Further Market Correction Expected This Week Due To Chaos From Escalation of Israel and Hamas War.

Israel has commenced expanded ground operations against Hamas with battle tanks and ground troops storming into Gaza. I foresee further blood bath in the stock markets this week as we have seen in preliminary market reaction during the on-start of previous wars. This week may pose another buying opportunity into SREITs which has been hammered down close to the COVID-19 low.

Quick Highlights:

1. Inflation may come back in the form of higher oil prices which trickled down into higher energy prices for all businesses

There is a current group think that interest rate is at its peak already and that the US Federal Reserve will not increase rates anymore. Current rates of  between 5.25%-5.50% is actually small relative to the interest rates once imposed in 1980s to combat the Great Inflation dark period- the effective Fed funds rate once reached 19.39% in April 1980. 

Moral of the story is not to be too over-confident that inflation is already brought under control. More rate hikes may come until the global economies tanked into recession for the hot demand to finally cool off and to disrupt the inflationary beast

2. "Stable" SREITs mostly in trouble too

The traditional "stable" government linked REITs such as The Mapletree family of REITs are currently running a very high gearing ratio that are already at or near the 40% mark. For example, Mapletree Logistics Trust, Mapletree Pan Asia Commercial Trust and Maple Tree Industrial Trust have gearing ratio of 39.5%, 40.7% and 38.2% respectively. Valuation may go further downwards given the higher interest rates impact and rights issue maybe on the way to avoid breach of banking covenants if the current economic climate worsen. 

Parting thoughts

Personally, I think that no time is a good time to invest these days. Hence despite the gloomy economic outlook, I will most likely be mopping up additional units in Capitaland Ascendas REIT, Keppel DC REIT or United Hampshire US REIT over this 2 weeks. Frasers Logistics and Commercial Trust also looks interesting since it has very low leverage ratio (less than 30%) but I have already added 23,000 units last week and will wait for its September year end results release on 2 November 2023 before deciding on further action.

Will SREITs Crash Further This Week? Cut Exposure to SREITs Or Buy More At Current Lower Price?

The million dollar question this week is whether our Singapore REITs market will crash further after the 4.8% disastrous plunge last week. Well, so far so good as Monday today (23 October 2023), there is a slight rally. SREITs like Keppel Data Centre REIT (“KDC”) which has dropped -14.4% in a single week, from S$2.010 per unit to S$1.72 per unit, has since rebounded by +3.49%.  However, I don't think we are out of the woods yet with the gloomy macroeconomic situation.

1. Risk of Israel & Hamas War Spreading.
Besides Gaza, Israel has been conducting airstrikes against Syria and Lebanon. Iran has also been aggressive towards Israel. US, China and Russia have also been joining in the fray. There are heighten risk of disruption to global supply chain and oil prices may spiral upwards and worsen energy price. Sticky inflation might also rear its ugly head once again. 

2. Interest Rates Risk- Rates Maybe Raised Higher.

The Feds have mentioned that the inflation target is still way above their 2% target and that they may be raising the interest rates again in the future. For SREITs, the fear of higher borrowing costs leading to smaller distribution is certainly driving the market valuation down for most REITs.

3. Divesting DigiCore US REIT And Buying Keppel Corp Instead.

On 18 October 2023, I have disposed 13,000 units of DigiCore US REIT @ US$0.555 per unit and used the proceeds to buy into Keppel Corp when it dropped to S$6.36 per share in order to reduce my exposure to US REITs as well as to take advantage of the special dividend from the latter. This turned out to be a lucky move as DigiCore US REIT has since dropped to US$0.480 per unit as at 23 October 2023. 

Parting Thoughts

Strangely, the earlier morning rebound in price for SREITs on 23 October 2023 morning trading session fizzled out by afternoon. Overall, prices of SREITs continued to drop with only a handful exceptions such as Keppel DC REIT, Capitaland Ascendas REIT & Frasers L&C Trust. I am tempted to inject additional funds into SREITs purchases to take advantage of the significant lower market pricing but have decided to wait till Israel commences their ground offensive into the Gaza which may mark further carnages in SREIT pricing.

Keppel Corporation Sharp Drop In One Day and Special Dividend Being Declared After EGM.

Keppel Corp mysteriously dropped by a staggering S$0.220 (-3.36%) within a single trading day to S$6.320 per share as at 18 October 2023. This was a big surprise to me as today marks the Extra Ordinary General Meeting which concluded with most shareholders (99.9%) voting for the distribution of the special dividend in specie resolution. I was expecting a huge rally instead but it went down the drain instead. I can only attribute it to the fear of the Israeli and Hamas war exacerbating into a “World War” with other countries being drawn in. Strangely, other blue chips did not drop as much as Keppel Corp.

Things to note about the special dividends being declared:

1. The Ex-Dividend date is 24 October 2023;

2. The expected date for distributing the special dividends to shareholders is 7 November 2023.

Finally, after waiting for so long…..the giant Huat Kui has materialized.

Is Keppel Data Centre REIT Annualised 5.1% Distribution Yield From Q3 2023 Results No Longer Attractive?

Is Keppel Data Centre REIT 5.1% distribution yield from its recently released Q3 2023 results no longer attractive and will its business continue to go downhill? Find out more in this video.

https://youtu.be/Uor_RRw8gBs

Hong Kong Land Limited Dividend Yield of 6.43% and around 75% Discount to NAV- Why I am Staying Away From It.

I was watching Master Leong You-Tube channel yesterday and Hong Kong Land ("HKL") was being mentioned due to its high dividend yield (around 6.43%) and a close to 75% discount to its NAV where the latter provides a relatively super high margin of safety for those who are going to invest in it. HKL is not a "stranger" to me as during the COVID crisis, I have purchased around 4,000 units then in late 2019 at around US$5.50 per share and then sold it a month later at around the same price to re-deploy the funds due to my bad feel on the development then in light of the Hong Kong protests. To cut it short, HKL market prices has plummeted -50% from US$7+ per share in early 2019, to the current US$3.42 per share as at 15 October 2023- note that this is also after the massive US$600Mil share-buy back programme executed by the management team. Hence this is not exactly a good investment after almost 5 long years.  

1. Most of HKL investment properties and projects in HK and China while the remaining in Singapore

Most of HKL's investments properties are in offices or mixed development with some retail components. I am not exactly a fan of office space investments due to their cyclical nature. Before COVID, I have been staying away from offices and focusing more on retail and industrial REITs. However, during COVID crisis, I have thought that the office REITs especially those in US were holding up their prices and distribution well and thus ventured into them since they have long tenure with tenants. This forage into the office space sector subsequently turned out to be a disaster as one of the notorious one (Manulife US REIT) breached its banking covenants and stopped its distributions totally and is in the midst of divesting properties during the trough of the current US commercial office crisis.

2. The super high margin of safety has been talked about for ages by bloggers/You-tubers since more than 5 years back.

The market pricing for HKL has been lacklustre for donkey years. In early 2019, its price hovered at US$7 before dropping to US$5. 50 towards the end of that year. Most folks were all talking about the remarkable margin of safety offered by HKL net assets value per share. Look at its current market pricing of US$3.42 per share. Add in the US$600Mil of share-buy back programme since September 2021 and one can see that its share price is perpetually stuck in limbo.

3. Future of Hong Kong and Property Development in China

The key risk faced by HKL would be its property development businesses in China/HK and the political policy uncertainties in Hong Kong. In light of Evergrande and Country Garden, it is not a surprise that the market is frowning down upon the real estate sector and unduly punishing HKL. 

The market also does not seemed to view favourably businesses with property development in them which has high risks and also staggered unstable earnings. Even in Singapore, other property developers like City Development also suffered from a significant discount to its NAV per share. 

Parting Thoughts

Personally, I thought that with the worldwide stock markets in doldrum, there are a lot of alternative buying opportunities out there that can offer a good distribution yield and also high discount to NAV. So I will probably give HKL a miss for now. 

Manulife US REIT Rescue Plan Status and The Fallacy of Equity Fund Raising For US REITs.

 

Interestingly, Manulife US REITS released an announcement and a presentation deck with regard to the CGS-CIMB US REITS Webinar  on 10th October 2023. It contained the latest status updates regarding the myriad of issues besieging Manulife US REITs. While I see no further new information (other than those we already knew) from this particular release, the market price of Manulife US REITs has surprisingly increased by a significant 9.62% immediately a day after the announcement......

Please see video on my YouTube Channel.

Singtel Finally Managed To Divest Cash Burning Cybersecurity Division For US$205Mil.

Singtel has finally found a buyer for its cash burning Cybersecurity business of Trustwave. It has agreed to sell Trustwave to MC2 Titanium (growth equity fund of the advisory firm The Cherloff Group) for US$205Mil. Singtel had purchased Trustwave for an astounding US$770Mil in April 2015. This is now half a billion dollar losses in terms of investment capital. If we take into account the losses retained since 2015 M&A, Trustwave has burnt a big hole in the treasury chest of Singtel ever since the acquisition. 

Back in 2015, while I was still working in Singtel Group, I could still vividly recall this much talk about "strategic acquisition" of this new business which is supposed to catapult Singtel to become a global player in Cyber Security.  This is meant to expand Singtel’s existing portfolio of cloud based solutions and further entrench its leadership position in the managed services market. Singtel will leverage Trustwave’s threat intelligence, technology and talent to meet the growing demand for always-on managed security services in North America and the Asia Pacific region. However, no one knew that this venture was destined for failure and became a white elephant. 

Parting thoughts

I am pleasantly surprised that some industry player is willing to part US$205Mil to buy this piece of cash burning business and attempt to turn it around. With this disposal, the balance sheet of Singtel will become even stronger. 

Anyway, I am looking forward to Singtel latest re-organisation where it has crafted out its local and regional data centre businesses  as a standalone infrastructure unit. Singtel seems well positioned to unlock latent values in this new engine of growth.