First REIT Review- Super High Yield of Over 8% And Possibility of 80% Drop in Rental Income For Upcoming Renewal Of Expiring Hospitals

I just saw something shocking from an analyst report by Phillip Securities Research on 7^th October 2019 with regard to First REIT. Basically, the uncertainties over the lease renewal of expiring hospitals and a hotel in 2021 seems to be the main cause of the low unit price despite the completion of the fund raising via rights issue exercise by Lippo Karawaci to resolve the previous rental default risk. Apparently, there is another significant risk of as much as 80% income support deficit should the sponsor decides to leave direct negotiation between Siloam and First REIT. This information is something very material because if it is true, it means that in the worst case scenario, First REIT maybe worth only 20 cents (by applying similar 80% discount to recent market price of S$1.01) per unit since such principle will apply to all hospitals tenancy agreements eventually.

The earliest lease expiry of 5 properties will start between August 2021 and December 2021. FIRST REIT will probably give some indication on negotiation status and key renewal contractual clauses 1 year before the expiry, that is at around August 2020 next year. Please see below screenshot.

Background giving rise to the shocking analysis by the Analyst

According to the Analyst, Siloam hospital operations are on stable footing and Lippo Karawaci could potentially step out of the lease renewal negotiation and let Siloam and First REIT deal directly with one another. Lippo Karawaci’s hospital operator division is known as PT Siloam International Hospitals (“Siloam”) and is listed in September 2013 on the Indonesia Stock Exchange. Lippo Karawaci owns 51% of Siloam and provides income support by subsidizing 80% of the rental for the hospitals.

Siloam is listed on the Indonesia Stock Exchange. In FY2018, rental paid to Lippo Karawaci was IDR125.5bn (S$12.2Mil), which only constitutes 20% of the rent paid to First REIT.

Now, not sure why is there such a thing as Lippo Karawaci subsidizing 80% rental indefinitely for its hospital business division as this does not make commercial sense. There must be a form of income recovery somewhere from Siloam. Else it means that Lippo Karawaci is running a substantial loss making business division perpetually. 80% free subsidy for another legal entity is incredulous even if it is a related party business. This also means that Lippo Karawaci had sponsored a healthcare REIT that has a ticking time bomb inbuilt during its IPO many years back.

I have written in to First REIT investor inquiry email for further clarifications to make light out of the whole enigmatic circumstances relating to the "income support" by sponsor.

Updates as at 18 Oct 2019- Reply from First REIT Investor Relation on the 80% sponsor income support.

The Never Ending Hyflux Saga- Utico Deal May End In Shambles

I was very disappointed last month when the Court again grant Hyflux another 2 months extension of the debt moratorium again. It was alleged that the predominately show stopper was the inability of the senior management of Hyflux to resolve the cap of S$25Mil imposed by Utico over professional and advisors’ fees in the restructuring agreement. Power struggle over board representation was also alleged to be the other issues holding back the signing of the restructuring and capital injection agreement by Utico.

The absolute lack of meaningful progress was even after Utico has managed to get creditors’ approval for the restructuring agreement and many perpetual retail investors got a very good deal relative to the first rescue package from Salim-Medco. Small retail investors could get as much 50% cash redemption. It was reported that Hyflux retail perpetual securities and preference (PNP) shareholders could get between "$50 million minimum to $150 million on the high side depending on the restructuring options which they choose". Of course, this is definitely so much better than the worst case scenario of forced liquidation where they are not going to get a single cent.

Unfortunately, the Utico deal may end in shambles and lead to the possible downfall of Hyflux due to the following reasons:

1.   Firstly, it is a fact that the management of Hyflux had make a fatal mistake from day one when they under-quoted the water desalination business of Tuaspring by the wrong assumption that the power generating business will be extremely profitable and hence able to subsidize the water treatment segment. This was the cause of the current predicament of Hyflux that has dragged on for many years. But right now, the management seems to be shopping around for the best deal on the block on offer by the numerous white knights that are perceived to be “dying to bail out” Hyflux. They sure have taken a long time to search for a white knight and are not afraid to delay signing any rescue package until all their wish list demands have been met by the White Knight.

I was very surprised that apparently, the bargaining power seems to have been residing more of in the hands of Hyflux which has defaulted on its obligations to numerous creditors (and surviving through the grace of the Singapore Court), rather than in the hands of the White Knight that has the capital. Despite this being closely aligned with my favorite motto of “Who dares wins”, this approach may just backfire anytime.

2.   Secondly, Hyflux had tried to forfeit the S$39Mil deposit placed by the Salim-Medco, the first White Knight to the rescue. With the PUB taking over the loss making water desalination segment of Tuaspring, the massive hemorrhaging in Hyflux business had stopped and things actually improved. Perhaps sensing an improvement in its business fundamentals and valuation from the taking away of the huge loss making business by PUB, Hyflux went on to assert that Salim-Medco had breached the agreement when they withdrew their initial offer and are willing to waste legal resources to play hardball with their first white knight in a bid to gobble up the S$39Mil placed in escrow. From a legal perspective, Hyflux did indeed have a case but personally and ethically, I thought that this was a bad move as it sullied Hyflux’s own reputation among other potential White Knights.

3.   Thirdly, for the case of Utico, the 2^nd rescuer, the lawyers representing Hyflux management team had cited that there are other “White Knights” waiting to rescue Hyflux even if the Utico deal does not go through as part of the argument for debt moratorium extension. I find such arguments offensive and personally, I think a bit conceited. They seems to have taken the white knights for granted.

Summarising, from the way the management are handling the cases of Salim-Medco and also Utico, other potential white knights who are waiting in line can see for themselves the behavior of the management of Hyflux in contract negotiation. Should the Utico deal fails, all other potential White Knights that are perceived to be waiting in the queue may also choose to simply walk away. This may just become a no rescue deal scenario with an eventual liquidation of Hyflux caused by none other than the Hyflux senior management themselves. I hope for the sake of the other stakeholders that this would be the last extension of the debt moratorium and the conclusion of the much anticipated signing off on the Utico rescue package.

The Tragic Fate of Singtel- Will Price Plummet Continue?

Since Singtel announced its Q1 FY19/20 results (ending 30 June 2019) on 8^th August 2019, it has dropped from its peak of S$3.56 per share on 5^th July 2019 to the current S$3.10 per share. That is a huge plunge of its share price by almost 13% within 2 months. But if one compares Q1 FY19/20 to the prior Q1 FY18/19 financial results of a whopping 35% drop in profits, then this is considered as just a small chink in the armour of Singtel.

Even if we just compare it to the previous quarter of Q4FY/18/19 of S$773Mil, this still represents a 30% decline in net profits from 2 consecutive quarters. Is this the start of an ominous downward trend?

To complicate matters, investing in Singtel shares also depends on widely fluctuating seasonality market sentiment. There are certain period during the year whereby the share price rally without any apparent reasons and at other times, it is in doldrums form regardless of financial performance. The strange pattern of huge plunge in share price typically happens after dividends declaration during the second half of the year and then all the major players started jumping right back in before the final dividends declaration the following year tends to repeat itself all over again and again.

A few key points to highlight with regard to the latest performance:

1. Disastrous results in overseas market for associate companies.

From the financial results (please refer to screenshot 1), the chief culprit for the weak numbers is once again the performance of Singtel’s associate results. A closer look will reveal that this is actually the result of Bharti Airtel fighting a brutal price war in India when Reliance Jio jumped into the fray in September 2016. Investors need to be skeptical of the honey coated words from analysts that the situation is expected to improve due to consolidation of players in the India telecom industry and “the sun will shine once again soon” talk.

So far, I have not seen any signs of major improvement in getting out of losses yet despite the crystal ball predictions by these analysts for the past 1 year. The rights issue for Bharti Airtel was the last straw for me to sell off all my stakes in Singtel. In March 2019, Singtel pumped in US$525Mil (around S$719Mil) for its 15% direct stake in this fund raising exercise to re-capitalize the balance sheet of Airtel. The funny thing is that after I sold off my shares, it went on to rally to a high of S$3.54 before taking a plunge back to S$3.10 recently.

The only good news is that excluding Airtel’s disastrous financial results, contributions from regional associates would actually have risen by 10% driven mainly by Indonesian Telkomsel. So not all is bad.

2. Cybersecurity and Group Digital Life businesses continue to make losses

Singtel’s cybersecurity business continue to chalk up losses of S$102Mil (before taxes) in last financial year and the bleeding continues in the latest first quarter results announcement. As usual, Group digital life is also still in the red.

The hope here is that Trustwave will start turning in profits and eventually, an IPO can make spin off these Trustwave along with digital life businesses by Singtel to reap a return on investments similar to what they did for Netlink Trust.

Singtel management kept emphaisisng a different set of KPI should be used to measure these businesses instead of just purely profit and losses. I am not sure whether I buy their logic. To me, a business must definitely be profit making else it will end up like WeWork IPO- a USD47 billion valued business is now possibly facing bankruptcy. The strange phenomenon of technological startup companies going for IPO with track record of huge losses is something which I cannot comprehend the sanity of it.

3. Bright spot- Rise of 5G Wireless Network for Australia, Singapore as well as for other Asia overseas markets. 

Singtel has already made major investments in network spectrum under Optus in Australia. In Singapore, it is expected to be pump in significant capital expenditure into the 5G network development. Given the high demand for high speed internet services and the conveniences offered via mobile network for this technological leap, Singtel would be able to attract lots of customers to drive its earnings forward.

4. Excellent corporate culture in using technology for innovation and cost control

Singtel’s management team is well known for using technology to drive productivity and cost control. For example, it had long began implementing Robotic Process Automation (“RPA”) into its various internal work processes. This has greatly enhanced productivity by removing routine work using manual labour. 

In addition, continuous developments in its digital services and products and bundling them with existing services as well as the synergy in implementing them across various overseas market offers great value in retaining existing clients and attracts new customers.

5. Valuation of Singtel share price

Now this is extremely challenging as it is a reflection of one’s outlook of the future variables that determines its pricing. For me, I will use what I can see with my own eyes that is, based on the latest published financial results. A quick and dirty way to do the valuation would be since Q1 FY19/20 profit dropped 30% from the Q4 FY18/19, we will apply the same discount to the price on 30 June 2019 of S$3.50 to derive a conservative floor target of S$2.45 per share. The assumption here is that given ceteris paribus and the only main driver is the worse than anticipated financial performance, then the share price should drop accordingly in percentage.

Given that Bharti Airtel is already reaching the bottom of the price war and also the potential growth of new 5G services subscription as well as growth in digital services, I will reduce the haircut by 15% to derive an estimated S$2.98 per share.    

Parting thoughts

At the current pricing of S$3.13 per share, I thought that Singtel is slightly overpriced but overall still decent given its businesses spread across various overseas markets and the impending rise of 5G technology adoption which offers attractive value proposition to consumers. The only question mark is whether Bharti Airtel in India can win the competition for subscribers to become profitable again after quarters and quarters of losses in the India market. The gain in India market share and revenue seems to be pointing to some obscure revival signs-albeit still not that clear at the current juncture- that things may improve next year.

Lendlease Commercial Global REIT Debut With One Possible Bad Debt From Tenant Forever 21

Not sure whether it is an inauspicious start for Lendlease REIT IPO but one of its top 10 tenants, Forever 21's US Headoffice just filed for Chapter 11 bankruptcy protection in US. Luckily it made up only 1.6% of gross rental income but nevertheless, this is still a possible doubtful debt case for 313@Somerset. Hopefully, the rental deposit will be enough to offset any potential default.

Top 10 Tenants For Lendlease Commercial Global REIT

IPO results are informally out although CDP account has not reflected it, one can check their bank account for the refund of application money to know whether they have been allotted any units. I applied for 5,000 units and only received 2,000 units. My other half applied for 25,000 units and got a weird 4,100 units allotment. Perhaps the issuance manager decided to allocate units to all retail subscribers but gave out a smaller slice to each individual. The formal publication of results later will shed some more light on their allocation method and the demand for Lendlease REIT.

Malaysia To Ask Singapore For Revised Water Deal Again- The Beanstalks Were Burnt Under The Cauldron And The Beans In The Cauldron Wailed

This is really bad for Singapore. The Malaysian government is coming after Singapore again. Mahathir is saying that as the economy of Singapore is well developed, we should pay more. A fresh proposal on revised water rates is being tabled again. But Mahathir has conveniently missed out the main essence again, that is, contractual terms needs to be respected and has nothing to do with being rich or poor. The hustling continues.

The 1962 water agreement (1961 there was another one which had expired) is not just about water. It is more than that. It involves the sovereignty of Singapore. The water agreements were guaranteed by the Government of Malaysia in the Separation Agreement signed in 1965 that established Singapore as an independent and sovereign state. The guarantee was also enacted into the Malaysian Constitution by an Act of Parliament. The Separation Agreement was also registered with the United Nations. Any breach of the Water Agreements would thus call into question the sanctity of the Water Agreements and the Separation Agreement, and undermines Singapore’s very existence.

Singapore has also paid more than S$300Mil for the construction and maintenance costs as well as compensation for land used for the Linggiu dam project to increase the yield of the Johor River.

Whom are we dealing with for this long dragging issue and will there be a future Malaysian Prime Minister?

The next confusing question comes in as to who will be the new Prime Minister in Malaysia that follows up on the above water agreement dispute with Singapore. PKR President Anwar Ibrahim has mentioned in an interview with Bloomberg Television on 18 September 2019 that he will be taking over as Malaysian Prime Minister by the middle of next year (2020)- 2 years after the prior general election (“GE”) in May 2018. It was widely reported that Mahathir has mentioned handling over of power to Anwar in 2 years.

However, over the past few months, it has emerged that it may be in 2021 or even worse, no fixed agreement as per some comments made by senior figures in the Malaysian government. PKR deputy president Mohamed Azmin Ali said he agreed with Mukhriz Mahathir (son of Mahathir) that no official agreement was made to hand over the prime minister’s post to Anwar Ibrahim within two years.

Murkier than mud

To compound the confusion, on 26 September 2019, while at a dialogue at the Council on Foreign Relations (a think tank in New York), Mahathir “promised that he would step down before the next election and give way to another candidate and hence he may have at the most three years perhaps”. This effectively means that Mahathir is hinting that he may be holding on to the Prime Minister post up to moments before the next general election. This is really a brilliantly executed move as Mahathir will be keeping his word to let another candidate become the Prime Minister before the next GE. One or two days as a Prime Minister for this “other candidate” is thus also a Prime Minister. 

The promise will indeed be perceived to have been honoured if crafted out as such. Also, I find it strange that Mahathir used the term “another candidate” and not Anwar. Am I thinking too much into the quote?

There were also speculation among coffee shop chats that Azmin or Mukhriz Mahathir maybe a challenger to Anwar for the top job in Malaysia.

Poignant conclusion

The only thing for sure is that regardless of who is the new Malaysian Prime Minister, Singapore will always remain the bad poster boy to bash up for political points back in Malaysia. I do hope that the relationship will improve between our two countries and reached an amiable settlement on the Water Agreement.

煮豆燃豆萁,

豆在釜中泣,

本是同根生,

相煎何太急?

Accompanying a king is just like accompanying a tiger- 伴君如伴虎

As part of the life of a working employee, one must always serve the call of his or her CEO at all times. Sometimes, when the CEO is in good mood, the boss will throw in a bone or two along with compliments on how value adding you are to him. At other times, when the CEO is in a bad mood, he will grill you with questions to make you feel speechless and look stupid. Not that one likes to be made speechless but those who have been working long enough will know that in Asian context, talking back too often and making the boss looks silly will most likely result in being blacklisted as well as to suffer a miserable future fate. Or worse still, your CEO then begin making plans to remove you immediately. The prospect of losing your job and losing your means to service your housing loan for a decent shelter is not a joke. 

But I guess sometimes, life does throw up unavoidable shit at you. Most people have their own bottom line and dignity- same for me. If you believe something is bullshit, you have to speak up despite knowing the possible consequences. The last time I did that, I was blacklisted for almost 2 months until a team building event. I was sort of forgiven over a team lunch when the boss cut half of his fish & chip and suddenly shared it with me. But not before hearing an analogy about "Being smart is good but don't try becoming a Smart Alec".

Recently, I got blacklisted again. Sometimes, being an accountant has its own occupational hazard. You have to call a spade a spade which always irks the boss. No two ways about it. The only good thing this time round is that I do not feel as stressful as before probably because I have managed to built up some passive income from investment. I had once attended an ethics training course ran by a former chief financial officer of major international banks in Singapore. He told me that an employee must always either invest in property or stocks in order to achieve financial independence. Only with financial independence can one truly adhere to his or her own principles without undue pressure and stress at work. His words resonates with me till this day. To hear a menacing "ROOAAAR"" roar or a mild "Meow" like a kitten thus all resides in one's state of mind.

"ROOAAAR" or "Meow"

Investment Portfolio Updates- 13 Sep 2019 (Creation of New Margin Account Portfolio)

1. Creation of new portfolio using margin financing

About 3 months ago, I went down to Maybank Kim Eng ("MKE") to apply for my first margin trading account. It was quite a daunting experience as I had given a CDP account number with typo and it took very long to resolve the administrative complications. Later on, I opened up another margin trading account with my usual trading broker, UOB Kay Hian as my trade representative mentioned  that her brokerage firm can match the lower financing rate of MKE. 

After trying out MKE platform, I was very impressed with their newest trading platform which allows one to customize the views to make it more intuitive with what you want to see. You can even divide up a single screen into multiple screens and add in the Widgets/Apps to choose what information to display. Personally, I thought that this was way better than UOB Kay Hian and hence decided to use MKE instead.

The use of margin financing is a double edged sword. Most essential part I think is not to get caught into forced liquidation of your holdings during times of recession whereby your portfolio may fall by 50% to 60% and you get a margin call from the brokerage. I have crafted out a separate investment portfolio "number 2" for this purpose. 

2. Some quick highlights of the changes made to my portfolios:

(i) Frasers Centrepoint Trust

My intention is to hold on to Frasers Centrepoint Trust for a longer term as the growth story is still intact with many M&A opportunities from its sponsor. However, the prices went up to a ridiculously high of S$2.87 per unit at one time and I decided to sell off 10,000 units (around half of my current holdings) at an average price of S$2.85 per unit. One week later, managed to buy back the 10,000 units at S$2.71 per unit. Decided to use part of the realised proceeds to buy a good dinner treat for my family at Swensen. 

(ii) Sing Medical Group

I have lost S$10K plus on Sing Medical Group ("SMG") albeit being unrealised losses. Prices dropped from S$0.400 per share recently to a low of S$0.275 per share before stabilising at around S$0.300. I have since made some additional purchases during this all time low period to boost my holdings in SMG. Results have improved but as usual, whenever there are capital raising exercises (be it rights issue or granting of convertible loans to shareholder), the market will slap SMG hard-left right and center- to punish it despite the better financial performance.

Please refer to to the enigmatic case of SMG write-ups.

I am still holding on to SMG despite the heavy opportunity costs suffered as I believe in the black and white quarterly reporting numbers until I am proven otherwise. Upcoming end Sep'19 report card will determine whether to cut losses. Also, the proposal mentioned by the Managing Director to consider implementing a dividend policy in FY2019 has not been executed. An announcement of new M&A or dividend policy implementation may act as a catalyst to boost up the much undervalued share price.

(iii) Frasers Commercial Trust

I have sold off all my units in Frasers Commercial Trust under my CDP account at prices of S$1.63 per unit  (half-10,000 units) and S$1.68 (remaining half-10,000 units).  However, under my margin account, I have bought back half (10,000 units) of my previous units held when its price dropped recently. 

Overall, reduced holdings due to concern over whether it can maintain its current distribution. 

Please see "Frasers Commercial Trust DPU May Not Be Sustainable Even With New Tenant Google Coming On Board".

(iv) Netlink Trust

This is no longer in my direct cash purchase portfolio as I have sold them off for a slight profit. The sustainable dividend yield is actually only around 4.023%. The current 5.5% distribution means that part of it is being financed through bank borrowings.  Nevertheless, I think that Netlink Trust can still maintain the current financial results and distribution for the next 1-2 years. For the short term, the pay out will still be sustainable but for the longer term, surprises may spring out from the risk of upcoming 5G technology rollout which may adversely affect the business of Netlink Trust. Vigilance will be the key strategy to hold on to this counter.

Please see "Netlink Trust- Stable Cash Cow Or Just Another Time Bomb Waiting To Explode?".

(v) Mapletree Industrial Trust and Mapletree NAC

Both have risen too fast in valuation which depresses the rate of return. 

For an industrial Trust, my required rate of returns need to be higher than what is being offered. 

As for Mapletree NAC, HK riot and weakening RMB in trade war with US all weighted on my mind. 

Have thus decided to recycle the capital from these 2 holdings into other stocks.

(vi) Starhill Global REIT

Took profit and sold off Starhill Global at S$0.78 per unit. The properties under Starhill Global are too overly dependent on foreign tourists at Orchard Road. Starhill Global is also unable to get positive rental reversion from its key master tenant Toshin which occupies most of the retail areas of Ngee Ann City. 

Last but not least, I have increased my holdings in SPH REIT via my margin account as I believe that the upcoming potential M&A being announced will be the acquisition of the much long awaited Seletar Mall from SPH.