Investment Portfolio Updates for December 2019 and Singapore Press Holdings Looks Attractive Again With New Growth Path

There is not much changes since my last update except for paring down of stakes in SingMedical Group and taking up positions over 3 tranches into Eagle Hospitality Trust. I have also moved part of my cash investments into my margin portfolio. My own goal for FY2020 will be to further reduce the volatility of my margin portfolio in order to enhance the resiliency of the dividend/interest income stream against market downturn for this new investment approach. My current overall projected annual recurring income has increased by around 52% using this newly created investment portfolio.

Singapore Press Holdings Looking Attractive Again with additional foray into Student Accomodation.

Currently, I am looking into some projection and stress testing of Singapore Press Holdings "SPH". The recent S$740 Mil investment into student accommodation brings SPH investments to over S$1 billion- this is a substantial foray into the new business. The student accommodation business investment will provide SPH with a new sustainable growth path. Nevertheless, the key risks for SPH are (i) its ever declining media segment that still has not shown signs of stabilising and (ii) poor sales of Woodleigh Residences (as at 30 Nov 2019, it only sold 183 units out of 667 units despite launching and relaunching it) which looks set for potential record of major impairment if SPH still cannot move more units. Will probably share some of my analysis on SPH in another blog posting later on.

Eagle Hospitality Trust Continues To Be Haunted By The Ghosts Of Queen Mary

Eagle Hospitality Trust (“EHT”) continues to face woes on many fronts. On 6^th December 2019, EHT announced the resignation of its Vice President of Finance, Mr Cheah Zhuo Ye. Mr Cheah apparently left for personal reasons. The thing that caught my eye was his date of appointment to EHT was 25 September 2018 while his date of effective cessation was 30 June 2019 hence he joined for less than 1 year. The other mind blogging issue was why EHT announced this only in December 2019 when the effective cessation was June 2019?

1. Implication of resignation of key finance personnel

In addition, the leaving of the key finance personnel (VP Finance) is closely watched by many stakeholders because besides “leaving for personal reasons”, I personally think that this may indicate other potential undercurrent such as disagreement over certain subjective accounting policies such as revenue recognition or not recognizing certain expenses or dispute within internal senior management team on operational issues. But good thing is that the CFO is still with EHT.

2. Queen Mary bites again- Long Beach City Auditor joins into the fray

The other headache is those of the ghosts of Queen Mary which just cannot be exorcised. They continued to plague EHT constantly. There is another view that Urban Commons, the sponsor, had not done much to improve the safety conditions of the ship hotel, Queen Mary. On 3^rd December 2019, Long Beach City Auditor, Laura Doud announced that it will set out to investigate the ship’s finances and the lease that governs its operator. The last audit was conducted in 2012 which began with a call to the city’s fraud hotline that alleged improper accounting or the possible diversion of revenue by “Save the Queen” campaign.

Since Urban Commons took over the 66 years lease in 2016, the ship continued to languish according to assertions by a third-party inspector.

According to the Long Beach Press Telegram on 19 October 2019, Long Beach City's third party inspector, Edward Pribonic asserted in a phone interview that he has seen little evidence of maintenance and repair work being carried out on the Queen Mary and that there is no enforcement on the City's side to get that done. US$23Mil that were already  allegedly spent appeared to have nothing much done on the ship.

In response, John Keisler, Long Beach Economic Development Director said in an interview that it is looking into the hiring of another 3rd party consultant, a larger engineering firm with operational capacity to do a deeper dive to look at the specifics issues raised by Edward Pribonic.

Worse still, aspersions over the financial strength of Urban Commons were being persistently casted and EHT has to come out with further announcements to clarify on those assertions.

3. But what if nothing is actually wrong and it turns out to be a false alarm?

If everything turns out well, shareholders who invested at US$0.55 of recent pricing will be looking at an annual reward of 11.67% dividend yield based on projected US$0.0642 per unit by EHT. The current entry price of US$0.55 is also close to a 30% discount off the IPO price. Even if Urban Commons turns out to be in financial distress and defaulted on its lease obligations, it does not mean that the hotel assets under EHT are worth zero in monetary value. EHT would always have the option to appoint other new hotel operators or sell off some of the current assets. 

The upcoming 2nd half year closing is coming to an end. The financial statements and dividend payout by March 2020 will reveal whether there are really hard cash on the balance sheet of EHT for distribution to shareholders.

Please see my other previous postings on EHT:

1. Price Meltdown For Eagle Hospitality Trust- The Curse Of Queen Mary

2. Eagle Hospitality Trust Imploded From Within On Valuation Concerns Of Other Hotel Assets In Portfolio-Down 40% To All Time Low From IPO Debut In May’19

3. Eagle Hospitality Trust Q3 FY2019 Performance- Is Hurricane Dorian the only main reason for the underperformance against IPO forecast?

Strange Encounter on Pricing of Kaya Toast Set at HDB Kopi Tiam

Apparently, the Kaya Toast set is quite unique in Singapore and Malaysia. It consists of (i) 1 coffee or tea, (ii) Kaya Toast and (iii) Eggs (half boil/hard boil). I have an interesting story from a colleague who went on board Cruise ship for a short holiday. While doing breakfast in bed, he requested the kitchen to bring him toast and also half boiled eggs. When the room service staff delivered the breakfast set, he took out a small knife and cut the hard boiled egg into half. Then he said to my colleague: "Sir, please enjoy your half boiled egg."  Needless to say, my colleague was flabbergasted. He took a long time to try to explain to the non-local room service staff but to no avail. Even the chef in the kitchen came to his room as he wanted to learn more about what is an actual "half boiled egg". My colleague had to ask for hot water and new eggs to demonstrate to the kitchen staff how to prepare "half boiled eggs".  

Every weekend, my kids will request Kaya Toast for breakfast. I have thus always been getting 2 sets of Kaya Toast from family cafes such as Ya Kun, Toast Box or Kaffe & Toast. Normally, I will upgrade the drinks to Milo by topping up 20 cents and also change the "half boiled egg" to "hard boiled egg". A typical breakfast set at these classier outlets will cost around S$4.80 to S$5.80 per set.

This morning, I jogged past my neighbourhood HDB Kopi Tiam and saw a banner outside proclaiming "Breakfast Kaya Toast set for only S$3". I decided to give it a try and start ordering from the Kopi Tiam Aunite.

Kopi Tiam Auntie: " What do you want?"

Me: "Auntie, can I have 2 sets of Kaya Toast? Dun wan Coffee or Tea. Please help me change to Milo. Also the eggs I would like hard boiled eggs."

Kopi Tiam Auntie: "Set only has coffee or tea. No Milo with the breakfast set. Also, the eggs are half boiled only. Take home and boil yourself if you want hard boiled egg."

Now, taking home and boil the half boiled eggs will defeat the purpose of ordering outside, right? Deep in my mind, I was wondering whether the Auntie is trying to be funny.

Me: "But Auntie, the cafe I went to can change to Milo by topping up money and also got hard boiled eggs."

Kopi Tiam Auntie: "Then you go back to your cafe to buy lor. Here cannot top up money to buy Milo de."

Sensing the Kopi Tiam Auntie getting pissed off, I decided to maintain my composure (good thing about getting older is one tends to have mellowed down compared to younger days when dealing with obnoxious and unreasonable people.) 

Me: "No worries Auntie, no need to be upset. I do not need the eggs then."

Kopi Tiam Auntie: " That will still be S$3 per set without eggs. Total S$6 for 2 sets."

Me:" Auntie, then I do not want set breakfast. Please do ala carte. Milo and Kaya Toast."

Kopi Tiam Auntie:" That will be S$2.70 per Milo and Kaya Toast. Total S$5.40 for 2 sets."

I was simply stunned when I heard that. Initially, the Kopi Tiam Auntie wanted to charge me S$6 for 2 sets even without the eggs and also cannot choose my Milo drink. But if I opted for ala carte instead of set, I got to upgrade to Milo and at an overall cheaper price of S$5.40, which is a 10% savings. I smiled back at the Auntie and paid her S$5.40 for 2 sets. Then I waved goodbye to her after collecting my toasts and Milo. The Kopi Tiam Auntie was surprised by the goodbye wave and smiled back at me and bid me goodbye too. It was a strange morning encounter indeed for both the kaya toast breakfast set seller and the buyer. 

Profiting from Pricing Abnormalities- Merger of Frasers Commercial Trust and Frasers Logistics & Industrial Trust

Ever since the announcement of the upcoming merger between Frasers Commercial Trust ("FCOT") and Frasers Logistics & Industrial Trust ("FLT"), it gave rise to the strange situation of an arbitrage forming due to wide pricing fluctuation between the 2 REITs. Arbitrage is the process of exploiting differences in the price of an asset by simultaneously buying and selling it and in the process, the arbitrageur pockets an almost risk free return. For example,  On 3rd December 2019, the price of FCOT suddenly shot up to S$1.72 when the offered price for the merger exercise valued it at S$1.68.

Extract of Merger Scheme for FCOT and FLIT

1. Market apparently is trying to price in who received the shorter end of the stick

Now, this is a matter of differences in perspectives that lead to the see-saw pricing of both FCOT and FLT ever since the merger announcement. Some view that FCOT got the shorter end of the stick as the deal did not take into account the improving signing rents at Alexandra Technopark post AEI. FCOT also have a much lower gearing relative to FLT. Valuing it at S$1.68 from the merger thus undervalued the fair pricing of as high as expected S$1.76 per unit.

As for FLT supporters, they view the earnings of the REIT as more resilient and have annual rental escalations in its leases as well as a steady proven organic growth profile. Pricing the exchange of shares at S$1.24 per unit to FCOT unit holders thus severely underpin the fair value of at least S$1.30 per unit.

2. The pricing offered in the exercise are actually quite fair

Frasers Property sweeten the deal by also throwing in the proposed acquisition of the remaining 50% of Farnborough Business Park based in UK conditional to the completion of the merger. This acquisition will be yield accretive and I reckon it is thrown in to incentivise the unitholders of both FCOT and FLT for them to support the merger deal. As such, personally, I would think that the pricing of S$1.68 per unit for FCOT and S$1.24 per unit for FLT are supported and fair.

3. Opportunity to make small profit out of the merger exercise

One good example as mentioned above is on 3rd December. The pricing of FCOT shot up to S$1.72 from S$1.68. Those who managed to get a unit at S$1.68 per unit can simply sell off at S$1.71 to S$1.72 per unit and then buy FLT which is being priced at S$1.24 per unit. Of course, one have to be careful on which price to enter into for FLT which is also similarly going up and down like a yoyo. 

Another example would be on 4th December, prices for FCOT at one point dropped to S$1.65 to $1.66 per unit range. One could purchase and then hold on till completion of the exercise. Alternatively, one can chose to just do a simple sell off of FCOT when it rebounded to S$1.68 per unit.

On 3rd December 2019, I have sold off all my FCOT positions at S$1.71 per unit and used it to buy up FLT at S$1.23 per unit during the pricing mismatch at different times of the day. In addition, as I was on annual leave for the past 2 days and have nothing much to do, I decided to monitor the daily fluctuation in price and do a quick buy and sell and lock in some small profits of a few hundred dollars. The downside is that this is not entirely risk free and you maybe forced to hold on to the units but I believe in the long term prospect of FLT and market pricing shall revert to its fair value eventually.

Parting Thoughts

The entire merger exercise will probably take another 3 to 4 months to complete. I do hope that the deal is completed as soon as possible as the new business entity will enjoy better diversification in terms of its property portfolio and also better leverage during negotiation with bankers on financing.

Surprising Upcoming Merger between Frasers Commercial Trust and Frasers Logistics & Industrial Trust

In a surprising twist of fate, both Frasers Commercial Trust ("FCT") and Frasers Logistics & Industrial Trust ("FLIT") announced a trading halt. According to the Business Times, their ''secret sources" revealed that both REITs will be joined in holy matrimony and merged into one entity. The "secret sources" identity also cannot be revealed as the information is still private. As always, news seems to have leaked ahead of the trading suspension and the unit price of both REITs increased suddenly above their normal trading range for no apparent reason over the past few days. FCT and FLIT seems to have jumped onto the bandwagon of Capitaland and OUE Group by suddenly deciding to just merge the 2 REITs. 

I am currently holding on to both FCT and FLIT with almost similar weightage in terms of quantum in my margin portfolio. So the question of whether one particular REIT's shareholders will benefit more from any bias or favorable pricing over the other REIT in the new entity will appear to be non-relevant to me. As I intend to hold on to Frasers REITs for the long term for their dividends, the post merger will not increase the distributions automatically. It does make it more financially stable and probably be able to obtain cheaper re-financing by virtue of its mammoth size. If these are the good points, then Frasers Property can probably do a merger every year by injecting its other REIT and business trust, that is, retail and hospitality arms into one super giant stapled Business Trust. But then, it will make it murkier than mud and take away one's freedom to choose the business that one specifically wanted to invest. 

The only other benefit in my view will be the reduction of statutory compliance cost from one listed entity instead of the current two entities. Will await further details from Frasers Group regarding their upcoming plans for these 2 REITS. 

US Senate Unanimously Passes Hong Kong Human Rights And Democracy Bill- More Harm Than Good To Hong Kong

I was flabbergasted by some folks from Hong Kong who seem extremely pleased with the passing of the Hong Kong human rights bill by the US Senate. The bill if executed will be mostly detrimental to Hong Kong’s economy. It will lead to economic slowdown and also job losses for the Hong Kong people. Under this weird bill, the US Secretary of State would have to certify at least once a year that Hong Kong retains enough autonomy to qualify for special US trading consideration that bolsters the status of Hong Kong as a world financial centre. Losing the privileges of being treated as a separate trading entity from China will lead to many unfavorable restrictions and disadvantages being imposed on Hong Kong.  

Also, I find it ironic that the US Senate is criticizing China and Hong Kong governments for being brutal and violent to the Hong Kong people when the US government did nothing much to implement gun control measures to curb domestic gun violence from killing innocent US citizens. Nothing was ever done despite frequent mass shootings in US shopping malls and schools. Apparently, the US has an extremely high tolerance for violence.

Now if the US has such a penchant for violence, then do they have other ulterior motive in passing the bill?

If the Hong Kong people have no jobs, will the US government be giving them monthly allowances to help them buy house, food and medicine?

If the Hong Kong protesters got jailed and blacklisted such that their future are ruin, will the US government undertake to take in all of them into the US without cherry picking?

Instead of encouraging dialogue and communication between the Hong Kong government and protesters, the US government simply passes some weird bill that is designed to stir up more domestic unrest in Hong Kong. While it is perfectly fine to fight for liberty and freedom, destroying MTR stations, shopping malls and other properties are just simply senseless violence that achieves nothing. Surely, such drastic moves are similar to employing the nuclear option where people are misguided that to win liberty, one should destroy everything including the economy and one’s own livelihood. I hope that common sense will prevail and order restored as soon as possible in Hong Kong so that it will continue to prosper and be business as usual.

Singtel Share Price Resilient In the Face of Billion Dollar Impairment and 2nd Quarter Losses of S$668Mil

Singtel is a very weird stock. In late December 2018 to early Jan 2019, the share price dropped below S$3 per share when it was making quarterly profits of over S$680Mil. However, when it was announced recently that Singtel had made a huge loss of <S$668Mil> for its second quarter results, its share price dropped only slightly from S$3.30 to S$3.18 which is a mere decline of only <3.64%>.  I am not sure whether shareholders of Singtel recalled that in March 2019, Singtel had just subscribed to a rights issue of S$730Mil  worth of additional shares for Bharti Airtel for working capital purpose to assist the Indian Telco to fight a bruising price war with Reliance Jio.

The current losses was due to the adverse ruling by Supreme Court of India over the government's computation of "Adjusted Gross Revenue (AGR)" whereby license fees and spectrum usage charges are payable. The result of the ruling was a US$ 4.3 billion due within 3 months. So, it may mean another rights issue coming of over S$1 billion for Singtel. In such  a terrible scenario, shareholders should ask themselves whether Singtel can afford to sustain the current dividends payout to them. Of course, most of the stakeholders (from Singtel's CFO to retail investors) seems very confident that despite the adverse court ruling, the India government will come out to save the telcos by either waiving off the amount payable or giving a huge discount to it. 

As for me, I do not share such bright optimism that Singtel will remain totally unscathed from this adverse court ruling.