Thursday 13 June 2024

HSBC Revolution Credit Card: End of the Title as Best Cashback or Miles

In May 2023, I said how the HSBC revolution was the card of choice for general expenditure which had 2.5% cashback or 4 miles for almost all categories of spending. 

What Has Changed

Since the start of 2024, HSBC revolution has reduced the categories eligible for 2.5% cashback or 4 miles per dollar. The latest exclusion was the removal of contactless spending which relegated the usual restuarants expenditure, since most use the paywave to tap and pay bills.

From 15 July 2024, contactless expenditure will not be eligible; and from 01 Jan 2025, online spending on air tickets, car rental, cruise tickets (importantly royal carribean) will not be eligible for bonus HSBC points.

That means from 01 Jan 2025, the HSBC Revolution Card becomes a specialist miles/cashback card which targets only online shopping. The card no longer has the versatility of being able to earn outsized rewards in almost any category.

How Will It Change My Expenditure

It does change a lot. As a consumer which has the most expenditure in dining and due to the amount i spend (less than $200 is spent contactlessly), I will need to switch cards. Fortunately, I have the UOB lady's card which is a specialist miles card for dining. However, if I wish to enjoy cashback, I do not have many options left, only the UOB One Card comes to mind.

However as I am still accumulating miles under my UOB cards, UOB lady's card will be my interim expenditure card.

Will I keep the HSBC Revolution Card?

Despite the no annual fee and no fee for converting to Krisflyer miles (until end Jan 2025), I do not have much grounds to keep the card. This is because I do not shop much online, hence accumulation of miles or 2.5% cashback on the Revolution card will be slow.

The credit card now only has value as a "enjoy the sign up gift after going through the loop of spending a certain threshold".

From an awesome general spend card, the HSBC revolution is now a specialist card which targets online spending and large purchase on dining. So if you are a massive online spender who spends $1k per month, HSBC revolution is still a card of choice. Outside of this expenditure, it is time to move on.

Wednesday 12 June 2024

Portfolio Purchase: Utdhampshire REIT & Hang Lung Properties

02 purchases have been made and with that conclude my bout of new companies addition.

Utdhampshire REIT:  I have covered this REIT before. It is in the US suburban retail business. My analysis can be found here here 

The REIT has sought to manage the risk of its balance sheet by reducing its payout ratio to 90%. I am expecting a 3.8 US cents annual dividend. 

Secondly, what surprised me was how valuation at year end was not a negative which would have breached MAS leverage limits. Given the 2 positives, the new dividend is sustainable and I am expecting Utdhampshire REIT to be a 10% dividend yielder. The interest coverage and leverage ratios should be within MAS limits.

Hang Lung Properties (HK): The second addition is Hang Lung Properties. It is in the retail mall segment and small part office in China and Hong Kong. The consumer segment it targets are the wealthy and upper middle income, relatively stable. The company owns malls and leases it to tenants. Similar to how Capland China Retail Trust operates.

While its payout ratio stands at 90% and at 78 HK cents, it is sustainable given how its mall rents have been increasing. It is a 11% dividend yielder. Its leverage ratio is much lower than many of Singapore local REITs. Hence for a less leveraged balance sheet than SG reits and its dividends, it is a worthy addition.

Asset Sale: 50,000 shares of Keppacoak was sold to finance the purchase of Utdhampshire. This was due to the limited cash I have and Utdhampshire went slightly down today to warrant a buy.

Dividend Portfolio

My portfolio should now provide approximately SGD$20,000 in annual dividend. Overseas REITs and blue chip HK shares are giving extremely good dividends because the risk free rates are much higher, therefore, dividend stocks with business in these countries have to offer a yield higher than risk free (in the region of 5.25%). 

In addition, due to the negative sentiments surrounding China companies, the sell down has made them double digit div yielder with its business not as adversely hit. They are companies worth owning.

The other advantage I am sitting on is that as global interest rates starts to be cut, the distributable income avaliable from REITs I own will be higher because interest expense is lower. This will naturally lead to a growth of dividends. For the US Commercial REITs, another hurdle to clear is that they survive their loan refinancing. Hopefully this comes to pass in the next 2 months.


Tuesday 11 June 2024

Nanofilm: 70% Down From Its 2020 IPO Price, What Will Make It Recover?

Nanofilm is part of my portfolio and since the start of the year, I have started purchasing it at its 70 cent pricing. To be exact, I bought Nanofilm in Dec 2022 and then divested it at $1.50 which was my target price.

Anything Has Changed?

China manufacturing has shrank considerably. Nanofilm is a proxy of the China manufacturing story. With the recent decline in China's manufacturing over the past 2 years, Nanofilm's revenue has fallen. In all honesty, it is very difficult to value Nanofilm without thinking of the China story.

The other improvement seen is that Nanofilm is now in a low CAPEX cycle and started to efficiense its operations.

Nanofilm Growth in Net Profits

In FY23, Nanofilm experienced another decline in revenue along with it gross profits and net profits fell. It is very hard to predict how much will Nanofilm earn in FY24. If revenue rises, operating leverage naturally kicks in and the gross profits and net profits will improve substantially.

However, there is one aspect I can be certain of

China Manufacturing Will Recover

From a low base, China's PMI has started to recover posting "above 50" figures which indicates manufacturing growth in the country. As said Nanofilm is a proxy. 

Secondly, the company has expanded into Vietnam. So taking this 1+1, revenue should grow in FY24. 

Target Price for Nanofilm

I do not know the exact amount Nanofilm will be worth, however, with knowledge that revenue will grow and assuming profit margins recover, my bet is $2.56 (2020 IPO Price) could be seen again. However, it will take not just profit growth but also the sharing of dividends to achieve this.

A $2.56 share price means Nanofilm has a $1.7 billion market cap. I will abscribe a 20 times P/E for Nanofilm. So the question is if Nanofilm can earn $85 million net profit annually.

Since its IPO, the max Nanofilm has earned is $62 million profits on the back of $246 milllion revenue (25% net profit margin). $85 million net profit is in the realm of possibility. I do feel a $300 million revenue is possible and that should take the company to a $85 million net profit figure. 

Secondly, as long as the company starts sharing dividends, the overall effect will be a return of $2.56. This is where I am valuing the company now. Lots of Arts and no Science because how much will Nanofilm regain its profits is just too difficult to forecast.

As to if Nanofilm will return to its all time high of $6 (Market cap $3.98 billion). The question is if it can reach $200 million in net profits. For now, I do not forsee it will happen, but who knows!

Monday 10 June 2024

Portfolio Transactions: Suntec, PRIME REIT Additions

It was difficult to search for a single candidate to add. But I finally settled on one.

Suntec REIT: While Suntec REIT has a relatively low dividend yield of 5.6%, it has a monetisation story. For every strata office unit it sells or even an office building, it is DPU positive for unitholders. 

I personally prefer if Suntec sells off its entire Singapore office portfolio. I believe if it happens Suntec REIT share price will go up by 50%. However, the REIT manager is unlikely to do it because of the fee structure where the manager is paid by the amount of asset value in the REIT and the total net property income (which excludes interest expense). So with more buildings, the Suntec REIT manager ARA/ESR gets a higher fee and it does not need to worry of interest expense. Currently, the REIT is better off selling off the buildings to save on interest to benefit Unitholders, but this will lower the fees ARA/ESR collects.

In my view, the manager is in a bind between doing good for unitholders and earning a higher management fee. ESR was the REIT manager voted out by Sabana REIT due to their supposedly value destructive ways in managing the REIT. It seems the same is happening in Suntec where the REIT manager is not acting in good faith for unitholders. 

Every sale is a positive to Suntec REIT. If the non core assets JVs in MBFC and One Raffles Quay are sold, it will boost Suntec to be a top dividend REIT master in Singapore with the safest balance sheet.

I bought a few shares in PRIME REIT and sold my shares in Yanlord Land.

Below is the portfolio composition. I still have about 1+% of cash deployable. All in all, it has started to become a REIT profile because REITs are providing good dividends now due to the higher risk free rates demanded:



Friday 7 June 2024

Suntec REIT: Potential Ability to Increase DPU by 15.7% with Sale of JVs and a Dividend Master REIT

As readers would know, I am looking for new companies to add to my portfolio. Today after scouring the SGX listed companies, another has come to my list and that is Suntec REIT. Suntec REIT is not due to its dividend but because of the potential positive DPU increase if it delverages. Let's see the maths below:

Suntec's SGD Debt


Suntec has SGD$3.486 billion debt at an average weighted debt cost of 4.6% interest rates. Annually Suntec REIT is paying $160.35 million in interest.

Suntec Valuer Valuation of its 33% JVs


Suntec's 33% JV has an overall valuation of SGD$3.142 billion and earns $109 million. All data is found in its annual report and valuation was done by reputable valuers.

Sale of JV and DPU accredition

A sale of its JV at say SGD$3.1 billion (nett of 1% divestment fee) and using its proceeds to pay down its Singapore SGD loan will result in an interest savings of $142.6 million and an income loss of $109 million; however, this means Suntec unitholders will see a SGD$32.6 million increase in distributable income annually.

Currently Suntec Unitholders enjoy $206.8 million in distributable income. With the divestment of its 33% JV stakes, this means there is a 15.7% increase in DPU a year. From 7.1 SGD cents, Suntec Unitholders can enjoy 8.2 SGD cents. (7.5% dividend yielder)

A sale of Singapore Assets will reduce leverage ratio as well.

Suntec has a leverage ratio of 42.2% on SGD $4.24 billion loan. This means asset value is SGD $10.04 billion. A sale of $3.142 billion JV will result in a hypothetical debt of SGD$1.14 billion debt and asset value of $6.898 billion. Its new leverage ratio will be reduced from 42.2% to 16.52%

Summary

A sale of Suntec's 33% JV can increase DPU by 15.7% making it a 7.5% dividend yielder, in addition, its leverage ratio will be reduced to 16.52% making it the least leveraged REIT in Singapore and cementing it as a blue chip status. It will help deliver long term value to shareholders and put the REIT on a much stronger financial footing.

It is weird why Suntec's REIT manager has not thought of this and I beseech the REIT manager to act in the interest of unitholders. Its Singapore valuers has provided a good valuation of the property and Suntec REIT should be able to find buyers at this price unless its valuers have been providing fraud information to the REIT manager and unitholders.

Wednesday 5 June 2024

IREIT GLobal REIT: Exposure to Europe Office/Retail, 7% Expected Yield

 Ireit Global REIT is another SGX listed REIT, it has exposure is only to 03 Europe Countries: Germany, Spain [both office] & France [Retail Space].

Portfolio Composition

Ireit recently expanded into to the French Retail space to diversify into the Europe Retail Space. I will not be able to comment on the intelligence of this diversification since the results are still not apparent. But it is a sound diversification into a discount store outlets which is defensive (similar to Utdhampshire US REIT)

IREIT Risk- German Office/Commercial

Ireit suffered a hit when the tenant at Darmstadt Campus did not continue the lease. Occupancy  is now at 25% and truth be told, the REIT is struggling to find tenants to backfill the office space. I suspect a further downward valuation will happen in end 2024. The submarket within Darmstadt has an ongoing issue of high vacancy rates. Think what is happening to PRIME/Manulife/keppel US.

The next risk is its Berlin Campus office buidling. With a few tenants' lease running up, I forsee downsizing will happen. It is a relatively old building and I think the REIT will have to do CAPEX to refurbish, pherhaps a demolition and rebuilding of a Grade A building could help improve the status of the REIT. It should end up like One Washington Centre of PRIME REIT where an extensive refurbishment will be announced.

Similar to the US Office space, I do think the Europe Office space will struggle. This will hurt Ireit global revenue and for 2024 and 2025, Ireit office space revenue will decline. There should be a Euro 30 million downward valuation, which will push Ireit leverage to 38.5%.

01 Lucky- Diversifying into the French Retail

Its French Retail segment experienced a valuation gain and with the share placment of forcing existing Ireit investors to pump in money at 40.8 cents per share, the REIT now sports a 37.0% leverage. If the REIT was still a standalone office REIT, Ireit could have followed the US commercial REITs with drastic cuts in the dividend. 

Regardless, the past is past and the purchase of French Retail assets has rescued the REIT. In my view, this is now a much safer REIT. Even with a slight downward valuation of its office portfolios due to my view of further tenants downsizing, I do not think the REIT will breach the 45% leverage limit.

02. Lucky Hedging

Ireit has done almost perfectly in its hedging strategy. With a 96.5% hedging, it has enabled its effective interest rate in Europe to be at 1.9% when currently, many property loans in Europe are going at 1.5% + 3-mth Euribor of 3.75%; this means interest rates at 5% to 5.25% 

As investors, we have to be aware of it. As Ireit interest swaps expire, its effective interest rate will increase. This is because its old Euribor hedges were at very low rates and will not be renewed at such levels again.

So it's a definite its weighted average interest rates will go up. Most of its hedges expire in 2026. At that moment of 2026, I do expect the Europe central bank will announce about 4 rate cuts. So I will not be surprised Ireit's effective interest rate then could be about 4.25%. This means something....

DPU Stagnant

While revenue would grow over time, the increasing pace of Ireit's interest expense would eclipse; mainly due to its interest rate swap expiring. 

I forsee DPU will be 1.6 Euro cents on an annual basis and it will remain as such. The REIT was fortunate that it went into the French Retail segment, otherwise it would have struggled. Germany Office Space revenue is in a decline.

1.6 Euro cents equates to 2.3 SG cents. At a share price of 33 SGD cents, Ireit should be a 7% yielder. But this should be the level investors have to expect moving forth. In Singapore, the savings bond and T bills are yielding at 3.3% to 3.6% rates. IREIT is only at a 3.5% premium. Not much to fancy about, but I do think the market has valued IREIT just about fair value. Until Singapore interest rates fall, potential investors should not expect share appreciation.

But given how lucky IREIT was in diversifying and with a leverage ratio that is far away from MAS's regulatory limit, I do not think this REIT will go under. For investors, the question is: Is the 7% yield is justifable? I am not vested in Ireit but it is 1 of my candidates to evaluate under the 7%-9% yielder. Hang Lung Properties, Capitaland China Trust and ICBC are others I am considering.

Tuesday 4 June 2024

UiPath has Fallen 40% in a Week, Is it a Buy?

UiPath is a software company which aims to provide business automation to automate mundane processes and repetitive work for companies.

Due to its lowered forward guidance in the latest financial results, the company's share price has taken a beating. It is worth noting till now, the company is not profitable on a full year basis. 

It has the largest market share in the software automation business, ahead of the likes of Microsoft, with many SME susing its software to automate work or even to carry out simple tasks such as sending hourly temperature readings of their server rooms or inventory management.

So is it a good business to invest now with low share price?

Business Model of Uipath

The company provides a software package where (i) subscribers pay a monthly fee to have access to the full suites of its function, (ii) free model where subscribers can get it for free but with limited function and there is an entrpise model which is a large package where 100 users get access to everything for a fee

Its software is applicable to almost all industries... which brings us to....

How Large is the Addressable Market and How will Uipath monetise users

These are the 2 questions we have to address to know the worth of Uipath.

In all honesty I do not know how large the addressable market is. Given how widespread and applicable UiPath's software is, I could say the addressable market is in the trillions of revenue. However, there are many competitors with Microsoft, IBM trying to catch up. So I would say the trillion dollar pie is split up among many companies.

The second question is monetisation. Uipath charges a fee for the access to its automation features. However, if it sets too high a price as fee, its customers may decide to switch companies. No doubt, there is a switching cost because if a company changes software, it has to re-write its codes. So there are some barriers but not too high as what Microsoft has in the operating systems segment.

What are My Personal Projections

While there is a hype going around how AI will replace human jobs and Uipath is indeed in such a business line, I do not think its revenue growth will be exciting. UiPath has been doing this for many years, so it's reach has likely reached close to maturity. Revenue wise, I forsee only a growth of 15% per annum for the next few years before plateauing to the 5% range.

The importance for UiPath is to manage its own cost as it grows, i.e. using its own software for roles to reduce manpower cost. One gripe I have about software companies is that they have to pay their software engineers a good package with stock based compensation to keep them with you.

Profits

With the continous growth in revenue, I do think UiPath can grow into profits. I personally forsee that the company will become a US$2.5 billion revenue company in 5 years time with its cost base increasing at most 40%, after all it has a business automating software which is a force mulipler. AI will replace human jobs!

In conclusion, I see UiPath as a future company which can clock US$700 million in pre-tax profits. Including US corporate taxes, it should be a US$500 million company. Setting it at a 20 times earning multiple, that means it is a US$10 billion market cap.

I do not think the software hype will warrant UiPath to be a 30 time or 50 times P/E company. This is because the business automation space has many competitors, it is not a niche industry where UiPath is the sole provider. UiPath is only worth as much as what its IP can carve for it. At US$10 billion, it means Uipath has only about 60% upside ( $18 target price)

Unless the company is able to cut its cost by automating more of its own functions or by cutting the pay of its software engineers, I do not see the company having too much of an upside.