Strange Encounter at Kentucky Fried Chicken Store

The new flossy crunch chickens offered by KFC are awesome. Crunchy and fiery! Highly recommended. Anyway, just to share a strange encounter I had yesterday evening when buying directly at a KFC store in a nearby shopping mall. Since I am buying for the family, I opt for the S$ 36.95 family feast package which comes with 8 pcs chicken, nuggets, whipped potato etc. 

From the KFC App, it has "pick up" option and also "delivery" option menus. I was exploring the KFC App to see what are the packaged deals on menu while waiting in the queue. When it was my turn, I showed the auntie staff whether they have the S$36.95 family flossy crunch meal illustrated on my phone screen and whether I can opt for a mixture of 4 floss chickens and 4 original chickens. Strangely, the auntie point to her counter menu and said all 8 must by flossy crunch chickens as per the picture that and I cannot mix. I then show her again the screenshot on my mobile phone which states that one can actually can choose from (a) flossy (b) crunch, hot & crispy or (c) original recipe.

The auntie staff serving me insisted that this is not possible for store direct order. Instead, she asserted that I need to order through the App and then use the "takeaway" option for self-collection later on as this cannot be done over the counter. I was dumbfounded and amused and told the Auntie that this does not make sense as the takeaway and self pickup option menu on the App is the same as the direct order at counter and urge her to exercise flexibility. But auntie turned around and asked another auntie staff who also said the same thing and ask me to please order through the App. 

Luckily for me, an Ah Boy staff manning the next counter stepped in and told the auntie that it is ok to mix as in fact, I was the one who lose out, as the flossy crunchy chicken cost more than the original recipe chicken. Thanks to the young man, I managed to get my mixed chicken selection and saved myself from being made to order on the KFC App and then come back for self-pickup in another 15 mins at the same store. Anyway, time to go burn off some calories today after the good meal yesterday evening. Enjoy the long weekend folks!

(P.S: Btw, don't throw away the receipt after purchase, KFC has a short survey similar to Subway. Do it and you are entitled to a 10% or S$5 off for your next purchase).      

Eagle Hospitality Trust- No Deal Reached With Far East Consortium And Open Up Request For Proposal From Interested Parties

On 23 July 2020, Eagle Hospitality Trust ("EHT") finally posted an update on the restructuring status. Far East Consortium International Limted ("FECIL") apparently walked out of their due diligence  exercise without making any offer. It was a waste of a good 4 months by granting exclusive rights to FECIL. This exclusive negotiation agreement just expired on 14 July 2020. The previous non-executive directors Howard Wu and Taylor Woods had thus made another detrimental decision against the interest of unit-holders by choosing to enter into an exclusive negotiation deal with only one sole interested party. They should have opened it up to a general public offer for proposal by interested parties from the onset. 

1. SGX stepped in with new guidance after the failed negotiation with FECIL that leads to no deal even after 4 months.

A request for proposal has been sent out to invite interested parties to submit their preliminary indication of interest by 31 July 2020 and formal bids by end of August 2020.

SGX has also instructed the management of EHT that (i) there should not be any restriction imposed on bidders eligible to take part  and (ii) that Howard Wu and Taylor Woods be barred from any further direct negotiation with any bidders or granting any special exclusive agreement.

2. By end of August 2020, the tender will close

Since formal bids will be submitted by end of August 2020, I anticipated that the earliest award will be end of September 2020.  November 2020 will probably be the earliest that all operations can resume after the necessary capital injection and ironing out of key issues by the new interested party.

3. MAS and CAD Investigation on Directors and formal officers of EHT

Still no results out from MAS or CAD of the Singapore Police Force. I am surprised by the audacity committed by Howard Wu and Taylor Woods. Personally, I hope they will face charges for breach of law by the authorities as well as an eventual personal lawsuit against this pair of directors by the Company for the transfer of liabilities from tenant to EHT via non-disturbance agreements.

Summary

While it is indeed disappointing that FECIL chose to walk away, I opt to be more optimistic. I would actually prefer to examine a wide variety of proposals out there that may be better than what FECIL had to offer. Also, if we are lucky, there may even be successful development of a COVID-19 vaccine in the USA in late 2020. This should start the recovery of hospitality assets.

Please also see my previous posts:

1. Will Eagle Hospitality Trust Survive Upcoming Bankruptcy Threat? (Part 1 of 2)

2. Will Eagle Hospitality Trust Survive Upcoming Bankruptcy Threat? (Part 2 of 2)

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

First REIT Share Price Crash Again- Sudden Announcement of 2 Months Rental Relief to Hospital Tenants

On 20 July 2020, First REIT made a sudden announcement that it will be granting rental relief of 2 whole months for April 2020 and May 2020 to all its tenants in Indonesia, Singapore and Korea. This was a shocking announcement as it is only now that they released this announcement. This is not a good sign at all as it seems to imply that Lippo Karawaci Group is battling cashflow issues. Earlier in the previous month of June'20, Lippo Karawaci had announced that it wants to restructure the terms and conditions of all signed tenancy agreements as they are unsustainable (pls see First REIT's Sponsor Plan to Default on Original Rental Support Agreements). I believe that this rental rebate is a compromise between either breaking tenancy agreements which is as good as a nuclear option for all stakeholders or extending temporary rental relief while upholding the sanctity of legal contractual obligations.  

1. First REIT price collapse again.

As at 23 July 2020, First REIT unit price has dropped from S$0.72 per unit (before the 20 Jun 2020 announcement) to the current S$0.635 per unit. This is a drop of -11.8% within 3 days. The prolonged COVID-19 pandemic has brought about significant impact to all businesses globally including lowering the patient load at its hospital healthcare businesses. The future does not bode well for First REIT and its major tenant Siloam with income support by Lippo Karawaci.  

2. The tragic downfall story of First REIT just unfolded

I believe that the contract renewal for 5 hospitals with revamped terms is coming out of the oven before mid of 2021 (initially First REIT plan was Dec'20 but I think in view of COVID-19, they may only finalised negotiation 6 mths before the expiry at end of 2021). I believe the terms will be extremely unfavorable. The key changes would be the removal of a pegged exchange rate to SGD. Instead, it will be denominated in IDR whereby First REIT will be exposed to forex fluctation going forward as part of risk sharing. 

3. Worst yet to come

Unfortunately, the worst is yet to come. 

(a) The remaining hospitals tenancy agreements (78% of remaining leases) will most likely follow the same fate as the upcoming renewal terms and conditions of the 5 hospitals. This is because the current commercial charging mechanism with 80% income support of Siloam Hospitals is just not sustainable in the longer term. How should the market priced in this given the different batches of expiry in the medium term to long term?

(b) The deteriorating financial health of Lippo Karawaci is also deeply worrying. There is too much tenant concentration credit risk in Siloam Group and Lippo Karawaci. 

Summary

As long as the new terms and conditions of the next batch of contract renewal due to the expiry of the first 5 hospitals are not released, it is very hard to predict what should be the fair value of a unit of First REIT. Many investors are just making assumptions and thus there is an overhang on its unit price. What are your thoughts on First REIT? Is this the opportunity of a lifetime to accumulate First REIT at S$0.635 per unit? Or will you sell off all your current holdings in First REIT for fear of a drop below S$0.60 per unit?

(P.S: Since June'20, my initial thoughts were to sell off only partial units of my 40,000 units of First REIT in view of the potential default of contractual obligations declared by Lippo Karawaci. However, I have since sold off 100% given my personal disappointment in the behavior of the new Lippo Karawaci CEO for the high handed way he dealt with the announcement without consulting First REIT team in Singapore that caused a major crash in price of First REIT in early June'20.)

Russia To Roll Out COVID-19 Vaccine For Use By September 2020

It looks like the World will probably see its first COVID-19 vaccine being made available for public use in 2020 afterall. Russia is moving at a lightning fast pace to roll out its own locally developed vaccine based on a human adenovirus (a common cold virus) fused with the spike protein of COVID-19 virus to stimulate an immune response in our bodies. This is similar to the vaccine being developed by China's CanSino Biologics. 

I have no doubt that there will be more and more success stories of vaccine being approved for use to combat COVID-19 this year and also early 2020. The only question will be how effective will be the new vaccines. Not all vaccine will be the same in terms of efficacy. For example, the CanSino vaccine using the adenovirus has results that suggest that it will not work well in people with pre-existing immunity to the adenovirus. Russia also seems to be rushing to come out with its own vaccine for mass production and public use without more extensive clinical testing. The good news here is that even if a vaccine fails to prevent COVID-19 infection but proves able to reduce the severity of the coronavirus devastating effect, it will still be deemed to be a partial success as it makes the virus less fatal. 

The stock market seems to have priced in part of the effect of new vaccines being made available within the next 6 months based on the see-saw up and down effect when news of Moderna releasing more details on its clinical trial was made available to the public against the concern of rapidly increasing COVID-19 record daily cases (with some countries undergoing partial lockdown again due to emerging second wave of COVID-19). If US, China or UK come out with confirmed phase 3 clinical trial results of their respective vaccines, I reckon that there would be a mini-rally in the stock-markets with many investors being convinced to take up more stakes in equity markets instead of sitting at the sideline. 

Global Investments Limited Still Way Below Its Net Asset Value- Unable To Unlock Intrinsic Value Despite Share Buy-Back

Global Investment Limited ("GIL") share price has surprisingly recovered back to its pre-March 2020 crash level. This means that its share price performance seems to have outshone the STI which is amazing. The Net Value Asset per share of GIL is around S$0.187 per share. Its latest share price of S$0.137 per share as at 9 July 2020 represented a discount of 26.7% given that most of its financial assets are already fair valued through profit and loss. 

1. Contingent convertibles (CoCo) made up the bulk of GIL's investment portfolio

The bulk of the investment of GIL are held in the higher risk asset class of Bank Contingent Convertibles (CoCo). Coco is a fixed-income instrument that is convertible into equity if a pre-specified trigger event occurs. CoCo is actually a creature created to help under-capitalised banks and to prevent a similar global financial crisis in 2008-2009. Hence Coco is a high risk but high yield financial instrument. 

As can be seen above, GIL has deployed a significant portion of its cash holdings into buying more CoCo during this period of market down-turn. The concentration of CoCo has increased from 43.4% in 31 Dec 2019  to 57.4% in 31 May 2020.

From the 2019 annual report, we can see that the weighted average coupon rate of return from CoCo is around 5.8% and the weighted average maturity is 5.09 years. 75% of GIL's CoCo are with banks in France, Switzerland, Germany and the United Kingdom. With the huge discount to Net Asset Value per share, it appeared that there is a compensatory margin of safety in event that the European banks sunk into bankruptcy should the COVID-19 2nd wave outbreak worsened the prevailing economic situation.

2. Daily share buy-back initiative still unable to unlock hidden intrinsic value 

I am not entirely convinced by the effectiveness of the share buyback initiative given the significant difference to its fair value. GIL is still severely undervalued by the market. In the longer term, the share buyback is no use as a tool to prop up share price as the mandate for purchase has a limit imposed on it.

The management of GIL should seriously conduct a strategic review as soon as possible and assess options such as selling off the entire company to other industry players such as banks, fund management companies or even government institutions (Temasek Holdings). This would then unlock the huge discount in its current languid share price. The market is apparently demanding a substantial risk premium for GIL over the meltdown of GIL during the previous Global Financial Crisis in 2008 that has scarred too many souls and did not re-price in the current restructured investment assets adequately. I would prefer the option of liquidating and walking off immediately and redeploying the returns to other investments. 

3. GIL and its relationship to the current scandal at Eagle Hospitality Trust ("EHT")

One important announcement by GIL caught my attention. One of its independent director, Mr Tan Wee Peng Kelvin, actually sat before on EHT's board of directors. The Authorities are conducting a joint investigation into current and former directors, and officers responsible for managing Eagle Hospitality Trust (EHT), in connection with suspected breaches of disclosure requirements under section 203 of the Securities and Futures Act (Cap. 289).

The thing about margin of safety is that this is assuming that the management's interest are aligned with shareholders and that they are discharging their duties faithfully. Else no matter how big is the magnitude of the margin of safety, the business is going to get into trouble sooner or later as apparent in the EHT case which is under investigation by the MAS and also the Singapore Police Force. 

Anyway, GIL clarified that the Board is of the opinion that Mr Tan is able to discharge his duties professionally as an independent director of the company. 

(Pls also see "White Knight Appears for Eagle Hospitality Trust And MAS & Singapore Police Force Commenced Joint Investigation")

Summary

For the upcoming scrip dividend scheme, I will be participating in it. Pricing is attractively set at S$0.135 which is at slight discount to its latest market trading price of S$0.137 per share and a 27% discount to its fair value per share. In addition, the current dividend yield of 7.3% (S$0.01 per share) is attractive while awaiting for an eventual unlocking of its hidden value. Saying that, GIL's heavy vesting in CoCo makes this investment extremely risky.  Well, there is no such thing as a free lunch. 

Singapore Press Holdings Severely Undervalued- Possible New Growth Engine Into Fast Growing High Tech Industry Data Centres

It is ironic that many investors have been dumping Singapore Press Holdings ("SPH") and proclaiming that media is dead and the way forward is to invest in high tech business with data centres such as in Mapletree Industrial Trust. Then on 29 June 2020, SPH announced a joint venture with Keppel Data Centres Holding Pte Ltd to develop and operate data centre facilities at 82 Genting Lane.

I have actually been to SPH's Genting Lane premise before to perform an external audit on SPH Magazine subgroup many years back. It was crazy then as SPH had many subsidiaries and there were many different group of auditors being dispatched to its various premises (main one at Toa Payoh) to rush out the year end reporting.   

1. Investments into development and maintenance of data centres- One off investment or building up in house expertise?

The reasons cited by the SPH management are to maximise the existing yield of its industrial property at 82 Genting Lane. 

But SPH could be harbouring a hidden ambition to develop a larger segment of its business into data centres development and management due to the trend towards digitization and cloud computing. This is not surprising as both SPH and Keppel Corp are indirectly owned by the Singapore Government. Diversifying into data centre business is actually a good move as it draws on the positive attributes of Singapore which is renowned for its political stability, free from natural disaster such as earthquakes, excellent infrastructure and a well-trained labour force. 

The only current problem for SPH is that it does not have the in-house expertise. The SPH management did a smart move by spinning off its 82 Genting Lane industrial property into a joint venture with Keppel Data Centres Holding Pte Ltd. It took a 40% stake in the business while learning the roles from Keppel. The Genting Lane JV will also be a good showcase to prospective tenants as proven experience if SPH chose to expand into the data-centre business. 

2. Improvement to SPH financial impact from this deal but strangely share price drop on 30 June 2020 immediately

Net tangible assets is expected to improve to S$2.09 per share after the proposed deal from S$2.08 per share before the transaction.

Earnings per share is expected to improve to S$0.15 per share after the proposed deal from S$0.13 per share before the transaction. This is an improvement of 15.4% to its future earnings. 

But surprisingly, price of SPH dropped to S$1.27 per share the following day of 30 June 2020 after the announcement. Apparently, the fear of a 2nd wave of COVID-19 and another Circuit Breaker had a devastating impact on its share price.  

3. SPH is severely undervalued- due to fear of declining media segment going into losses

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"), retail mall businesses and the possibility of expansion into development and management of data centres.

If the Media revenue decline further such that it became loss making, it will not make any sense to carry on this business. If the Singapore Government thinks that it is a strategic asset, then either it provides the funding through taxing Facebook and Google (just like what Australia is doing) or it establish a government agency to buy over this business segment. It will not be fair for the shareholders of SPH to be doing charity service perpetually and there will be many queries raised during AGM.

Summary

I think that SPH is severely undervalued given that its latest announced net asset is currently at S$2.09 per share. Trading at S$1.29 a share, this is a whopping 61% discount to its net asset value per share. In addition, the EPS projection of S$0.15 per share in the latest announcement means that the Price Earnings ratio is at an amazing low 8.6. 

(P.S: I am vested in this as I just repurchased new SPH stocks at S$1.28 per share today. A week or two back, have sold off all of them off to take profit at S$1.36 since buying some on 4 June 2020 after its price plunged from the fall out of MSCI index)