Thursday 21 January 2021

Fu Yu Corporation Shot Up 40%- Trio Co-Founders Sold Off Majority Stakes To Private Equity Fund And Went Into Retirement.

Superhero strength and superhero cash generating abilities indeed best describe Fu Yu Corporation ("Fu Yu Corp"). Earlier this week, I was surprised to see that Fu Yu Corp stock price has shot up by 40% relative to my average entry purchase price of S$0.205. Turns out that the trio co-founders has sold off the majority of their stakes to a private equity fund. The co-founders have sold off 29.8% of their stakes, around 224.4Mil shares of Fu Yu Corp, for S$58.3Mil to local fund management firm, Pilgrim Partners Asia. This works out to a valuation of S$0.26 per share. 

1. Is Fu Yu Corp overvalued at S$0.290 given last major sales is at S$0.26 per share? Time to sell?
Based on net assets per share, it is showing S$0.217 as per the recent announcement. However, there was an analysis report by UOB Kay Hian which had interviewed the management then to reveal that the leasehold properties were recorded at historical value convention. The fair value upside is around S$50Mil. Hence this will give an adjusted net assets per share at S$0.284. Current market price is around S$0.290 as at 21 January 2021, which thus suggest some slight overvaluation by the market.

If we are looking at earnings multiples, the current EPS of S$0.0169 per share means that market price is at 17 times of earnings. Historically, this has been around 12 times. Therefore, from earnings multiples perspective, current market price seems overpriced. 
2. So what happens next with the leaving of the trio co-founders?
The 3 directors who sold off their majority stakes have went into sudden retirement. There is not much information on the new directors taking over the founders except that they were of banking background and can add value to business development via their vast banking network. I am actually quite worried as no one seems to have manufacturing background. In terms of operations, will the new directors be as experienced and nimble as the trio cofounders in knowing exactly when and how to react fast  taking into context  the macro-economic situation via scaling up and scaling down production operations? Timing is essential in this business else the business will be bleeding profusely non-stop. 

I have dropped a note to the Investor Relations team to be more transparent and release more information on the background of the new directors other than formerly from "banking" and full stop.

3. Dividend yield.
Fu Yu Corp has declared a final dividend of S$0.01 per share. This brings the total dividends given for FY2019 to S$0.016 per share. This is a dividend yield of 5.52% and a payout of 95% of earnings for the year. The key question as per point 2 as aforesaid mentioned will be can the new directors maintain such excellent results?

As per above mentioned points, it does not appear to be very attractive anymore to hold long term stakes in Fu Yu Corp given the recent run up in price. It seems now more reasonably valued albeit on the high side. Not sure on the new management team's plan in place but I am worried over the experiences of the new directors. In the absence of further disclosure of strategic future plans of the new team, I have taken out the unrealized profits by encashing approximately S$10K earlier this week for re-deployment into other stocks. But have retained around two-third stakes in Fu Yu Corp. Good attributes of Fu Yu Corp will be zero leverage and high cash balances in its financial position. The payout of 5.52% is also still decent. 

Please also refer to my previous posts on Fu Yu Corp:

Tuesday 19 January 2021

Results of FIRST REIT EGM Held on 19 Jan 2021- Overwhelming Unitholders Support On New Restructuring Deal.

This was a huge surprise. Despite all related parties such as the Lippo Group abstaining from voting, over 90% of unit-holders voted in favour of the restructuring deal. Also, the rights issue in resolution 2 enjoy overwhelming support of over 90%. Hence the rights issue exercise will proceed immediately to complete the new operating model for First REIT. 
With all unit-holders demonstrating such strong support and being one heart one mind with Lippo Karawaci, there is a high likelihood things will go well from this point onwards especially in view that Indonesia has also started its vaccination programme and the Indonesian economy is slowly mending itself.

Saturday 16 January 2021

Are The Distributions From Manulife US REIT (MUST) Sustainable? Clarifications from MUST's Investor Relation Team

This is a follow up to my last post on "Are The Distribution From Manulife US REIT Sustainable? Payouts Seems Greater Than Free Cashflow for Past Two Years". As mentioned previously, I have sent out an email to seek the comments of the management team of Manulife US REIT ("MUST"). I was surprised at the quick response within 2 working days by their Investor Relation team which is an excellent reflection of the dynamic culture and tone at the top. I should summarize and share the key comments by the MUST Investor Relation team here.

1. MUST Comments on 1H 2020 Income Statement Net Losses
Accounting recognition of fair valuation through P&L does create volatility in the P&L. In the case of 1H 2020 results, the accounting loss is due mainly to fair value loss of investment properties and derivatives - itself does not create a cashflow issue.

For the purpose of distribution computation, certain adjustments has to be made to the accounting numbers to derive what should be paid out to Unitholders i.e. non-cash items such as unrealised fair valuation losses and fees paid in units (no impact on operational cashflow generated from the properties net of expenses). Refer to note (g) on page 6 of 1H 2020 results announcement – reconciliation of accounting to distributable income.

The derived distribution to Unitholder is sustainable and supported by net cash from operating activities, refer to page 10 of 1H 2020 results announcement. Its higher than what was distributed in 1H 2020.

2. MUST Comments on classification of distribution to Unitholders in the form of  (i)Tax-exempt Dividends and (ii) Capital
The "Capital" component of the payout isn’t distribution in excess of earnings. It’s a result of tax structuring. Both elements are in fact supported by the underlying net property income.  

In terms of capital structure into US, it’s in the form of equity and shareholder loan. The shareholder loan carries a higher interest cost providing effective tax shield in addition to other onshore deductions to neutralise US taxable income to nil. The shareholder loan interest paid to Manulife US REIT is free of 30% withholding tax due to the portfolio interest rate exemption rule, upon receipt in Singapore is classified as Tax-exempt. The balance of earnings in US is extracted through shareholder loan redemption, upon receipt in Singapore is classified as "Capital". 

MUST Structure

2A. Additional query to MUST Investor Relation arising from the comments on Pt 2 as aforesaid mentioned above- Is the distribution sustainable if the shareholder loan is fully redeemed in future and part of the earnings thus get exposed to additional US taxes? 
One very interesting thing to note from the above comment is that the capital distribution of the half yearly payout is actually from property income and is actually part of recurring earnings. The only reason why it is deemed "Capital" in distribution nature is due to tax transparency planning to mitigate tax leakages. MUST extract this back via half yearly partial redemption of the shareholder loan given to the Parent REIT setup in the USA. 

This naturally give rise to another grave concern, which is, what if the shareholder loan is eventually exhausted due to constant redemption? Does it mean then that the tax shield setup will breakdown and the distribution will be subject to additional taxation hence eventually lowering it in future?

The investor relation team gave further insights into the MUST organizational structure being setup with regard to the above query:

"It will take a long while before the existing shareholder loans are exhausted. This will be further extended when we acquire more properties. 

For example, 
a) We acquire a property in US for $100, we inject capital into US in the form of $40 equity and $60 shareholder loan;

b) The property yield 6% which mean there is $6 annually (6%*$100) to be paid out from US to Manulife US REIT (“MUST”);

c) Say shareholder loan interest rate is 7%, 7%*$60=$4.2 out of the $6 will be repatriated to MUST via this route; 

d) Balance of $1.8 will be extracted via repayment of shareholder loan each year. $60/$1.8 = 33.33 years. It will take 33+years for this to be exhausted.

On (c) above, effectiveness of the tax shield should reduce over time as the shareholder loan reduces but it’s a long while. To reiterate, this will be replenished with further acquisitions. 

New shareholder loan can also be created when we refinance our loan as well".

3. Clarification with regard to the sustainability of the distribution going forward if we consider it from the perspective of the more stringent Free Cashflow assessment methodology? I noticed that in FY2019, the free cashflow (Operating CF net off CAPEX) less distribution to unitholders is negative of around <USD44MIl> and this is financed through bank borrowings and rights issues proceeds.
The reply from MUST Investor Relation is that " On capital expenditure, the response would still be to fund it via borrowings, which is a more efficient use of capital and that we have managed gearing prudently, well within MAS gearing cap of 50%."

Summary and personal thoughts:
The 1H total distribution pay out of 3.05 cents (dividends + "Capital") will give an annualised 6.10 cents payout from its recurring earnings. This is an 8.2% dividend yield based on the last 5 trading days average price of US$0.746 per unit. 

The question of sustainability of this 8.2% will depend on how fast MUST grow its earnings organically such as positive rental reversion of renewed tenancy agreements in order to get sufficient additional future returns on the use of borrowings to fund office capital expenditure, if we adopt the stricter free cashflow perspective. Growth can also be via inorganic M&A. 

In addition, any additional unrealized fair valuation losses will lead to the gearing hitting the MAS allowed maximum of 50% which will lead to the inability of the REIT to drawdown any further borrowings to finance capital expenditure. The aggregate leverage ratio of MUST at group level as at 1H 2020 is around 40%. Will be keeping a close look at this ratio for the upcoming year end results that will be released on 8th Feb 2021. 

Based on the current known conditions and historical track record of MUST, their performance has been remarkable and growth focus with M&A being carried out. This should mitigate the downside business risks and ensure sustainability of the distribution of 8.2% yield.   

Sunday 10 January 2021

Are The Distribution From Manulife US REIT Sustainable? Payouts Seems Greater Than Free Cashflow for Past Two Years.

Recently, I decided to take a closer look at the financials of Manulife US REIT as I was rather confused by some analysts asserting that Manulife US REIT has a dividend yield of 8% but when one check the SGX dividend announcements, the annualised dividend yield is only around 5.4%. Apparently, there is a "missing block of dividends". Upon closer examination, the missing block of dividends is actually the capital distribution component of the half yearly distribution. The next question would be why is Manulife US REIT paying out distribution from its capital? Most importantly, is the future distribution sustainable? Also, is there a fundamental deteroriation in the results of the REIT?

1. FY2020-Manulife US REIT Making Losses
Yes. This is not a typo. Manulife US REIT results for the first half of 2020 is a loss making one and the entire FY2020 is also expected to be a loss. But why are so many analysts still painting Manulife US REIT as a resilient REIT during this COVID induced recession?
Summary Income Statement
If one is a long term investor, then this set of loss making results as at the first half of 2020 is not something to be too worried about. The main reason for the unrealised loss is due to the flamboyant fair valuation concept in accounting that creates the volatility. Basically, the investment properties fair value went down by <US$77Mil> during the economic crisis. Since the tenants are locked in for a long WALE and are of good quality, this fair valuation yoyo is not exactly a major concern. When the recovery comes over the next 2-3 years, the independent valuer will become more optimistic and relaxed their assumptions and one will find the fair valuation goes up again. 
Fair Valuation Losses From Derivatives and Investment Properties-US$92Mil
Also, since our topic is on distribution sustainability, I would like to point out that fair valuation losses does not impact the cashflow.

2. Free Cashflow Analysis

Free Cashflow Computation
Based on extrapolation of the 1st half FY2020 results, the entire FY2020 is expected to deliver a free cashflow of US$74.6Mil. However, distribution payout is US$96.6Mil. There is thus an apparent over-distribution of  <US$22Mil> which is not sustainable and is being financed via either bank borrowings or previous rights issue. 
Extract from 1H FY2020 Cashflow Statement Manulife US REIT
As per the cashflow statement, note that US Manulife is actually borrowing to finance its capital expenditure and leasing costs. I am currently not a fan of the use of leverage as a tool to keep on financing the distribution to unitholders as it adds on to the interest cost and weakens the financial position of the REIT. A more sustainable payout would be to reduce it by around 23% which gives a dividend yield of 6.37%. 

Parting Thoughts:
I have sent out an email to the management of Manulife US REIT to seek clarification on the rationale of using borrowings to finance additional distribution not just for FY2020 but also prior FY2019 (yes, the free cashflow is also negative in prior year). I reckon that the reply would be this is to take advantage of lower borrowing cost as there are still ample debt headroom to optimize the capital structure.  However, this argument will be Deja Vu to me as I recalled the episode of Asian Pay TV Trust which delivered fantastic payout before the music stops and the price crash.

Anyway, Manulife US REIT does have a number of strengths such as having having grade A offices, diversified and good quality tenants with long WALE. Interestingly, Manulife US REIT had raised US$142Mil in FY2019 at a pricing of US$0.876 per unit. So, new investors who decided to be vested actually enjoy a free US$0.136 per unit contribution by previous unit-holders based on the last market trading price as at 8 Jan 2021.

Updated 16 Jan 2021: Please refer to this latest post on comments from Manulife US REIT Investor Relations.

Thursday 7 January 2021

Organisational Behaviour: The meaning of "Sinecures"

The recent reporting of the saga revolving around the continuous resignation of more directors of City Development Limited ("CDL") since the acquisition of a 51% stake in a Chinese real estate developer, Sincere Property Group, lead to a very rare word being utilized in writing these days.

The investment into the loss making Sincere Property Group in FY2020 has cost CDL a total of S$1.9 billion as at Oct 2020 which included S$895Mil for its 51% stake , S$303Mil for subscription of bonds and another S$133Mil in working capital loan. CDL will need to take into the account the loss given its 51% controlling stake to its consolidated accounts. In October last year, CDL shocked the market when it announced that a long standing director, Mr Kwek Leng Peck had resigned from the board mainly due to disagreements with regard to CDL's investment in Sincere Property Group.

It was also reported that Mr Kwek Leng Peck's resignation may have pressured the other non-executive directors of CDL who had expressed misgivings about the Chinese property group to make an exit lest they be accused of treating their board positions as "sinecures".

What is "Sinecure"?

Sinecure basically means holding on to one's position in an organisation but doing almost nothing other than holding on to the associated status or financial benefits. In every organisation, you will be able to identify a small group of people whose jobscope fits the sinecure definition. I reckon this is more common than one thought. 

In your own work place, are there also people who are merely pretending to work but are actually holding on to their job as sinecure? Chances are also such that you cannot do anything about such folks as they tend to be in a position of substantial power or influence in the organization......really nothing much one can do except maybe gossiping and complaining during break time with your fellow colleagues. Unfortunately life can often appear unfair, so achieve financial independence fast and get out of the rat race as soon as you can.  :)

Sunday 3 January 2021

Reflection for 2020 and Equity Portfolio Updates (31 Dec 20)

1. Friend of StocksCafe
I finally decided to subscribe to become a "friend" of StocksCafe and gave up on my attempt to track dividends manually on Excel spreadsheet which is causing too much grief over the years. Time to fall in along with modern times. It turns out that StocksCafe is extremely easy to use and allows one to keep many different portfolios. The dividends feature also ease the mammoth effort to track it manually as well as give a projected dividend forecast for the next 12 months in it.

While StocksCafe allows data import, I decided to take the easy way out for this migration and just key all equities at the high level by assigning an average cost as the first transaction for the respective purchases. So effectively from 1 January 2021, my profit and losses with dividends will be tracked on board by StocksCafe.  

Highly recommended to all as the more I use it the more I love it. Thanks Dr Evan Koh for starting StocksCafe and sharing the intellectual work for this great site/App. 

2. Purpose of posting Portfolio updates is more for own references as well as sharing.
Sometimes, I find it easier to refer back to the internet for summary snippets of my historical portfolios especially during lunch break or travelling on the public transport rather than booting up my laptop to access the information. Hence the information is more tailored for my own reference. I have no intention to show the detailed profit and loss for each of my own holdings as I think it is overall meaningless given my main investment philosophy is to hold long term and have sustainable passive income from dividends - please also refer to pt 3 below.

3. Weird that folks on HardwareZone Forum are criticizing bloggers using Margin Financing
One day, I was looking through my blog statistics and surprised to see a surge in traffic from HardwareZone forum. It turns out that some folks are bashing bloggers who are using margin financing and as a matter of fact, passing condescending remarks in their posts.  

First and foremost, I am sure everyone knows that using leverage is a double edged sword. For me, I remain mostly invested throughout the March'20 market crash COVID mayhem- I do not own a magic crystal ball unlike the folks on HardwareZone forum who can time the market perfectly and then proudly proclaiming that bloggers with margin financing are unable to take advantage of the March'20 low. But I did deploy and divert additional cash into the market during Feb'20 to June'20 period as well as did partial sell off to buy into blue chip banking stocks and other stronger REIT such as Mapletree Commercial Trust. I see another 20%-30% upsides over my existing portfolios over the medium term once the market recovery plays out. 

For those who are not comfortable with the use of leverage, then simply stay far far away from it. For those who wanted to know more, then I will personally recommend the Early Retirement Masterclass by Christopher Ng. 2 years back, I attended a seminar by Chris. Employment of leverage is not a gamble as many folks on HardwareZone believes. Chris's methodology has been backed up with back-testing and personally tested during the 2008 GFC and he is constantly refining his techniques and system. In fact, one of the very intellectual and smartest people I have ever met. I say it and I say again, if you think that leverage is akin to "playing with Russian roulette", then just stay away from it- there is no need to be very upset at what others are doing. 

4. Eagle Hospitality Trust- Saga continues and no progress.
This is one of my worst investments to date. Apparently, there were already unpaid local taxes issue even before the IPO. Coupled with fraudulent authorization by non-executive directors to pick up liabilities on behalf of lessee that were unauthorized by the Board of Directors and also wasted lead time by the 2 main ex-directors locking in a special deal with only 1 potential rescuer in the initial stage (not open to public for tender of proposal), there is just too much conflict of interest by these 2 ex-directors who owns the REIT Manager. The breaches of the Securities and Future Act also lead to the eventual removal of the REIT Manager by MAS.

After the last EGM on 30 December 2020, it is back to square one for stapled securities owners of Eagle Hospitality Trust. I can understand the frustration of all owners....but rationality needs to prevail. Either choose to resume operations with a new REIT Manager or liquidate.  But to choose neither is very strange indeed.

5. Sold off most of my equity holdings in Suntec REIT
I have sold off most of my holdings in both cash and margin portfolios for Suntec REIT (average cost around S$1.17 per unit) and retained only a small stake of 3,000 units for diversification purpose & future upsides. I am worried over the office rental reversion for Singapore office as well as the convention centre MICE businesses. The retail component is also inextricably intertwined with the office and MICE traffic. 

The main difference between Singapore and US commercial offices is that US has already adopted work from home a decade back whereas the many bosses of Singapore Companies only realized through this COVID period that their workers can still meet deliverables from home and this represented cost savings in hefty office space rental in commercial buildings. As I am already building up stakes in CapitaLand Integrated Commercial Trust (CICT), I decided to pare my stake down in Suntec REIT. 

6. New REITs purchased in December 2020.
Added United Hamsphire US REIT for its tenants that deals mostly with groceries and has long WALE as well as Manulife US REIT which has proven itself resilient in the face of COVID in US.

Parting thoughts:
Well, that's all the updates and thoughts for now. HAppy New Year folks! Best wishes for the new year and good health always to all!