Monday 20 May 2024

Asian Pay TV Trust: A Dividend Bagger

Similar to the US Office REITs, Asian Pay TV Trust (APTT) is suffering from a period of high interest and high leverage (but as it is not a REIT, it is not constrained by the 50% leverage limit, so not force selling is happening but has to pay corporate taxes).

The trust has a disastrously high debt load to equivalent of SGD$1.22 billion or 58% debt ratio. For now the trust is first using its cashflow to pay down its SGD debt which has a higher interest rate


Cashflow Generation Ability

APTT is in the Television and Broadband industry within North and Central Taiwan. It is in a highly regulated industry where new entrants find it difficult to enter unless Taiwan issues them the license. 

No doubt it has a utility-like trait but in recent times, APTT's TV customer number has been falling. And with that, so has its revenue in the TV segment.

As evident, revenue has declined due to its shrinking Cable TV business. EBITDA, a measurement of its cashflow has thus shrank. While the trust generated $153 million in cash from its operations last year, I am forecasting APTT's revenue and cashflow are going to shrink 3% annually. This is because its rise in broadband business has not been able to offset the cable TV segment.

For this full year, APTT could generate $149 million in cash from its operations. Its CAPEX should remain at $35 million outflow. Factoring annual interest expense of $44 million and income taxes of $20 million, APTT should generate free cash of $50 million. As of now, the trust is distributing $19 million as dividends to unitholders. The trust has guided for $46 million to be used to pay down debts, so I expect a decrease in 3% of loan/interest expense.

However, let's not forget its revenue is shrinking as well at forecasted 3% annually. With CAPEX unable to be cut and interest expense shrinking in line.

Expectation of Future Cashflow

I expect APTT to face shrinking cashflow of about SGD$3 million per year. This means $47 million cash generated next year after factoring all cash outflows. 

Can the Dividend Be Sustained?

APTT has guided for 1.05 cents annual dividend. This amount to SGD$19 million in cash outflow. In my view, this dividend can be sustained for at least a decade. With interest rates expected to decline and APTT paying down 2-3% of its debts annually, the trust should be able to generate the free cash to support the dividend. 

Future Interest Rates Should Drop and Leverage Ratio

In the latest AGM, the CEO has conceded its current leverage is not ideal and the trust will be paying down debts. While no desired leverage ratio is mentioned, I sense a lot depends on its goodwill amount and a 50% debt limit. Due to APTT's declining business, its goodwill is likely to suffer another round of impairment in the next few years. Hence I do expect the current $2 billion asset base to decline to pherhaps a $1.5 billion base. This means a future debt load of about $750 million.

Fortunately with the expectation of a decline in global interest rates in the next few years, interest expense should reduce and debt repayment can be accelerated.

What Investors Should Expect

1.05 annual dividend is sustainable. However, I do not think APTT will increase it. At current price of 8 cents, this translates to a 13% yield.

No doubt, the risk is that APTT's business will decline faster than its current 3%+ annual rate. However, I feel given the information, a 13% yield is too generous. APTT could move to an 8% dividend yielder and should interest rates start to fall, it could compress into a 6% dividend yielder. Based on my thoughts, the target price range for APTT is 13-17 cents. Should APTT continue to annouce a 1.05 cent annual dividend, the market could appreciate the company to this price range.

Thursday 16 May 2024

Portfolio Update: Sale in HK Dividend Stocks, Purchase of Singapore Shares

This is an ad hoc update on my portfolio because of significant changes.

I have divested shares in Alibaba, China Construction Bank and Ping An. 

Due to PRIME's improvement in situation, I have added 100,000 shares. Yanlord and Nanofilm saw additions to ensure my exposure to China remains about the same.

Last a new company has been added call Asian Pay TV Trust (APTT). The company is highly leveraged but is gradually paying the debts down. It is guiding for 1.05 cents annual dividends which I think is attainable despite a declining TV business in Taiwan. It will form part of my dividends. 

Overview of my portfolio as follows:

PRIME US REIT: Sale of 01 Building Makes it Safe and Management Confident of Refinancing

Yesterday's announcement saw PRIME REIT divesting One Town Centre (OTC) at about 3% lower than its valued price at end 2023.

As said in my earlier post, PRIME US REIT needs to sell 1 to 2 buildings to ensure the financial safety of the REIT. This has happened and I am confident the REIT can stay afloat.

Refinancing Risk

A $478 million debt is due. During the latest AGM, the CEO said he is confident that the refinacing will be completed by the deadline of July 2024. With the sale of One Town Centre conciding with expiration of the current debt, what I am infering is that the new debt principal will likely be of a smaller amount (probably a $450 million loan).

However, with OTC sale and adequate cash balance, it is likely a refinancing can be completed in time.

Current Loan Profile

What many investors do not see is that the OTC loan is the most expensive loan on PRIME REIT's book at SOFR + 1.65%. In addition, with the leftover cash from One Town Centre's sale, PRIME REIT will use it to repay some of the due July 2024 loan principal.

For the refinanced loan, I do not expect a SOFR+1.15% margin. My expectation is that it will be a SOFR+ 1.7% loan similar to that of Sorrento Towers/One Town Centre. Furthermore $155 mil of PRIME's hedging will be lost  This mean despite the pay down in loan principal and cancellation of One Town Centre's loan, PRIME REIT's interest expense year on year will not fall. Instead I expect further rise in interest expense to about US$30 million per year.

Cashflow and Dividends

Interest expense is US$30million. Manager base fee is US$6.2 million, Trustee Fee is US$2 million.

The loss of OTC and decline in occupancy could place NPI at about US$82 million. CAPEX should remain at US$24 million.

This means the REIT is in a position of generating US$20 million of cash this year. With plans to strengthen the REIT's equity and pay down the loan, a significant portion of cash could be retained. I will not be surprised PRIME REIT pays out only a dividend of 0.5 cent per share for the full year. I do not want to see PRIME US doing another share bonus because it does nothing for shareholders. 

Give 0.5 cent dividend and explain it or otherwise...

Dividend of 90% of Taxable Income to Get Tax Breaks

During AGM, the CFO revealed in order for the REIT to continue achieving tax breaks from USA, they have to pay out 90% of the taxable income. In my view, PRIME might be able to earn US$25 million in taxable income this year. 

This means an approx US$22 million in dividends could be given to shareholders. If this holds true, this translates to a dividend of 1.6 cents per share for the full year.

This will be great news. But given the situation the REIT is in, I will not be surprised PRIME opts for a 0.5 cents dividend this year instead of 1.6 cents dividends. A 1.6 cents dividend may force PRIME to increase its borrowings due to cashflow. So I am expecting the worse case scenario where the REIT only announces 0.5 cents per share in dividend.

I do not agree with this but given the prudence the REIT has to be in, a 0.5 cents dividend look likely. I personally prefer the REIT to divest off another building and refrain from doing anymore office space acquisition forever to slowly delever 

Saturday 30 March 2024

First Quarter Portfolio Update: Purchase of Nanofilm and China Construction Bank, Sale of Few Companies

While Sea Group has run up in share prices, my holdings in Elite Commerical fell. So its both happiness and sadness. I have sold both of these companies and bought Nanofilm & China Construction Bank. A partial divestment was done for my long held Yangzijiang Financial to fund the nanofilm purchase because nanofilm seems to have better recovery prospects.

Nanofilm is a company that does coating using its unique technology and has factories across Asia with its largest factory in China. It is a proxy to the state of China's manufacturing and consumer activities. In my view, the lowest point in China's manufacturing has past and therefore, I have bought 27,000 shares in Nanofilm. 

China Construction Bank's (CCB) purchase is to maintain a good dividend yield and I do feel the bank's results is strong despite the real estate downturn. CCB has a large segment of its loan book portfolio in real estate and construction. 

Portfolio Valuation

Due to the surprise suspension of dividend by Keppacoak, my portfolio has taken a beating. However, I have not sold off any of my US REIT shares, reason being, I do feel we are at one the lowest end and therefore, holding it will be wiser.

Readers would notice my PRIME US Reit has increased by 30,000 shares. This was not due to a purchase but because these are bonus shares given by the company in its latest year end financial results at no cost.

Friday 29 March 2024

What's the Progress of Manulife US Asset Sales? Brookfield Sales Shows It Might not be Smooth Sailing

I am not vested in Manulife US REIT (MUST), but am following it because it reflects the state of the US Office market which affects my other 2 investments.

Recently, MUST insiders have been buying up shares which is good news. However, a recent news of Brookfield asset sale in Figueroa might dampen news, it does not seem like its good news in the progress of Tranche 1 asset sales for Figueroa.

BrookField Asset Sale

Just 1 block away from MUST's Figueroa property, Brookfield has sold off its 777 South Figueroa street at US$145 million and with 15 offers. The office tower was only 50% occupied and sold at 25% of its 2020's valuation. The good thing is MUST's Figueroa property is 81% occupied, so it is on a better footing. Hence in my view, it is possible for MUST to start selling it at 35% of its 2020 valuation of US$337.6 million. This means about US$118 million.

For MUST, it is a definite it cannot sell its property at say 25% of its 2020 valuation. This is due to the Decemeber EGM circular which was approved by shareholders in its recap plan.

The Dec 2023 Recap Plan

Shareholders of MUST approved the share sale for Tranche 1 assets at the following parameters:


Pre-approved MUST can only sell its Figueroa asset at the lowest price of US$106.2 million, if it happens. Right now, at its current year end valuation, it can only be sold at US$132 million. However, with the recent comparable sale of Brookfield's asset one block away, I will not be surprised a further downward valuation happens for MUST's Figueroa, this should bring it near to the floor price of US$106.2 million. My baseline valuation is US$118 million. To why I think the value of MUST's Figueroa value would fall, this is because BrookField's Figueroa has a larger floor area by 40% and is 1 year younger than MUST's. The saving grace for MUST is its higher occupancy rate. Nett nett, I do think MUST should be able to fetch about US$118 million based on sales comparable approach. However, given that Centrepoint is below the circular agreed sale, the sale of Tranche 1 office assets seems to be increasingly hard.

Secondly, its worth noting in the recent devaluation, Centrepoint's value is now lower than the pre-approved price to sell its Tranche 1 asset. While MUST can still sell, the lenders approval to sell at the lower price has to be sought. This hinders the target goal of raising US$328.7 million from sale proceeds. 

I am not surprised the sale of a few Tranche 2 assets may occur. The sale of US$230 million target is important as well because failure to meet it results in a higher interest rate levied by lenders. And while Centrepoint can be excluded, it makes the required sale execution to be close to perfect. Diablo is already at the bottom price range of the circular.

The above are my opinions.

Progress of MUST's Tranche 1 Sale?

I hope MUST brings good news that it has sold at least 1 of its Tranche 1 property during the AGM or release of its Q1 results. The progress of the sales has been rather quiet thus far. A sale at its current end 2023's value would bring good news.

Wednesday 13 March 2024

Yangzijiang Financial Holdings 2023 Results Review

 Yangzijiang Financial Holdings (YZJFH) delivered a result which was within expectations.

Summary

  • Earnings per share of 5.5 cents
  • Dividends of 2.2 cents
  • Done slightly more than 10% of share buyback since spin off
Currently YZJFH trades at a share price of 32 cents or SGD$1.13 billion market cap.

$900 Million in Cash and Cash products in Singapore

One important point from the year end results is that YZJFH has transferred a significant amount of cash from China to Singapore. With the cash in Singapore, it can be easily verified and reduces the allegations that the cash items in its balance sheet is fake. 

The rest of its $340 million of Singapore funds are in investment funds, investments in other companies shares and funds. The total amount of funds in Singapore is now SGD$1.246 billion. This exceeds its current market cap. 

The market is currently valuing YZJFH at 10% discount to its Singapore assets and I find this rather undervalued. Currently, 80% of the market cap is in liquid cash in Singapore.

China Investments

Based on current market prices, the stock market is valuing its China investments at zero value. One concern is that the allowance YZJFH has set aside for its debt investments have risen from 8.8% to 13.3%. This means the company sees an elevated risk of getting all its money back from China companies it has lent to. In my view, the concern is valid. Given that YZJFH gets about 10% returns from its debt investments, this means the individuals it is lending to are not of blue chip status but of lower credit ratings. 

In China, the prime lending rate is 4.35% and the blue chip companies in China are borrowing at 4-5% interest. For YZJFH to be earning 10% interests (PRIME + 5.5%), this means its borrowers are not of strong credit profile. To worsen the situation, China is in a credit crisis. However, I do not think a zero value is fair value of its debt investments. Its parent company Yangzijiang Shipbuilding sold all its debts at 56% value of principal. To me, in a worst case scenario, the debt investments held by YZJFH is at 50% of its principal value. It currently holds SGD1.92 billion of debts and I think the fair value of this debt is SGD$0.96 billion.

In addition, the company has SGD$0.72 billion of cash and short term cash investments in China. In total, I do think its China investments carry a worth of at least SGD$1.68 billion. Netting off the 10% tax for transferring the cash from China to Singapore as dividend. The China portfolio should be worth SGD$1.4 billion.

Fair Value of YZJFH

I would say $1.246 billion of YZJFH assets are real because it has been shifted to Singapore. With potentially another SGD$1.4 billion from China and netting off its $0.25 billion in liablities, the company is worth SGD$2.4 billion. This places it at 68 SG cents fair value.

Thursday 22 February 2024

US Office Commercial REITs- PRIME Pulls Positive Surprise With Its Young Property Age.

The full year results for the 3 US Office REITs are out. Downward valuations, as expected were reported with varying magnitudes.

Below are their current financial health:

CAPEX Shock

To me what came as a surprise is the CAPEX needs of KORE's property portfolio. KORE spends more CAPEX than the rest. This is due to KORE's portfolio being the oldest among the 3. While KORE claims the higher CAPEX is needed to retain tenants, the main (probable) reason is due to the need to refurbish its old buildings to match tenants needs.

As a result of the higher CAPEX needs as compared to PRIME US, KORE has decided to suspend dividends. PRIME US REIT on the other hand, due to its smaller CAPEX by virtue of having newer buildings, has slashed it to 10% payout ratio with a plan to delever wtih US$100 million. 

On the point on CAPEX, its interesting to note KORE puts in nearly twice the CAPEX expenses but still obtains the same ratio of "NPI to property revenue" or "Revenue to Valuation" as compared to PRIME. This clearly shows the main reason why KORE needs to pay so much for its CAPEX is because its properties are old and there is a need to spend more to maintain. This showed Keppel Capital had tried to fool public investors by IPO'ing older assets in a way to get rid of the looming cash needs then. Keppel seems to have pulled a fast one over Singapore investors.

PRIME- All eyes will be on debt Maturing on Jul 2024

PRIME carries a significant risk where a 600 million debt facility is due July 2024. This is a make or break segment, if it succeds, PRIME will have a very strong chance of an upside and rebound. A failure to renew and there will be a massive haircut to building valuation during the firesale. PRIME management has to present to the syndicate of bankers that its properties are of good balance sheet, the manager is committed to the REIT future and preferably the sale of 01 building should be done before this. 

ManuLife US REIT Has to Execute Well

MUST did a year-end valuation. With the revaluation, the expected sales from Tranche 1 assets are still within range of the announced sales proceed in their December circular for Tranche 1 sale.

However the resultant leverage places MUST very close to 50% (estimation is 49.7%). The sale to Diablo to me will be difficult because it is of a Class B asset (least desired) and it has not undergone refurbishment since its completion in the 1980s. Hence, there may not be many interested buyers. If the US Commercial office issue persists until 2025, MUST might need to sell off 01 additional building in Tranche 2 because the next revaluation in end 2024 would put it above 50% leverage again.

Sale of Buildings

In all likelihood, both PRIME and MUST could be selling buildings at the trough of the business cycle to delever to safety. It is a neccessary move but one that is forced due to the breach of leverage.