OUE LTD - Divestment of Crowne Plaza Changi Airport & Extension

OUE Ltd has just announced a proposed divestment sale of their crown jewel in Crowne Plaza Changi Airport (CPCA) and the future extension of Crowne Plaza Changi Airport (CPEX) to OUE-HT for a sale consideration of $290 million and $205 million respectively.

Based on the assets valuation as of 31 Dec 2013, this would translate into a gain of $44.5 million for the divestment of CPCA and $71.6 million for divestment of CPEX, giving a total gain of $116.1 million for the sale.

Thoughts

This is not new information to us.

We know that OUE Ltd was going to divest these assets into their hospitality trust sooner or later but the timing of the announcement was quicker than expected. Many property management would develop and like to see their assets and occupancy stabilized before injecting them into the Reits. But not this management. It appears that the Riady family wasted no time in recycling its capital for higher growth and investment opportunities.

The trick to do that is through the leaseback agreement and providing income support for the first few number of years to ensure that it guarantees a minimum level of income and yield to satisfy investors. This is financial engineering expertise from the Riady family to quickly recycle capital.

If we take the latest occupancy rate of 88.4% and a revpar of $234.7, this would translate into an approximate Gross Revenue of $24,233,056 ($234.7 x 320 rooms x 88.4% x 365 days) and NPI of $21,809,750 (24,233,056 x 0.9). The capitalization rate in this case would be 7.42% ($21,809,750 / $290,000,000), which is a pretty high rate for a newly developed hotel. I think the location of the hotel near the Changi Airport played a part despite keen competition from the other hotels. The capitalization rate for Mandarin Orchard for comparison purpose was 5.68%.

CPEX would only be injected into the trust upon completion at the end of 2015. As the income from CPEX would not have stabilised at the point of divestment (since operations just commenced), there would be an income support of $7.5 million per quarter to stabilise the income. Annualized figure would come to about $30 million per year. Comparing against the above calculation, this income support is obviously a good deal for OUE-HT investors as this would assume a higher occupancy rate and higher revpar with lesser rooms compared to CPCA. As always, the trick is in the income support so that investors of OUE-HT would enjoy the "high" yield provided by these assets.

Pro-forma effect on the NTA upon divestment of both the CPCA and CPEX would increase from the current 4.11 to 4.29. The NTA is adjusted assuming OUE-HT is under the associate and OUE has a reflective equity stake of 33.5% in the trust. 

You can see that this does not have the impact of Mandarin Orchard when they were divested back then. Mandarin Orchard was held at cost since they bought them at land value many many years ago and the carrying value was $115 million. When it was divested into OUE-HT, the valuation surplus exceeded $1.1 billion and you can see why NTA jumped from 3.11 to 4.06.

CPCA was bought in 2011 at a cost of $229 million (after less depreciation). The valuation surplus to the current offer at $290 million is therefore less affluent as compared to the earlier.

I think this is a good move from OUE Ltd to recycle its assets given the optimism about the stock market. Given that there are leaseback program and they still hold a 1/3 equity stake in OUE-HT, they won't want to screw this up. With interest rates most likely to increase next year and given the pessimistic outlook on Reits and Trusts, it's better to seal the deal earlier.

Vested with OUE as of writing.

What do you think of this financial engineering move by OUE?

"Nov 14" - SG Transactions & Portfolio Update"

No.	Counters	No. of Lots	Market Price (SGD)	Total Value (SGD) based on market price	Allocation %
1.	FraserCenter Point Trust	30	1.90	57,000.00	20.0%
2.	SembCorp Ind	9	4.62	41,580.00	15.0%
3.	Vicom	6	6.40	38,400.00	14.0%
4.	China Merchant Pacific	40	0.99	39,600.00	14.0%
5.	Ascott Reit	15	1.27	19,050.00	7.0%
6.	Mapletree Greater China Commercial Trust	20	0.98	19,600.00	7.0%
7.	FraserCommercial Trust	11	1.46	16,060.00	6.0%
8.	Neratel	20	0.77	15,400.00	5.0%
9.	ST Engineering	4	3.37	13,480.00	5.0%
10.	OUE Ltd	5	2.05	10,250.00	4.0%
11.	Ascendas Hosp. Trust	7	0.70	4,900.00	2.0%
12.	Stamford Land	10	0.55	5,500.00	2.0%
	Total SGD			280,820.00	100.00%

There has been quite a number of buying activities for the month of Nov as I accumulated more China Merchant Pacific, Sembcorp Industries and Stamford Land. You can review my previous posts on the analysis of these purchase at Here and Here.

The portfolio has increased from previous month to $280,820 mainly due to the buying activities and the good stock performance of China Merchant Pacific and Vicom. A couple of stocks performance like Sembcorp and ST Eng have disappoint in the short term but fundamentals still remain solid for the long term. No panic at this time.

The amount of annual dividend income for this portfolio is estimated to be at $14,428. This represents an average of 5.13% yield based on current market price.

It is quite evident that savings towards the last 6 months have deteriorated quite a bit because expenses have been going up due to family commitments. In this regard, I might do a revised rolling forecast towards the 10 year target sometime in the early of 2015 to make it more sustainable.

As we draw towards the final month of the year, I hope everyone will stay vigilant towards any volatility in the market while enjoying the upcoming festive season to the year end.

Recent Action - Stamford Land (2)

I accumulate a little more of Stamford Land today after the stock price consolidate at around $0.55.

With this purchase, I now own 10 lots of Stamford having accumulated some in the past. I've also written a post in the past when I purchased them at a slightly higher price. See Here

The fundamentals have not changed for the reasons from the day I decide to purchase this counter.

 

I am looking at this counter from an asset play point of view where their hotel assets remain recorded based on their historical costs under the PPE segment of the balance sheet. Based on the FCL example I have given in my previous post on Stamford, the RNAV value for the hotel assets should be more than double the current book value stated. In other words, I am really just awaiting for one day when someone really bids for the hotel assets from Stamford and the management agree to the sell. I am not sure it will come soon as the management has rejected a bid price back then in 2008 when the bid price was equally attractive. This will become a long term investment for me anyway as I buy the hotel assets cheap at half the price and get the business for free while waiting for value to be unlocked one day.

 

1H14 Earnings came in at 1.34 cents a share, so they would most likely ended up the year with earnings less than 3 cents a share. It will be interesting to see if dividends of 3 cents a share will be maintained, otherwise 2 cents might be more sustainable. At a current price of $0.55, 3 cents would represent a 5.5% yield while 2 cents would represent a 3.6% yield.

 

Revenue from their development Macquarie Park Village will only be recognized in 2017, so earnings will somewhat be dependent on the hotels and probably subdue from now till then. Elsewhere nothing much to shout on as this will probably be a long term investment play for those who are willing to wait.

Coincidentally, I share the same office building as Stamford and took this photo on my way to lunch today :)

 

With this purchase, this adds $180 (assuming 3 cents a share) to my annual dividend income. I will update the details of the purchase under my Recent Transactions shortly.

 

What do you think of this stock? Spot any other good stocks lately?

Do you have what it takes to withstand the bear market?

I wrote a post last month regarding how Bear market will make you rich, if you are willing to accept that price volatility is part of the investment game. Of course, as Musicwhiz has pointed out right at the end of the comment, the business moat should not be adversely affected by the recession that they are unable to bounce back when things pick up. We will see what Howard Marks have to say about that later.

Now, history has shown repeatedly that the market will rebound after a bear market and it appears that many of the financial investors seem to have the warchest and the mental preparation to withstand a dramatic fall in price.

However, it is always easier in theory than to walk the talk.

Take myself for example, I did a quick exercise on my net worth on equity today versus what it would have been back during the recession in 2008. As of Oct 14, my portfolio on equity stands at $250,025. Assuming I used the same portfolio today to compute the lowest price it had seen during the GFC, my portfolio would have looked like this.

No.	Counters	No. of Lots	Market Price (SGD)	Total Value (SGD) based on market price
1.	FraserCenter Point Trust	30	0.57	17,100.00
2.	Vicom	6	1.36	8,160.00
3.	SembCorp Ind	9	1.83	16,470.00
4.	China Merchant Pacific	40	0.38	15,200.00
5.	Ascott Reit	15	0.36	5,400.00
6.	Mapletree Greater China Commercial Trust*	20	0.79*	15,800.00
7.	Neratel	20	0.18	3,600.00
8.	FraserCommercial Trust	11	0.70	7,700.00
9.	ST Engineering	4	2.04	8,160.00
10.	OUE Ltd	5	1.69	8,450.00
11.	Ascendas Hosp. Trust*	7	0.68*	4,760.00
12.	Stamford Land	4	0.18	720.00
	Total SGD			111,520.00

$111,520!!!

That's a 124% drop in the market value to what I have today.

I don't know about you but that would take a lot of pills to swallow those losses, especially as your portfolio gets bigger. Although I did not go through the previous GFC cycle, but I know they come to you thick and fast. Back then, things were so serious that I remembered companies were closing down and for stronger companies, there was salary and hiring freeze across almost all companies. And I can tell you that there's plenty of considerations to think of when those things happen: Sell now? Buy later? Buy some more? Buy which stocks?

Do you have what it takes?

During periods of uncertainty and volatility, many investors get scared and begin to question their investment strategies, often abandoning them in favor of capital preservation. The most common ones we saw was the selling and pulling out of the stock market altogether, wait on the sidelines, and then attempt to get back in when the economy recovers. As previously highlighted in my post, we know the consequences of waiting on the sidelines and attempt to enter the market at its lowest price. We often fail to sell at the highest price and enter at its lowest price and if you do this consistently, you would be worse off than being invested in the market at all times.

Mentally, it is also not easy to convince and play the devil's advocate with oneself. Despite understanding the general theory that adhering to the public euphoria and following the herd are not always the best option, taking the opposite side is not as easy as it seems. Howard Marks, in one of his excerpt from his book on Contrarianism, mentioned:

"Accepting the broad concept of contrarianism during bear market is one thing. Putting into practice is another. On one hand, we never know how far the pendulum will swing, when it will reverse, and how far it will then go in the opposite direction"

"In order to achieve above average results, you have to think different and better. It doesn't always work to do the opposite of what the herd is doing. You have to know what they're doing, know why they're doing it, know what's wrong with it, then do the opposite"

Finally, the psychological barrier of having to face the losses during recession, even if we know that they are temporary, is undeniably the constant outcast playing in the mind. Alan Greenspan called the human mind for this as Irrational Exuberance.

As much as we know that the losses during recessions are temporary, we hate losing money a lot more. Because of this, we want to hold on to what we have for fear of losing more, which explains why most sells their stocks at a low price, then subsequently buy them again at a higher price. These people are the trendsetter and we see why they have not been successful as the firefighter mental way of investing.

So are you prepared for the bear market? Do you have what it takes to survive and opportune at the bear market?

Do we really need more time?

Following is a sequel to my previous post on Do you know your real hourly wage.

A lot of people grunts at the idea of the notion of lack of time, which at times sounds like a little flimsy excuse to being either unproductive or just simply the case where you are being overloaded. So you often hear complaints that go like this:

"I wish there would be 35 hours in a day"

or 

"Why do time pass so fast? I have not completed any of my assignment yet" 

or

"I don't have time for all of this"

The fact is in our everyday life, we measure everything directly or indirectly through time. Take the previous post for example, we used wages / hours to measure our real wages on a hourly basis. Or maybe productivity - where we were indirectly given a fixed amount of hours (for example 8 hours a day in the office) to complete the assignment or projects we were assigned.

The truth is maybe these grunts are not warranted after all. All we probably need is not more time, but more pair of hands to get things done. Take my recent case for instance, I was tied up with my audit project at work, final assignment at school, daddy role at home, a husband care for my wife (who is currently unwell) and a writer role for this blog. All of this happening at the same time with a required tight deadline to complete. These episodes get me thinking. I certainly do not need more time (which can help) but rather a pair of more helping hands in order to complete the tasks.

Financial bloggers (including myself) often preach that we aim for financial independence because time is finite and we want to utilize those times to do what we enjoy rather than what we were "forced" to do. The idea for this is certainly not because we want to have 35 hours a day or prolong our life expectancy to  beyond 100 years of age so that we can have "more time" to finish our bucket lists in this world. More time in that sense would mean that we have to eat more than 3 times a day, budget more than what is required, and project a more conservative withdrawal rate to account for the prolong life value. We don't want all of that.

The goal is to ultimately free up our pair of hands on things we can assign other people to complete and use our pair of hands to do the things we really love to complete.

Time is a subjective matter. Some people would love to have more time while others would love to fast forward them. The idea with time is that you have to do things that matters and create values for what you want to achieve in your life. It's not a matter of quantity but a matter of quality.

The next time you see someone grumbling and complaining about lacking of time, you know the answer: "Do they really need more time"?

Do you know your Real Hourly Wage?

If you had read this book "Your Money or Your Life", you would know that the author came up with a formula adjustment to calculate the Real Hourly Wage. This means that on top of your physical mandatory hour in the office, you need to include some of the intangibles such as commuting costs, clothing costs, meals, entertainments and so on.

The author stressed that these adjustments are important because they are associated with your job and therefore should be adjusted when you are computing your real hourly wage. To a certain extent, the statement does make certain sense. For example, you can't simply disconnect commuting time and costs from your job unless your office is just next door (and even so, you would be spending some time walking there). However, I disagree for certain things like meals and entertainments which is able to run independently on its own. I mean, you still need to eat whether you are working or not idling. So they are necessity costs to us everyday anyway.

For the purpose of this example, I will simplified by using my own case when I started working 7 years ago at one of the big 4 firm, including some simple adjustments to the case.

Starting Salary: $2,600/month

Official Working Hour: 40 hours/week

Overtime (including Sat/Sun): 23 hours/week

Preparation time: 5 hours/week

Commuting time: 10 hours/week

For those who knows how the big 4 firm works, they usually drill graduates down by giving them exceptionally plenty of work beyond their capacity that runs beyond your official working hour time. On top of that, not only are you not allowed to claim overtime wages, there is also no 13th month bonus. Ahh, what a life (or no life) back then.

Going back to my example above, the hours add up to about 78 hours/week, including those adjustments made (now, I really sound like an auditor). Multiple that by 4 and we get around 312 hours/month. Now, if we simply divide this number by the salary of $2,600/month, we will get a real hourly wage of $8.33/hour. So after all these years of burning midnight oil and hard work of studying, I am only earning a real hourly wage of just above $8. Shocking.

Now, we know that there are plenty of assumptions made there and they do not justify anything more than simply adding in adjustments here and there. Of course, your salary will also increase over time as you gain more experience and assuming the hours does not increase correspondingly, your real hourly wage should also go up. What does this mean and how we should use this then?

There are apparently several ways that this methodology can be useful to you:

1.) Comparing jobs

This is a very classic case where you get a better offer with a higher salary from another firm but you may need to spend more time on commuting or doing overtime during the weekend. By computing your real hourly wage, you'll know if the grass is greener on the other side.

2.) Wasting time

Have you encountered a situation where you are simply doing something that you don't enjoy and think that you could have better utilised the time to do things more productively? Or have you ever encountered a situation where you just blankly stare at the sky or window for an hour? These can be considered wasted time that you can go out there to earn some nice bucks for your early retirement. Of course, sleeping time is always debatable on whether they are practical or wasteful. At least for me, I enjoy an 8 hour night sleep everyday.

3.) Exchanging time with money

This is what financial independence is all about isn't it.

You trade time with the passive income that you are everly working so hard for so that you can spend the time productively on things you enjoy doing, and this includes my 8 hours of proper sleep everyday. Just kidding. There are more important things to do with the time I am sure.

We do this because time is finite and money is not. By wasting our time on a meaningless journey to work everyday or working on a project that does not excite you does not seem warranted that we should give up our time and life just like that. We want more, we need more, we deserve more.

Final Thoughts

Just like any personal finance formula, there are no single metrics that gives you the perfect rule that you need to conquer the world. By working out on your real hourly wage, you get a sense of how much you probably need to reach your true financial independence figure.

How does your real hourly wage works for you?

The Firefighter gene way of investing

Imagine this scenario.

Your neighbourhood house is on fire, and there were helpless children inside the house. Do you run to the fire and save the day or do you run away from the fire thinking it's none of your problem?

Firefighter gene

 

The same applies to Investing. 

Do you have the firefighter gene of contrarian investing when there are blood on the street or do you invest based on following the crowds favorite?

If you are one of those who choose the latter, then it is most likely that you are paying a dear price premium to what their intrinsic values them for. This could be exemplified by the increasing price to earnings ratio over time, indicating market future expectations that have been priced into the market price. In addition, these are stocks which are usually equally loved by analysts as they attempt to recalculate and price in higher growth expectations into their financial model, coming out with higher target price, leading mostly clueless investors who read it at face value who take them for granted. When the company announces quarterly results that disappoints or not up to expectations, the stock price can fall quicker than the meteor.

A good example in the local market context would be Osim, whose share price went horribly wrong recently due to disappointing quarter results. This is a counter which has for 22 consecutive quarters reported increase both topline and bottomline. There has been countless re-ratings from analysts who set higher target price each time and because of its multi-bagger popularity, its price has gone up faster than its earnings. Those who bought them a few years ago would be sitting with plenty margin of safety, but think of those who entered at a high.

The same goes last year in 2013 for Reits. Due to the low interest rate environment, Reits have been in hot demand for investors who are chasing for yield. I remember some of the Reit counters such as PLife Reit went up as high as $2.80, and FCT went up as high as $2.32. The average yield rate for Reits compressed to about 5.7%, and the spread with risk free rate SGS bonds were getting very close. These are times when there are extreme euphoria for such demand, and it is only a matter of time before the bubble burst. True enough, they massively corrected not long after the US is signaling the end of QE.

Firefighter Contrarian

On the other hand, Contrarians, as the name implies, try to do the opposite of the crowd. They sniff at opportunities when a good company takes a dip but unwarranted drop in the share price. It takes more than just guts investing as Contrarians. In fact, a full scale planning in advance is necessary in order to succeed. You will go against the tide of the analysts' reports, and many of your friends who have done the opposite. You need the mental toughness to prepare yourself for a cut-loss strategy should your judgment is wrong.

A good example in the local market context would be China Merchant Pacific (CMP). This is a counter that does not have wide analysts coverage and local investors tend to shy away due its connection with being an S-chips. Having said that, a closer look at the company and you would see how the management have transformed this company into a real solid dividend growth company in recent years by making solid acquisitions that contribute to the earnings. This is a company which gives around 7.5% yield and a payout ratio of about 70-75% at fully diluted EPS. Recently, there has been more liquidity and this counter has started attracting some of the local investors into the scene, so we'll see if this becomes the next growth story in the future.

There isn't a sure way win for investing but the contrarian way of investing is one of the best strategies for achieving great returns over time. A contrarian view of investing is also advocated by many great investors we had.

Warren Buffett

"Be fearful when others are greedy and be greedy when others are fearful"

Baron Rothschild

"Buy when there's blood on the streets, even if some of the blood is yours"

Sir John Templeton

"To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage, but provides the greatest profit"

"Bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell"

George Soros

"The worse a situation becomes the less it takes to turn it around, the bigger the upside"

Arthur Cutten

"Being a contrarian requires a superior sense of what is real, and what is out of synch with reality. In general, few amateurs possess this level of judgement and perspective, and end up just looking silly and eccentric after a few correct calls, taking the opposite position because it is the opposite, proclaiming night to be day, and the moon to be cheese"

Thanks for reading. I'm vested at FCT and CMP as of writing.

Do you have the firefighter gene when you invest?

IPO - TransCab Holdings Review

I am usually not that interested in participating in an IPO. In my investing journey thus far, I have only participated in two of them, both which I have failed to get them. This review is on the back of request from my friend who seems to be interested in the company. So let's see where it takes us.

For a start, these are the offerings in respect of the 168,000,000 shares they would be releasing:

(i) 65,000,000 Cornerstone Shares;

(ii) 94,200,000 Shares under the Placement (including 6,350,000 Reserved Shares); and

(iii) 8,800,000 Shares under the Public Offer (subject to the Over-allotment Option).

Timetable is as follows:

12 November 2014: Opening of the Offering 

18 November 2014, 12.00 noon: Close of the Offering 

19 November 2014: Balloting of applications, if necessary (in the event of an oversubscription for the Public Offer Shares) 

20 November 2014, 9.00 a.m. : Commence trading on a “ready” basis 

25 November 2014: Settlement date for all trades done on a “ready” basis

Firstly, my comment is the public tranche offered to retail investor is relatively small, so judging from the demand, it will seem that there will be an oversubscription for the stock. They have placed a large portion of the offerings to the Cornerstone and Institutional investor, which probably means that they want stability and long term investors who placed trust in their growth story.

Core Business

The Group's main core business is in the operation of taxi services and in-house workshops, where they would be conducting services relating to the general maintenance of the taxis. 

Not coincidentally, the proceeds of the amount raised from the IPO would mainly be used to expand its taxi operations (~30%) and diversify its other transport business (~30). The rest would be used mainly for working capital purpose. 

The diversification into the other transport business, mainly Bulim Bus transportation, is a good move as there is a new contracting model which allows LTA to own the assets and lease them back to bus operators. This would allow the company to free up much of their capital in owning the asset, a move that would benefit companies such as SBS (under Comfort subsidiary). The bad news is that this is their first venture away from the traditional taxi operation business and will likely to face keen competition from experienced operators such as SBS.

Taxi Penetration Ratio

Going back to its main core business, i.e taxi operations, the number to look at for future growth potential is always going to be the taxi penetration ratio.

Taxi penetration ratio is an important indicator because in a country as small as Singapore, there are always going to be limited growth relative to the population and competition for demand. This is in addition that there are multiple taxi operators in Singapore. Comfort, Premier, SMRT, Trans - to name a few.

As much as we hear complaints from people that they are not able to get cab during peak hours, look at the ratio compared to other big cities. Singapore has as much as twice the number of taxis available per 1,000 people as compared to Hongkong and London and thrice as many as Jakarta. Incredible.

Profit & Loss

Looking at the financial highlights, we see that topline and bottomline have shown steady increase over the years. However, a closer look at the income statement and you would have found that in FY13, they recognized a one-off gain in disposal of their PPE. Excluding the one-off, profits would have been at around $23 million, which is rather stagnant with 2011 and 2012.

Gross Profit margins has averaged at around 26%-28% for the past few years, which shows that the management has been keeping the costs well under control. In case you are wondering what Comfortdelgro is raking in terms of gross profit margins, they are currently churning in at around 28.4%. It has been competitive.

Financial Highlights

Income Statement

Balance Sheet

Pre-IPO NAV is currently at 14.2 cents while post-IPO the NAV would be at 25.5 cents. At 68 cents IPO pricing, this gives their P/B ratio at around 2.6x.

Some investors have expressed their concerns regarding paying a premium to its NAV, but I will explain later why they should not be too concerned.

As taxi operators, it is no surprise that most of their assets (and therefore NAV) consist majority of their taxis, machinery and equipment, which falls under the PPE portion of the assets. These assets are depreciated accordingly over time under IAS16 which goes into the PnL under depreciation expense, which in turn was added back to the Cash Flow from Operations to make up for the cash portion. Hence, net equity does not really suffer in that sense.

The book value of an asset reflects its original cost and in this case, it doesn't really help that the assets are aging and depreciating over time. In other words, I don't know if price to book value is a good measure to value this sort of companies. Take a look at Comfortdelgro and SMRT. They should be trading above P/BV as well.

Balance Sheet

Dividend Policy

I believe their dividend policy in the future would be somewhat similar to Comfortdelgro, who agreed to pay out around 60% of their earnings. For a company that requires plenty of CAPEX, it doesn't sound rationale to increase their payout any further. So we could be looking at a pretty low yield similar to CDG.

Conclusion

Finding a good business is about prospecting the future growth of the industry and opportunities. Looking at the relatively muted growth for the Singapore taxi operations for CDG, it is hard to see how Transcab can do better than the blue chip counter. CDG is looking to expand elsewhere beyond the Singapore market, given the relatively higher margins and opportunities, and it is difficult to see how Transcab can be one step better than CDG. They may do okay but not great and in that sense, I just have feeling that they don't have the required business moat to grow much in the future.