Tuesday 27 October 2020

MAS To Kick Out Manager Of Eagle Hospitality Trust - Dramatic Plot Twist That Beats Korean Drama

What a dramatic twist that is even better than the Korean drama for the latest development at Eagle Hospitality Trust ("EHT") as announced by MAS on 26 October 2020. During my last posting, I have touched briefly on various issues including the possible agenda of MAS and the Commercial Affairs Department ("CAD") relating to the EHT Trust saga by kicking off with the arrest of the directors of EHT in order to send a message to 2 ex-directors Taylor Woods and Howard Wu of the sponsor Urban Commons and also as an announcement publicly to all stakeholders. It turns out that my hunch was correct, MAS has continued with a beautifully executed phase 2 of its strategic move, that is, to kick out the current Manager of EHT which is controlled by Taylor Woods and Howard Wu by quoting multiple breaches of the Securities Future Act.  

1. Intergrity seems to be at issue for ex-directors of Urban Commons- taking COVID loans in US under EHT without informing BOD of EHT; entering non-disturbing agreements with liabilities transferred from lessee to EHT and delay notificaiton of insufficient financial resources news to regulator 
Many unit-holders just want any rescue deal even if it involves people with possible integrity issue. Their main purpose is just to get the counter removed from suspension for trading resumption and to sell the units on hand immediately to salvage whatever residual cash leftover. It is a fallacy to think in such short-sighted manner. 

This will not solve any of the current predicament facing EHT unless the control held by Howard and Taylor are removed totally. As I mentioned earlier before, worst that could happen is getting nothing back as an investor. Hence if one wants to get the maximum value back from the upcoming restructuring, then the Manager of EHT controlled by Taylor Woods and Howard Wu must be eliminated immediately.

2. EHT REIT Manager's shareholder- Mandarin West Holdings
Mandarin West is indirectly owned by Howard Wu and Taylor Woods. Both Howard Wu and Taylor Woods resigned from their board positions at EHT's Reit manager as at May 2020, but both continue to wield substantial influence over EHT as joint owners of both Urban Commons - EHT's sponsor - as well as of the Reit manager.

How powerful and influential is EHT's Manager? Consider the removal of the independent director, Carl Gabriel Forian Stubbe just a day before the AGM where he was assigned by the directors and DBS Trustee to be the chairman for the following day's AGM. Stubbe was not re-elected by the Reit managers' shareholder, Mandarin West Holdings.

Stubbe, who had offered himself for re-election and was "willing and desired" to continue his role as independent director, "laments the decision" by Mandarin West Holdings which surely is to the detriment of stapled security holders but alas, there is nothing that can be done. This is just how powerful a REIT manager is and why it needs to be removed in order for the upcoming restructuring work to be aligned to the benefits of the majority of unit holders instead of the interest of only Howard and Taylor. 

3. The White Knight has been chosen apparently
I reckon that the White Knight from the  "Request for Proposal" has been chosen. Phase 3 by MAS and current directors of EHT will be to unveil this after the 10 days notification to the current Manager to exit. This will  move at lightning speed after the strategic phase 2 move by MAS is completed. Unit-holders should prepare for an EOGM soon to approve the rescue plan to revive EHT from near ashes. 

The move to eliminate the current Manager of EHT will also leave a clean slate for the white knight's management team to execute their turnaround plans without hindrance. 

Hopefully, the White Knight has extensive international hotel management experiences and an additional bonus if it has previous experiences operating in the US market.

It is no doubt a brilliant move engineered by the MAS, CAD and also the current directors of EHT. I just hope that the restructuring plan can be executed successfully by 1st week of December 2020. But taking into account the lead time for re-capitalization by the white knight, I would think EHT will earliest be operational only in the new year of 2021. The final hurdle would be at EOGM itself as Taylor and Howard still hold significant share holdings (15.2%) in EHT and may succeed in stopping the appointment of  the White Knight if other stapled security holders do not come out to vote for change. 

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Sunday 18 October 2020

Will Malaysia Change Prime Minister Again?

It is interesting to see that Anwar has met the Malaysian King to inform him that he has the majority now to form the new government. Muhuyddin had just been sworn in as new Prime Minister previously in March 2020 which is less than 1 year and to be more exact around 7 months only. There appears to be a musical chair politics being played out.

Personally, I am just glad that Mahathir will not be coming back as Prime Minister of Malaysia at any time soon. Mahathir has been adopting an antagonistic attitude towards Singapore such as wanting to walk away from signed agreement to raise the price of water supply to Singapore and the extension of Johor Bahru port limit which intrudes into Singapore's territorial water. This has undone many years of excellent win-win cooperation between the 2 countries. 

I look forward to better bilateral relationship between the 2 countries.  


Friday 16 October 2020

The SPH Share Price Disaster- Media Segment Needs Emergency Rescue

The terrible results announced by SPH of a first time loss led to its share price dropping to less than S$1 per share. Current price has recovered to around S$1.01 per share. If one has been holding on to SPH when it was S$4 per share, 75% of one's invested capital would have gone up in smoke. But then again, I think that SPH is oversold albeit its Media segment needing an emergency rescue.

1. Fair value accounting can be nonsensical and illogical
The main reason for the net loss of SPH is due to S$232Mil fair valuation loss of its investment properties. Accounting rule have been changed from a historical focus basis to the current fair value model. Unfortunately, this leads to weird "see saw" effect on the yearly profit and loss. This <S$232Mil> is an unrealized losses due to market valuation in the midst of COVID-19. Last year 2019 was a valuation gain of +S$82Mil. The fair valuation thus becomes a yoyo. 
Taking into account the difference in fair valuation variance, this amounted to S$310Mil differences. so if next year COVID-19 improves, one will see another S$100 Mil valuation gain. This is absurd for any analysis as we know that the going concern issue for SPH group should not be an issue currently due to the huge amount of cash maintained on its balance sheet.

The "Operating profit" line item will be a better indicator of the financial health of SPH. Current Operating profit is S$100.2Mil relative to prior year of S$186.9Mil which is a 41% decline in earnings due to the COVID-19 pandemic (before one-off items).
However, we will still need to normalise the Operating profit for one off gains and losses for (i)Jobs Support Scheme (-S$33.4Mil), (ii) other COVID government grants (-S$35.1Mil), (iii) retrenchment costs (+17.4Mil), COVID related grants expenses (+28.3Mil) and (iv) goodwill impairment and intangibles (+17.5Mil).  Hence normalised Operating profit is S$104.9Mil relative to prior year's normalised profit of S$210.5Mil which is a substantial decline of -S$105.6Mil and a drop of 50.2%.

2. Media Segment Woes and Solutions
The main problem currently is with the disruption in advertising revenue that keeps declining over the years and for this year, the COVID-19 pandemic further exacerbate the financial performance of SPH. Advertisements on Facebook for example are cheaper and more targeted thus leading to the declining trend.
2(i) Can SPH close the Media Business and just focus on the very profitable property business?
This is the ideal case. If SPH no longer has the competitive edge in media, it should probably closed down the Media Business and change the Group's name from Singapore Press Holdings to Singapore Property Holdings. Unfortunately, the Singapore government will need a local communication media. Hence the government should get a Temasek linked company to buy and takeover it since apparently, SPH is expected to do National Service.

2(ii) SPH should consider hiring a new CEO with overseas Media commercial experience.
SPH may have to consider getting a new CEO who is well versed with Media commercial working background to try to steer SPH back into profitability for Media segment. If the CEO cannot address the decline and the losses, then have to consider changing  a new one which is the norm in many other global MNCs.

2(iii) Government to provide funding to sustain Media segment if it not practical to terminate the Media business.
As alluded to 2(i), if the Singapore government wanted a loss making business segment of SPH to continue in business, it probably should look into providing additional grant to sustain it. A cost plus model can be worked out similar to the current public bus service routes being awarded. 

Once the economy turns around, and advertising dollars increases, any extra profit made can go back to the government. SPH will be allowed to only just retain the cost plus mark up portion agreed. This will be a fairer approach to both the Singapore Government and shareholders of SPH.

Shareholders of SPH should consider raising the above points at AGM or writing in to the SPH senior management. It cannot be letting the current management strategy continue for the Media segment and allow it to keep deteriorating and bleeding. 

Thursday 8 October 2020

What Should The Investors of Eagle Hospitality Trust Expect Over Next Few Months- Will The Eagle Survive?

The Eagle Hospitality Trust (“EHT”) drama climaxed recently with the arrest of current and prior directors by the Commercial Affairs Department (“CAD”) of the Singapore Police as part of their investigation into possible breach of Section 203 and Section 331 of the Securities and Futures Act. 

Now, Section 203 deals with responsibilities of the directors in making necessary disclosures on the SGX to investors whereas Section 331 spells out the penalties for directors found to have committed the offence as aforesaid mentioned. Many current unitholders have been very angry with the directors and you can see some folks calling for them to step down but I think people are going after the wrong directors.

1. What is CAD and MAS trying to do here with the arrest?
Personally, I think this is just part of their routine investigation procedures but with hidden agenda by the CAD. The burden and responsibilities on the directors are heavy. But one can’t be held liable if some directors are purposely holding back information from the others. I think the 2 ex-directors Howard Wu and Taylor Woods are actually the main targets. They have been making a number of deals behind the back of the other directors of EHT. For example, non-disturbance agreements to assume liabilities for the lessee and taking out loans using EHT name in USA which was never agreed by EHT.

I also strongly believe that CAD and MAS are trying to send a message to Howard and Taylor to back off the current restructuring exercise as apparently, they are making lots of noise in public to get back the hotels. Another hidden message perhaps is to the entire Board of Directors to discharge their duties faithfully and align to the interest of the unit-holders. I will leave this point for now as I do not want to prejudice the current ongoing investigation, so let's just wait for the results. But it is interesting to see CAD jumping out like that and the news get spread in such a manner-very interesting play by the CAD and MAS.

2. Some Unit-holders are asking EHT Management team to sit down with Urban Commons to reach a deal to save EHT- Is this the best option or maybe barking up the wrong tree?
Many unit-holders just want any rescue deal even if it involves people with possible integrity issue. Their main purpose is just to get the counter removed from suspension for trading resumption and to sell the units on hand immediately to salvage whatever residual cash leftover. This is suicide. Urban Commons lead by Howard and Taylor  have many financial issues. As I mentioned earlier before, worst that could happen is getting nothing back. If one wants to get some value back, then might as well ensure it is the maximum value that can be unlocked out of the current deadlock.  

I know people are desperate. But to call for Urban Commons to come back into the fold means nothing has changed from day 1. In such case, might as well just do a liquidation straight away instead of trying to restart all the hotels with the same sponsor that brought EHT down. If Urban Commons want to come back in, they should have taken part in the Request for Proposal (“RFP”) instead of doing numerous Public Relation stunt to try to come back via a back door from behind the backs of other genuine parties taking part in the bid and submitting viable plan.

I expect the RFP results to be announced very soon and an EGM is coming up for EHT. Taylor and Howard as shareholders will be desperately trying to block the new white knight from coming into the picture as they want to continue running the hotels under their Urban Commons. I recommend unit-holders to go for the new white knight deal and the upcoming re-capitalisation proposal.

 3. Worse case scenario but not the end of the world
The worst case scenario here which many investors should expect, as part of investing, is to get back nothing- zero value from liquidation after repaying bank loans and creditors. But fortunately, things are actually not as dire as it seems. If so, EHT would have announced that no one submitted any proposal for taking-over the hotel business but as a matter of fact, 15 parties have entered into Non-disclosure Agreements with respect to the RFP. There were many interested parties which have subsequently submitted their plans by 31st August 2020 and the management of EHT is working to partner with the new prospective white knight. 
Above extracted from AGM Q&A released on 23 September 2020

Existing investors should be patient and wait for further news announcement. I expect another update by EHT towards the end of October’20 with regard to the progress of the restructuring exercise. Also an EGM on the prospective deal will most likely be on the table by end November’20. If this deal does not go through in EGM, then probably investors will have no choice but to take up the deal with Urban Commons and their new strategic joint business partner, Encore Enterprises. This whole thing will probably drag into December 2020 or even January 2021 to complete re-capitalisation and resumption of trading. Not a bad thing considering better COVID-19 anti-bodies treatments for those infected and vaccines to prevent infection will be rolled out in the US which will help in ensuring the hotel valuation are higher relative to half a year ago in the event that liquidation as an option of last resort is exercised. 

Saturday 3 October 2020

Lendlease REIT Still Severely Undervalued- Nibble Away At JEM Suburban Mall

Lendlease Global Commercial REIT ("LREIT") announced that it has acquired a 5% stake in JEM shopping mall in Jurong East. While the current acquisition stake is only 5%, it has demonstrated that LREIT has good potential for future growth due to the many properties that could be injected by their sponsor Lendlease Group. The diversification into a suburban mall with 12 levels of office further increases the resiliency of its future earnings. My personal thoughts are LREIT share price is severely undervalued and the market is putting up excessive risk premiums on LREIT relative to its peers. 

1. LREIT Background
LREIT IPO price was at S$0.88 per unit on 2nd October 2019 (about 1 year ago). It later went up to S$0.955 per unit at one point in time before plummeting to an all time low of S$0.440 per unit during the March 2020 stock market crash. Holding on to Lendlease is thus a roller coaster ride despite the fact that it has two extremely good quality properties in its portfolio. LREIT derives around 66% of its property income from 313@Somerset and 34% from Sky Complex in Milan. 

2. LREIT remains severely undervalued- COVID-19 will not last forever
LREIT happens to be severely undervalued at the current unit price of S$0.69 per unit as at 2nd October 2019. While there have been rental reliefs granted to tenants during this pandemic induced economic crisis, its fundamentals remain intact. You can go down to Orchard Road to take a look. The young and the beautiful are all flocking back to 313@ Somerset after the circuit breaker. Its Sky complex office portfolio also remained resilient due to the sheer financial strength of its tenant despite the terrible COVID-19 situation in Europe. 
Net asset value as at 30 June 2020 is S$0.85 per unit. Current market price to book value is at a discount of 16%. 

The IPO projection for FY2021 was initially 6% dividend yield. Current net profits for full financial year is down 20% from forecast due to the rental relief packages. Once the pandemic is over and the economy on track back to normal, investors who went in at today's pricing of S$0.69 per unit will be reaping a dividend yield of 7.6% dividend yield per annum and also a capital upside of close to +45% based on target price of S$1 per unit in another 2-3 years (it already hit close to S$1 before the COVID-19).  

3. Growth of LREIT is assured with latest additional investment into JEM shopping mall
The growth path for LREIT has been re-affirmed with the recent acquisition of a 5% stake in GEM shopping centre at Jurong East. There are thus many potential pipelines for LREIT to grow besides relying on the organic growth of Sky Complex and 313 Somerset.

I think that the potential upside for LREIT out-weights the potential downside risk of another devastating economic lock down. I have also ploughed back the recent dividends received from LREIT into my investment portfolio. Keeping my fingers crossed that a safe and effective vaccine will soon be released to stop governments from locking down the global economies again. 

(Note: Currently, I am vested in 135,000 units of LREIT.)