Chasing Yields: Singapore Business Trusts

You can’t have your cake and eat it too... says who? Look at these yields...

Yes these are the yields that these business trusts (BTs) are trading at. Despite having higher yields than REITs in general, BTs are seldom in the limelight.

The BT regime was initiated in Oct 2004 but the BT structure was never applied until 2006 when CDL Hospitality Trust, a stapled security created by stapling both a REIT and a BT, was established. In CDL’s case, the BT was a dormant entity. The first active and independent BT was tested by Temasek Holdings when they carved out Cityspring Infrastructure Trust with 2 utility assets in its portfolio.

Apart from Temasek Holdings, several other corporates have tested this structure. Some interesting examples include: Hyflux’s Water Trust (delisted); Li Ka Shing’s Hutchison Whampoa listing the largest BT in Singapore with Hutchison Port; Macquarie Funds spinning off their Taiwanese Pay TV assets on the SGX as Asian Pay Television Trust; India’s Fortis Healthcare creating Religare Health Trust; Accordia Golf Trust from Japan creating the first BT with golf related assets etc. As of today, there are 13 BTs listed in Singapore encompassing a variety of asset classes.  

So what exactly is a BT? A BT is a yield product that securitizes assets with stable and recurring cashflow with the focus of distributing dividends to unit-holders. Too confusing? Well, you can think of a BT as a REIT with a twist. The 2 structures are similar but with some nuances that render specific benefits depending on what the company’s objectives are.

The primary differences between a BT and a REIT are as follows:

1. Asset specification à A BT is able to securitize any type of asset including but not limited to real estate
2. Control à The trustee manager for a BT can only be removed by a super majority compared to a simple majority for the manager of a REIT (Note: Trustee and Manager for a REIT are separate entities)
3. Flexibility in paying out dividends à A BT is legally permitted to pay out operating profits as dividends compared to statutory profits for REITs
4. Development projects à No restrictions on engaging in development activities for a BT unlike the 10% limit for REITs
5. Financing à No gearing limits for a BT unlike a 35% cap for a REIT

You must be wondering – this structure is pretty attractive? There’s more in the bag.

In addition to the aforementioned reasons, BTs like REITs enjoy large tax incentives from the government. Sectors that enjoy these incentives are shipping, infrastructure and real estate. Pretty sure more sectors will be added to this list.   

Nevertheless, a disclaimer must be made.  

Let’s use an analogy. In portfolio A, you have a shopping centre. In portfolio B, you have 5 ships. Both are valued initially at the same book value. Over time, the land on which the shopping centre sits on increases in value. On the contrary, portfolio B’s value decreases as the 5 ships undergo wear and tear, a familiar term in finance – depreciation. Now, what must you do to ensure both portfolios are equally as attractive? Well, by paying a higher dividend in portfolio B, one would increase the attractiveness of the portfolio. This is one of the primary reasons why BTs are obligated to pay an attractive yield in order to compete in the yield space.

Building upon this concept, it is hence crucial to select BTs with strong sponsors (same concept as a REIT). A sponsor that has a solid pipeline of assets to be inject into the trust. Nevertheless, we’ve seen how Temasek ‘neglected’ Cityspring trust post listing. Since Cityspring’s listing in 2007 till present, only 1 asset was acquired into the trust. Perhaps that’s the reason for the merger between Keppel Infrastructure and Cityspring Infrastructure to create a larger entity and boosting the asset values.

Valuation of BTs differ slightly from conventional equities. Apart from the all-encompassing DCF methodology, BTs are not valued on a P/E ratio basis. Instead, a forward dividend yield is used as the key valuation tool. Just look at all trust listings – the largest font size in the entire prospectus is the forward dividend yield. Check this out!

GS

Chasing Yields

Monetary easing - we've heard this term on a daily basis for the past 6 years. The implications of such a dramatic reaction by the Fed post-financial crisis, and what Milton Friedman analogizes as 'dropping money out of a helicopter' is unseen and untested in history. 

Blackrock's 'Investing for a New World' campaign hit the nail on its head. So intelligently slick - It’s a new world. Yields are low. Markets are volatile. Confidence is scarce. One question is on everyone’s mind: So what do I do with my money?

Let's talk about yields. 

It is first crucial to understand the difference between yields and returns. Stealing snippets from Investopedia, while both terms are often used to describe the performance of an investment, yield and return are not one the same thing. Return, expresses what an investor has actually earned on an investment during a certain time period in the past. It includes interest, dividends and capital gain. In other words, return is retrospective, or backward-looking. Yield, on the other hand, is prospective, or forward-looking. It measures the income, such as interest and dividends, that an investment earns and ignores capital gains.

In Mr Greenshoe's opinion, yields are quite simply the most important investing tool in this ‘new world’ defined by Blackrock. Almost all investment opportunities in today’s market yields beats the bank deposit rate. The first question is – can you beat inflation. The second question is – can you get rich. Fret not, investment opportunities lie aplenty.

Focusing on Singapore, we have no lack of yield plays. In fact, the yield market in Singapore yield market is undoubtedly the strongest in Asia. From the creation of the first REIT in 2002 by CapitaMall Trust to the initiation of the Business Trust structure in Asia in 2004, the little red dot now has 33 Singapore Real Estate Investment Trusts (REITs) and 13 Business Trusts (BTs). As of yesterday, REITs and BTs make up 9.8% of the total SGX market cap. A reason for their significant prevalence lies in the numerous government tax incentives and structuring mechanisms that make these yield stocks not only good to buy but also good to hold. Mr Greenshoe will pen a detailed article on S-REITs and S-BTs in the coming weeks!

To end off with a food for thought - c.70% of all Main-Board IPOs in 2013 and 2014 were yield stocks.  

Impressive? Indeed.

GS

UG Healthcare Corp IPO

2014 is absolutely the Catalist's year on the SGX. 

Share price changes since listing have been absolutely phenomenal. It is even more appalling considering healthcare related counters such as TalkMed, QT Vascular, ISEC Healthcare. 

Glove Maker UG Healthcare Corp has commenced on the public offer for its S$4.3m IPO (net proceeds) on the Catalist board. Just based on the precedent Catalist listings and the minimal public offer size (that generates more demand than supply), Mr Greenshoe would bet on this offering with a blind eye. 

Nevertheless, a few insights on this offering: 

Business: Like the fact that UG Healthcare has presence in the nitrile examination glove space. This creates higher margins compared to the usual latex space. 

Geography: Healthy geographical revenue breakdown. Germany represents 27%, UK represents 21% and North America represents 20%. 

Landscape: Globally there is an over-supply of rubber gloves. ASPs are dropping and competition is increasing. Hence it is crucial for a glove-maker to differentiate itself via cleanroom / nitrile areas. Recent outbreak of Ebola and other diseases will potentially increase demand for rubber related products. 

Peer Comparables: Lack of comparables in the Singapore market with the exception of Riverstone Holdings. Riverstone's share price has been pretty impressive - one straight line up. albeit plateau-ing slightly in the past couple of months. Peers around the region would undoubtedly be the Big 4 in Malaysia - Hartalega, Top Glove, Supermax, Kossan. Global peers include Ansell from Australia and Kimberley Clark from the US. 

Margins: Ebitda margin for UG Healthcare pales in comparison to its peers. At adj. ebitda margin of 11.2%, the Big 4 Malaysian peers are performing better at c.18% while its only Singapore peer is at c.25%. Margins are T's greatest concern. 

Valuation: Historical PER based on IPO price (post offering) at 8.3x. This is significantly undervalued compared to the regional peers. Refer to below table: 

Use of proceeds: 62% utilized on expansion of projects (sales and distribution network and production capacity), 5% utilized on R&D, 31% utilized on IPO expenses. remaining 1% utilized for working capital. Rather disappointed only 5% used for R&D. This needs to be bumped up. Also, a whopping 31% on IPO expenses. Frankly, company should just raise more money.

Dividend Policy: At least 20% of net profit after tax for FY16. Dividend yield across comparables range between 1.8% - 3.1%. 

Verdict: Hmm...not very comfortable about margins and intense competition on the sector. But precedent listings + discounted PER against peers might result in a potential hit. 

Going to the ATM now ;)

GS

Property Perspectives: Income Yield Valuation

There are countless approaches to decide on a final purchase price of a property.

Some include – merely quoting a 5% discount from the listed price; taking a median of the district’s previous transactions; nice sounding number eg. S$1,888 psf.

Of course intangibles play a huge role in a property’s valuation. Factors such as location, general feel, facing, etc. But nevertheless, Mr Greenshoe takes a slightly more theoretical approach to quoting a price.

Similar to valuing a company, theoretical approaches towards a purchase price decision include:

• Discounted Cash-Flow (present value of all the future potential cashflows attributed to the property + terminal value which is the potential selling price after X number of years)
• Transaction Comparables (previous relevant transactions that took place in the same area)
• Base Value (cost of the site + building construction cost)   
• Income Yield Method (read on friends)

The income yield method is typically used as a way to achieve a rental yield – this is for investment properties. For non-investment properties, an implied rent can be derived from one’s opportunity cost of staying at the respective apartment.

To utilise the income yield method, one must first derive a rent –  for a resale, it would be listed / precedent rents in the same development; for a newbuild, it would be comparable rents around the area.

Income yield is then obtained by: (Derived Rent * 12 mths) / (Value of property).  

Squarefoot Research www.squarefoot.com.sg has published an entire page on the top yielding properties in Singapore. Attached here for your convenience.  Don’t be too shocked by these kinds of yields. The Singapore average is roughly 2.5 – 3.5%. Some of these yields are from shoebox apartments such as Suites @ EastCoast which has areas as small as 377sqft hence the relatively higher yields.

Building upon this income yield method, one can also value a property based on a target yield. Let’s use an example:

Assume an investor is confident in receiving 3.5% from fixed deposits / stocks / alternative investments. He would hence expect a yield of >3.5% from real estate. Let's use an example: 

• A 1 bedroom apartment currently sells at S$1m dollars. Rental is S$2900 a month, resulting in a yield of 3.48%.
• Should a yield demanded be >3.5%, say 3.6% for illustrative purpose, one would take (S$2900 x 12) / 0.036, equating  to S$966,667 which should be the maximum price one is willing to offer
• Building upon this further, one can then subtract maintenance cost from the rent and then calculate an implied value. Example, [ (S$2900 – S$250) x 12 ] / 0.036 = S$883,333.

Voila, this method is one of the several handy pocket calculations one can utilize before deciding on a purchase price.

Comments?

GS

Property Perspectives: Chaos

Mr Greenshoe placed 3 offers in the past 3 months in Districts 9 / 10 hoping to sneak a good bargain. All were rejected. Yes, Mr Greenshoe's aware that he's the nightmare of real estate agents - the ones who spoil the market. Well, perhaps he's just one of the many players in the market creating more chaos and uncertainty.

Please don't get me wrong, Mr Greenshoe absolutely enjoys this chaos. He also particularly likes the fact that no one, absolutely no one, knows what is going to happen. Research analysts, housewives, property agents, sophisticated investors all appear to have their own view, but frankly, no one has a clue where the market is going.

Mr Greenshoe shall attempt to break this chaos down into 3 buckets.

1st bucket: Global macro

• Down: Fed has ended QE, borrowing cost goes up, property prices come down
• Down: China's home prices slip further c.2.6% in October. Effect is felt in HK and indirectly Singapore
• Up: ECB, BOJ, PBOC have commenced on their own QE ambitions to stimulate growth; does this neutralize the liquidity influx into markets and continue to keep rates low?

2nd bucket: Local property economics

• Down: Supply rising faster than demand, rental competition increasing
• Down: ABSD and TDSR result in investors to waiting on the sidelines. A 7% / 10% buyer stamp duty is just too significant for many to swallow. Note that these cooling measures merely delay transactions, innate demand is still present
• Down: Cooling measures have drastically reduced transactions, for example, c.60% for CCR 9M2014. Prices however still remain relatively stable, albeit exceptions from high-end luxury developments
• Up: New launches stabilize prices as they do set a benchmark in some sense. Numerous upcoming launches will act as a support for prices in their respective areas, unless, a developer become very desperate
• Up: Sound developments still generate steady demand. The likes of 70 St Patricks, Marine One, Coco Palms, Lakeville are testaments that good, sound, quality developments still can attract buyers

3rd bucket: Local property politics

• Down: Price of houses have reached unbelievable prices. Thinks it's just the price to pay for being a first world city. Government will to some extent contain / reduce the rate of price increases to ensure affordability (prices to rise in tandem with salary increases)
• Property represents the largest proportion of Singapore's domestic wealth. Property players such as CDL, Far East, Oxley play a crucial role in Singapore economy's growth. A logical government will have to protect this wealth. Some say, it's merely a propaganda to briefly cool the market ahead of the general elections; some also say that there's potential for the removal of ABSD post GE2015; some even say markets will rebound and soar should ABSD be lifted - (Mr Greenshoe predicts it will take place roughly during the National Day period)

These 3 buckets categorically represent the chaos that plagues every home buyer / investor / seller. Is there a smarter way around it? Definitely.

There's always a good buy in every market. It's how one finds this buy. On one hand, property data / charts are often skewed due to outliers or in-comparability, on the other, the media is indubitably distorted towards objectives. The onus hence lies on the buyer to make a calculated decision.

Mr Greenshoe is happy to graciously share some tips in the next few posts.

Watch this space.

GS

Trans-Cab IPO: Pulled

Ridiculous.

IPO pulled because of a S$1.83m insurance premium - huh?

That has got to be the most ridiculous thing I've heard.

Albeit amounting to 4.96% of earnings, it represents a mere 1.6% of the offering (pre-greenshoe). Furthermore, IPO fees alone are S$6.2m. Under Section 241 of the SFA - should a new circumstance arise since the prospectus was lodged with the MAS, the person making the offer shall take reasonable steps to inform potential investors of the lodgment of any supplementary or replacement document. Couldn't they have issued a separate supplementary statement?

A similar scenario happened 2 years back when DBS, SCB, Macquarie underwrote ARA's Dynasty REIT. The reason provided was weak market sentiments. Now, that's reasonable given Religare Health, Astro and HuiXian crashed post debut.

Pity the lawyers and bankers who have spent hours drafting the prospectus. Been there, done that...

Nevertheless this is a failure in due diligence and the architects of the IPO have only themselves to blame.

On a side note, my first post on an IPO ended so theatrically bad. Coincidence?

Exciting times ahead!

GS

Trans-Cab IPO

Well done Trans-Cab! (or should I say DBS?) Certainly an opportune time to launch this IPO in light of the developments surrounding Singapore Land Transport. The asset-light strategy proposed by the government for the rail and bus businesses is an obvious sign that the government deems intervention critical in Public-Private Partnership success.

But does this guarantee a success for punters / investors? Let’s break it down.

Business model

• Core business is the operation of taxi services – acquire and rent out taxis to licensed drivers (the market loves this kind of easy to understand business models) 
• Operator license granted by the LTA – subject to renewal and government policy (high chance this wouldn’t pose a problem in light of numerous complaints on taxi shortage) 
• 2 recurring income streams – Taxi rental and engineering services (a no-brainer in recurring cashflow) 
• Strong competition from other players (service Trans-Cab renders pales in comparison to that of Comfort and SMRT – 2nd tier booking / app system, cash-only policy practiced by most drivers despite possessing a card system) 
• Concentrated business - 100% of revenue is derived from Singapore; this is unlike c.42% of Comfort's revenue coming from abroad

Financials

• Based on historical financials provided in the prospectus, revenue is growing at a healthy consistent rate of c.7% 
• Margins from Trans-Cab are impressive – GPM c.30% and NIM c.22% - Comfort’s NIM is only c.7% (this is due to the less profitable bus business) 
• Slightly concerned over the minuscule cash pool when compared to other transport players in Singapore 
• However, the term loan, revolver, proceeds from offering should enable them to tide over working capital challenges in the coming year 
• Dividend policy - no fixed policy, offering at least 15% of PAT for FY2014 distribution and 60% of PAT for FY2015. Assuming EPS of 6 cents (annualized adj EPS), applying a 60% dividend payout, the yield is roughly c.5.2% (pretty decent compared to c.3% Comfort gives out) 

Use of proceeds

• Expansion of taxi operations – S$30m 
• Diversification into other transport businesses – S$30m (tendering for bus project?) 
• Investment in technology and innovation – S$4m 
• Construction and refurbishment of new corporate headquarters – S$3m (seriously?) 
• Working Capital – S$30.8m (absolutely needed) 

Valuation

• Trans-Cab Post IPO P/E – 13.9x (FY2013) and 12.3x (FY2014E) 
• Peers forward FY2014E P/E trading at significantly higher multiples (EPS adjusted based on personal discretion): 
• Comfort – 19.8x 
• SBS Transit – 33.5x 
• SMRT – 27.4x 
• Blue Bird, largest Taxi company in Indo – 19.4x 
• Express Transindo, 2nd largest Taxi company in Indo – 16.8x 
• When bench-marked against its peers on a forward basis, Trans-Cab is quite a steal! Nevertheless, value is indeed subjective. Extensiveness of SMRT's and Comfort's business significantly surpasses the company in focus. 

Cornerstone Investors

• Surprisingly high quality cornerstone investors - Eastspring, FIL, Havenport, JF, LionGlobal, Maxi-Harvest 
• Eastspring, JF and LionGlobal are indeed great names to have on the shareholder register (perhaps attracted to the yield / transport play) 
• Kudos to Trans-Cab (or should I say DBS again?) 

Offering

• 168m shares on offer (65m cornerstone, 94m placement, 8.8m retail) 
• Greenshoe of 20m shares (recall the previous post, Greenshoe Option: A banker's best friend) 
• Ridiculously small public tranche – c.s$6m from this portion. Good luck in getting allocated 
• Only 1 local bookrunner engaged to run this offering? (C’mon... International banks are exactly what Trans-Cab needs to glam the offering up and appeal to international funds!) 
• Priced at top of the range S$0.68 implying strong demand – (Salute!) 

Mr Greenshoe’s thoughts

• Markets slightly volatile but great time to launch on the back of favorable government policies 
• ComfortDelGro is a market darling and Trans-Cab can ride on the positive transport wave in Singapore’s stock market 
• Valuation from a comps basis very attractive 
• High quality investors, priced at top of the range, logical use of proceeds – key ingredients for a good IPO 
• Heartening rags to riches story from Management (not sure how investors will perceive this) 
• Like the fact that the Teo family owns c.72% post-listing 
• Recent listing of Blue Bird on the Indonesia Stock Exchange soared c.14.6% on listing day 
• Just a trivia and certainly not a guarantee, Mr Greenshoe has downloaded all the IPO’s DBS led / co-led since 2013 to see how price changes on debut. Pretty neat! 

Public offer closes on 18th November 2014

You are very welcome

GS

Greenshoe Option: A banker's best friend

What better way to kick start this journey than this journal’s first name. Greenshoe.

You might be wondering why this name was chosen. Frankly speaking, the Greenshoe Option or more professionally known as the over-allotment option / stabilization option, is the purest form of legalized market manipulation in modern finance. Her elegance was hence deemed worthy of this journal’s name.

So, why do I rave about her elegance?

Quoting investopedia, ‘Greenshoe Options: An IPO’s best friend’, the Greenshoe gives the underwriter the right to sell to investors more shares than originally planned by the issuer. The devil is in the word underwriter. Why isn’t the right given to the issuer?

Mainstream knowledge deems the Greenshoe as a necessary tool in the after-market performance of a stock. Oh boy, it definitely is necessary. 

• The utilization of the Greenshoe Option is determined pre-lodging of the prospectus.
• In Singapore, over-allotment is permitted up to 20% of the offering. Let’s say the company decides to have a 15% Greenshoe Option
• Post listing, should the share price rise, the underwriter exercises this option to over-allot the shares and buy the extra 15% of shares sold to investors at the IPO price, ultimately resulting in an enlarged capital raise of 115%
• Post listing, should the share price falls, the underwriter exercises this option to stabilize the share price by buying in the open market up to the pre-determined (15%) of shares. If the stabilization option is utilized in full, i.e buying back 15% of shares in the open market, the quantum the issuer realizes would henceforth be only 100%

Well, let’s get on to her elegance.

In the occasion that the share price rises post IPO, it also means that 115% of the initial offering was sold. Key point here is that the fees that accrue to an underwriter would be equal to (IPO fee %) x (no. of shares underwritten). It therefore makes perfect sense for the underwriter to yearn for a larger offering.

On the flip side, in the occasion that the share price falls post IPO, underwriters buy back shares from the open market. You might be thinking, the amount underwritten by the underwriters would not be as large as the previous scenario, hence a reduction in fees. That’s accurate, but only to a certain extent. Underwriters buy the fallen shares on the open market at a discount and have the right to return the shares back to the issuer at IPO price. What happens to the spread then? 100% of it enters the underwriters pockets. Voila! There you go. Does this create a conflict of interest then? Obviously. But guess what, it is highly encouraged by regulators and issuers are demanding for such an option at IPO.

Elegant isn’t it. So the next time you see a prospectus with an over allotment option, just think about the fees that goes into the underwriters pocket. An IPO’s Best Friend?, definitely a Banker’s Best Friend.

http://www.bloomberg.com/news/2014-09-22/how-alibaba-boosted-its-ipo-size-by-taking-a-walk-in-greenshoes.html

GS