit before taxation, whereas the bulk of the remaining profit numbers are now derived from the real estate and other business segments. The new growth engine is in the purpose built student accommodation ("PBSA") and retail mall businesses.

3. Concern over declining Media Segment is over-rated- It is already at the trough bottom in FY2020.
This is a remarkable progress from 1st Quarter of FY2019 whereby the advertisement and subscription contribution to profit were substantial of almost half of net profit (before tax) at 47.7%. Right now, SPH had completed its transformation to a real estate group. The Media portion to me is nothing more than a national service to Singapore as I do not think that the Singapore government will allow SPH to divest this sunset business that is losing out to Google, Facebook and online influencers in advertising dollars. The world of marketing has changed. Nevertheless, as long as SPH keep this segment at break-even and slightly profitable will do. This is as bad as it should get with such terrible performance of only S$2.8Mil contribution to group net profit in Quarter 2 of FY2020.

There is actually an interesting upside in the Media segment as I see that the Australia government has legislate such that Google and Facebook need to share their advertising revenue with local media companies. Of course, Google and Facebook are now fighting it out with the Australian government. If this is the trend and stand adopted by all governments, then SPH will be able to make additional income out of this. Alternatively, the Singapore government should channel back some of the corporate tax on Singapore Google and Facebook businesses to SPH for them to sustain the Media business such that it will never get into a loss making situation.

4. Growth Areas- Purpose Built Student Accommodation Business (PBSA) and Woodleigh Shopping Mall.

(i) Major investment into PBSA  
SPH has invested S$1.5 billion into the PBSA business in UK and Germany. Current portfolio consists of 7,726 beds in 18 cities in the 2 countries. The student population is projected to grow by 25% in 10 years time. A boost in market share will help to improve yields and optimise the overall portfolio.

(ii) Woodleigh shopping mall- construction in progress + other M&A in retail malls
SPH has already commenced looking out for tenants for Woodleigh shopping mall. The new Singapore shopping mall is expected to come online in another 2 years time. This will further boost recurring rental income. 

Also, the maiden foray by SPH into Figtree Grove shopping mall had given its management team further exposure in the Australian market. In  Nov 2019, SPH REIT invested A$670Mil into its second Australian shopping mall of Westfield Marion. This will certainly build up further capabilities and competencies for other Australian mall acquisition in future.
The only major concern I have with SPH is its property development project in Bidadari. The Woodleigh Residences seems overpriced at over S$1,800psf even with the re-launched from S$2,000psf. The current pandemic and the severe recession may mean a fire-sales in the near future if SPH still cannot sell enough units in time to avoid the ABSD. For the valuation exercise in the next section, we will need to include in a discount to derive at the fair valuation.

 5. Valuation- Is it worthwhile to invest now or prices will drop even further
As mentioned earlier therein, the price of SPH at the beginning of January this year is at around S$2.20 per share. To get an estimate of the current valuation, let's do a quick and dirty way to shorten the various mental acrobatics and assume the following:

  • As at 2 January 2020, investors already knew that the Media business is declining rapidly and have factored this in based on the full year results for FY2019 ending 31 Aug 2019 which was publicly released on 17th October 2019. 1st Quarter FY2020 was not out yet at that juncture. Hence we will start off with S$2.20 per share and adjust this for the next few factors. 
  • Adjust out for Media profit decline as per section 3. Media currently only made up 5% to 13% of net profit contribution. Assume 10% needs to be shaved off and thereafter zero contribution from Media business segment.
  • Adjust for Woodleigh Residences Bidadari impairment due to economic recession.  Assuming 50% discount of S$400Mil in investment property for Woodleigh by SPH, this will be S$200Mil discount off the net asset value which has already been fair valued. Based on the total shares outstanding (excluding Treasury shares), the 50% discount to be adjusted out will be a mere S$0.092 per share. 
  • Adjust out for effect of COVID-19 and economic lockdown in Singapore and Australia. Assume 1 year in total for frequent lockdown out of 10 years cashflow discounting. Assume from a high level this will shave off another 10% off its valuation. (Note: In actual fact, we are only locked down for 2 months. I have exaggerated this to get a sense of the worst case scenario of further lockdowns till mass vaccination against COVID-19). 
Based on the assumptions and adjustment factors, one will arrive at a fair valuation of S$ 1.45 per share. Also, this is excluding the upsides from the PBSA and further M&A growth. My own stress test placed the value at between S$1.45 per share to S$2.00 per share for the real estate business and zero profit from Media. SPH has been on my watchlist since last year as I would very much like to gain exposure to the PBSA business but the ever declining Media segment put a stop to my plan. So when the price dropped to around S$1.30 per share, I decided to acquire 26,000 units at between S$1.27 per share to S$1.32 per share. 

(Note: For sanity check purpose, the net asset value per share of SPH as per the results announcement for SPH's 2nd half FY2020 ending 29 Feb 2020 is S$2.14 per share.)

Parting thoughts
Hopefully, the vaccine development can be a success this year and there would not be any further devastating economic lock-downs in Singapore, UK and Australia.

Monday 1 June 2020

First REIT's Sponsor Plan to Default on Original Rental Support Agreements- Price Collapsed By 30% Within A Day

What a shocking announcement being made by First REIT this afternoon. Lippo Karawaci plans to default on the rental income support for Siloam hospitals stipulated in the rental agreements. The sponsor has cleverly crafted it as a "rental restructuring" instead of a planned default. First REIT share price dropped from S$0.885 to an all day low of S$0.635 this afternoon- a whopping 28% crash in valuation. Even before the announcement, I was puzzled to see the price suddenly corrected by over 12% in the morning. Looks like some insiders managed to get the news first and escaped by dumping their stocks. SGX regulatory team immediately raised query on the abnormality. First REIT management team had no choice but to call for a trading halt immediately. Then a few hours later, news came out that the sponsor is unable to provide the huge rental income support. According to First REIT, its sponsor, Lippo Karawaci, had not approached it with regard to the "lease restructuring".
First REIT Response To The Surprised Announcement By Sponsor Without Prior Notification
Announcement Extracted From Lippo Karawaci and Posted by First REIT

Income support of up to 80% by Lippo Karawaci and Internal Organisation Politics?

Lippo Karawaci had just thrown a spanner into the works on upcoming lease renewals of the 5 hospital leases at the end of 2021. This time round, Lippo Karawaci decided to activate the nuclear option as it disclosed this material announcement without touching base with the current First REIT team. Is this due to internal politics and major disagreements on the current discussion? I reckon that this may have risen due to local First REIT management or OUE team putting up a fierce fight for a fair renewal of contractual terms that are not prejudicial to the interest of the current unit-holders.

The sponsor now declares that it is not just the 5 properties expiring in 2021 up for new terms and conditions, but for all the properties of Siloam hospitals under rental support by the sponsor as it is under intense financial pressure from the COVID-19 recession. In short, Lippo Karawaci is not going to honour the rental income support commitment. Worst case scenario will be that Lippo Karawaci just walk away from the previous signed contractual obligations. This is like holding a knife to the throat of the management of First REIT.    

Personal thoughts on the current soap opera
I do not like the current development. Lippo Karawaci had just completed a USD 1 billion rights issue last year and also raised funds by selling away a shopping mall to Lippo Mall Trust. It had even set aside hundred of millions (USD 315Mil) from the rights issue exercise for REITs rental payment for FY2020. However, upon being hit by COVID-19 pandemic recently, Lippo Karawaci decided to activate the nuclear option of potential default of rental payment to First Reit.

I am currently still vested in First REIT. But luckily since the March 2020 crash, have pared down 60% of my significant holdings and concentration risk in First REIT and diversified more of my holdings into Mapletree Commercial Trust, Suntec REIT and AIMS AMP in view of the possible devastating COVID-19 impact in Indonesia. Saying that, I am still vested in 40,000 units. Will probably sell off another 25% of my current First REIT units this week based on the worrisome historical track records of the owners. Personally, I think there is enormous destruction of shareholders' value in Lippo Mall Trust and OUE Commercial Trust. So I guess it is now First REIT's turn at the slaughter house to butcher if off. 

Summary- To buy more units, hold or panic sell all your units?
The price of First REIT had dropped from its heyday of S$1.30 per unit to the current S$0.680 per unit due to the uncertainty of the upcoming lease renewal on a triple net charging basis. The key to answer whether to buy more, hold or panic sell rest on:

(i) whether this is just a strategic move by the Sponsor to force the First REIT management and OUE folks to agree on more favourable terms and conditions for Lippo Karawaci or 

(ii) is it really due to threat of bankruptcy facing Lippo Karawaci?

By decreasing the dividend income, the yield of First REIT will go down. This may make it easier for OUE Healthcare to sell off some of its assets into First REIT as yield accretive to unit-holders in future to reduce reliance on only 1 main healthcare client concentrated in Indonesia.  One thing is for certain, that is, retail investors are always the ones getting the shorter end of the stick either way.