A Re-look at Accordia Golf Trust

It has been about 4 years since I looked at Accordia Golf Trust (AGT) as an investment proposition. Many things have changed since then and I wondered how it has fared since then.

What has Changed

Dividends- The dividend history of AGT has shown there is a slight decline in dividends. Below is the dividend history.

From its latest Financial Year Ending March 2019, it can be seen that dividends for AGT has been on a decline. This is a far cry from the past where Dividends given were generous.

Sustainable Dividends?

From the cashflow statement for FY2018,  AGT gave out JPY$3.4 Billion in Dividends. With the recent release of dividends which is about 2% lower, one can reasonably expect another JPY$3.3- 3.4 billion in dividends provided to investors. However, the question begs- Is the Dividends Sustainable?

In terms of Cashflow wise, it does seems sustainable because AGT is producing about JPY$10 billion in operating cashflow annually before working capital changes, with CAPEX in the past 5 years averaging in JPY$1.5 billion as well as income and interest expenses totalling to JPY$2 billion. It does shows that JPY$3.4billion of dividends (or 3.77 Singapore Cents is sustainable).

Again cashflow depends on the industry outlook and if AGT business does deteriorate by 40% resulting in a similar in cashflow generated, I do expect dividends to be slightly cut

Higher Leverage Ratio

AGT's leverage ratio has slightly climbed over the past few year and now stands at a 30.4% loan to value ratio. This is a rise from its 29% when I last looked at it. The slightly elevated ratio is similar to the levels that are deployed by our local REITS currently. 

Conclusion

Hence based on current share price of 53 cents and dividends, AGT is offering a 7% leveraged yield. In my view, it does seem about right. In our current global environment of yield hungry investors, we have seen local REITs being bided down to 4-5% yields albeit in more stable sectors such as Retail and Commercial officer space.

The Japanese Golf Industry seems to be in a slight decline based on AGT's past financial results. Past performance indicates around 0.6-1% decline. However with the pick up in Japanese tourism and the Olympics, my opinion is that revenue will stay in the JPY$50-51 billion range for the next few years. With an operating expense base of JPY$45 billion, the JPY$3.4 billion in dividends does seem sustainable.

Even with a decline in revenue from 2021 onwards, there should still be sufficient cash to pay for dividends and JPY$45 billion debt repayment. With 76% of its land under freehold tenure, AGT has the capability of having perpetual generation of cash to repay its debts. This is unlike our local REITs whose portfolio are majority leasehold land and thus have to depend on our government bailing them out by allowing a lease top up back to 99 years. With such a large proportion of freehold land, AGT has a lowered risk of its assets facing leasehold depreciation or lease expiry, which will in turn result in a loss of revenue.

I do now own any Accordia Golf Trust now but am just observing it to see if it can be part of a dividend portfolio.

Far East Orchard Holdings

Far East Orchard is a relatively unknown company on the SGX. However, what I noticed is that it has been constantly declaring a dividend of 6 cents annually. At a current price of $1.27 per share, this translates to a yield of 4.65%.

Far East Annual Declared Dividends

Is the 6 cents dividend sustainable?

This is the first question I had in mind. While delving into Far East's cash flow, I did not use the reported figure under " net cash from operating activities" but instead "Cash before working capital changes"; this eliminates the chance of companies using trade receivables or trade payables to juice up their operating cashflow. Below is what I found for Far East Orchard:

FY14: $50.9 Million
FY15: $36.2 Million
FY16: $24.7 Million
FY17: $27.2 Million
FY18: $28.9 Million

(Edits with Ghchua Contributions on Investing Cash inflow)

Ghchua has pointed out that Far East Orchard has been receiving cash inflow as dividends from its joint ventures of overseas assts. A quick look into their investing activities shows the varying level of dividends received.

Cash inflow from Dividends of JV, found in investing cashflow:

FY14: $2.8  Million

FY15: $17.4 Million

FY16: $27.5 Million

FY17: $14,1 Million

FY18: $36.7 Million

To sustain Far East's Dividends, the company needs to generate about $26 million. Netting off interest expense (of about $5.5-6.0 Million) and income tax expense, it seems Far East Orchard has a sufficient buffer of cashflow to sustain its 6 cents dividends

Business of Far East Orchard

While Far East Orchard's business is no doubt in properties, this segment can be broken down into 2 further parts - Property Management and property developer.

One positive aspect of Far East is its property management as a REIT manager. Far East is the manager for a business trust listed on the SGX. As a reit manager, a majority of its management fees comes from the asset value of the REIT; this means a rather stable of income for Far East, preventing any downward revision in its future cashflows.

The company too has recently purchased student accommodation projects which should ensure stable cashflow.

However in the sense of cashflow, Far East's property development arm is one which generates inconsistent cashflow- one year can be extremely high, while the next can be low. Looking at its latest annual report, Far East's property Development revenue for the past 2 years has been below 20%. It seems the company is largely dependent on its hospitality assets and business trust for income

Hospitality Arm

Far East has a few hotels in Singapore, Australia, Germany, Denmark and Malaysia. The hotel chain names of "Rendezvous, Oasis and Village Hotel" are one of the largest few brands in the chain.

On the other hand, it runs a business trust called Far East Hospitality Trust, which manages only its Singapore Hospitality property. Far East Orchard is drawing a fixed amount of $12.2 million annually for running the Trust.

This means the rest of Far East Orchard's assets such as overseas hotels and student accommodation projects are contributing to the remainder of the $16 million plus cashflow. Most of these assets are freehold by nature which is definitely better than a leasehold property. From the cashflow, received in its investing activities, it seems Far East Orchard has been receiving about $16 million in cashflow, which will sustains its 6 cents dividends.

In addition, In my view, Far East Orchard has another attraction and that is its ability to sell off its freehold overseas assets into its business trust (who will always be a "willing buyer").

Conclusion

From the above, Far East's 6 cents dividend is sustainable. In addition, with Far East owning numerous freehold assets in Singapore and the rest of the world, it seems a definite that Far East Orchard will be at least able to generate $12.2 million of cashflow even during the worst times.

At its current price of $1.27 with an estimated dividend yield of 4% similar to CPF Long term interest, the company is slightly undervalued. With Far East Orchard additional ability to monetise its overseas assets by injecting it into its Far East Hospitality trust. There seems to be some value to Far East Orchard

Singapore Financial Authorities are Doing too Little and in the Wrong Area

In the past few years, Singapore has seen a wide range of corporate failures of SGX Listed companies. Some of them include delisting after a large unexplained fall in prices, spectacular accounting impairments not seen since Enron, lack of material disclosures and corporate governance issues.

All these is leading to a dearth of IPOs and lack of investor sentiments which has seen the latest IPO only being 1.3x times subscribed. If it is difficult for investors to analysis the financials of a company due to poor accounting and lack of disclosures, they are likely to stay away. This is why regulators are present in every country to ensure rules are in place to ensure transparency and reduce the amount of frauds.

Unfortunately, it seems Singapore lacks the above.

Ayondo, the first fintech listed on SGX and probably holds the record for one of the fastest IPO to suspend itself. In March 2018, the company started trading after its IPO at $0.26 per share after approval from SGX and MAS. On the first day itself, the share price fell below its IPO price and went on a downward spiral never to recover again. In Jan 2019, the CEO then resigned after discontentment and disagreement between controlling shareholders, following which it was discovered Ayondo had accounting issues in its financials during the years leading up to its IPO. The company has since suspended itself from trading in Feb 2019- less than 1 year since it IPO'd. Ironically Ayondo is not a local company but has operations only in Europe. Why did SGX and not MAS first ponder over why the company chose Singapore as a listing place instead of European exchanges like London or Germany where its business operations were?

Ezion, the once darling of Singapore oil & gas, underwent restructuring and supposedly announce that its restructuring had been finalised in Feb 2018. It applied for release from suspension and SGX approved the trading of its shares in April 2018. However fast forward to today, the company announced a u turn that its restructuring is not completed despite having a year and the company's share is once again suspended from trading. The only disclosure it made that restructuring was still pending was in December 2018!

Then we have Sinograndness, a food and beverage company. The company is currently languishing at an extremely low price, where its valuation is at a price book value of 0.06 times and PE of 0.6. I am not kidding! However the company has many severe irregularities. Firstly the company did not announce it had defaulted on the loans it received from a Thai listed company. However the Thai Listed company had announced it on their stock exchange on 8 January 2019. Within the next few days, Sinograndness share price fell on the SGX, however the company made no announcements. It was only after 1 week plus did the company finally announce on this default; probably due to the numerous number of complaints sent to SGX by members of the public (including me) on the lack of material disclosure. What is more suspicious is that the company has growing receivables year on year despite a constant revenue and is always deploying its free cash flow back into PPE without much growth.

What Singapore needs are more Investigators and not Analysts

In the past few months, MAS has announced government funds has been set aside to subsidise the salaries of financial analysts and listing fees in order to boost the stock market. In my opinion, MAS is barking up the wrong tree.

The reason for the tepid stock market is because (i) companies with questionable business models are allowed to list, (ii) companies with corporate governance and (iii) accounting irregularities are largely unchecked during their time of listing on the SGX. Such companies are highly susceptible to frauds and doing massive impairments when the writing has been on the wall over the years, prior to its impairment.

Furthermore due to poor investor protection and enforcement by both SGX and MAS to the above points, this results in low quality listings in Singapore. The lack of quality listings outside the STI top 30 and known listed GLCs is causing poor valuation and liquidity. To summarise, what we need is a stronger enforcement regime in Singapore to shore up investor sentiments - MAS and SGX should be channelling funds to hire more investigators or allow its investigation unit to have more leeway to investigate companies with questionable accounting and business models that are currently listed here. This will improve investor sentiment and in turn the stock market.

The Conflict of Interest of SGX

Unlike other countries, where the authority regulating stock listings is one entity (in US, it is the SEC) while the company which runs the stock exchange is a separate entity (NASDAQ, New York Stock Exchange etc); Singapore runs on a different model where the regulator and business of running the stock exchange is the same entity - SGX.

This is an open conflict of interest. How can SGX regulate companies when they are also dependent on these companies for revenue via allowing them to list and trade on their stock exchange. SGX would want as many companies as possible to list so as to earn more listing fees. 

In my opinion, Singapore should immediately separate the function of regulating listings away from SGX. A separate entity giving it to MAS or another authority should be done as in the examples of USA (SEC) or Japan (Securities and Exchange Surveillance Commission). It is bemusing that Singapore merges both regulatory and profit functions into SGX and hopes that the SGX could enforce companies and protect investors when it has to rely on companies for their revenue.

The continued lack of enforcement and subsequent lowered investor sentiment has been affecting the brokerage services of Singapore; as seen in the case of DBS vicker restructuring. Remisiers jobs are on the line as investors confidence falls.

How Singapore's Soverign Wealth Fund may cause further damage in the local Oil & Gas industry and eventually Job Losses

I have been reading up on the recent annual reports and financial companies as this is the usual time of statement release. There has been some interesting observation. However one of the most pertinent is what I am seeing is in the oil & gas sector. Below are just purely my views on what may happen in Singapore's Local Oil & gas industry and readers should not just depend on it for investment decisions.

Temasek is trying to profit from the situation and not acting as a backstop

This is my first and most important observation. While we have seen our sovereign wealth fund (SWF), Temasek, putting money into local oil & gas company recently; from what I am seeing Temasek is not acting as a backstop to stabilise the industry but are actually trying to profit from it. One observation is from Marco Polo Marine. On February 2018, it was announced Pavilion, a Temasek Subsidiary, had bought a stake in Marco Polo Marine (MPM):

However when MPM released its latest annual report in 2019 , Pavilion fund appears in the top 20 with a diminished stake from 5+% to 0.93%. All this points to the thinking that our SWF is not going to act as a backstop to the ongoing oil & gas weakness in Singapore. They are in the market to profit and not stabilise the industry which is an economic backbone to our country.

Annual Report showing Pavilion Stake in Marco Polo Marine has reduced from initial levels

I understand Pavilion too has bought a stake in Ezion which would have placed it in the top 20 with a 4.43% stake. I am willing to venture that in Ezion's latest annual report, Pavilion would have a much lower stake. Even accounting for the equity dilution etc, Pavilion stake in Ezion should not fall below 3%; however my sensing is that Pavilion has offloaded stake in Ezion to that of below 3% to profit on the situation 

Banks are probably spooked due to low oil prices and SWF's Actions

As seen from the many announcements made on the SGX, a few oil and gas companies are not receiving working capital funding from banks for their businesses. As AQ from valuebuddies has put it: 

Over the past 3yrs, Sam Tsien (OCBC CEO) has been consistently saying that he does not see a "recovery for the OSVs unless oil >60 consistently. This is significant not because he is a great forecaster, but cos he is OCBC's CEO i.e. banks will not lend for oil<60.

Brent bottomed out ~30 in 2016, spent 2017 in 50s, broke 60 in 2018 and hit 85 on 1Oct18. Analysts called for $200 oil.
2nd Oct - Jamal Kashoggi got murdered and oil fell back to 50s and is hovering ~60s now.

For until Trump shuts up and OPEC acts led by Saudis, oil will find it hard to rally, and thus banks will not lend. Unless O&G players intend to fund capex, working capital etc solely out of equity, demand will not pickup. i.e. it all boils down to oil price.

I suspect the consortium of banks were willing to refi Ezion in 2017-2018 thinking oil bottomed and perhaps thinking state support, but now reluctant since oil collapsed and Temasek ended up being flippers."

The persistently low oil prices and actions of our sovereign wealth fund is causing a credit crisis in our local oil and gas industry

What Happens Next?

Below is my own opinion. It is likely we are going to see more defaults among the SGX-listed companies. This will range from ASL marine asking for more haircut among bondholders to Falcon Energy probably undergoing another round of dilution. Indebted companies in the oil & gas will continue to flounder and more job will be lost.

It is true that oil prices has indeed recovered. But let's be honest, banks here are still not willing to lend. In 2008 our Sovereign wealth funds entered the financial markets and acted as back stopper, via buying and holding onto their stake. This sent a strong signal to the market the worst is over and banks started to lend again; however currently, the actions of our sovereign wealth funds being vultures attempting to profit, instead of a back stopper is likely to cause a credit event in the oil & gas industry. The worst is not over and we can expect more job losses in this industry. I too am bracing for more defaults and equity dilution in one of the largest industry in Singapore.

First Ship Lease Trust - Q4 earnings

FSL has released its Q4 results. All in all, a rather muted outlook. So here's a summary

Lower Cashflow generation

Year on Year cashflow generation ability has fallen to US$40 million range, previous year was US$51.4million Thereafter, this amount is likely to drop to US $20 million with the loss of the lucrative US$ 20 million evergreen charter come 2021.

Valuation based on Balance Sheet

On balance sheet, FSL has debts of $97 million 6.7% per annum interest and a 7% convertible bond of 6.3 million.

Using a simple cash flow projection, it is now estimated that FSL is likely to pay down this loan up to Year 2024. However this is unlikely to happen.

It seems FSL is planning to expand its fleet by adding brand new ships to its existing fleet. Cashflow wise, the conversion to interest only loans and that of convertible bonds ensures that the Trust will be able to finance the building of new ships which are to be delivered to the trust

This changes the entire situation and we will have to see how much yield does this new ships achieve when they are delivered to the fleet. Previously, I had valued FSL on an assumption that the trust will self-liquidate itself but things are now changing

How Hyflux was taken advantage by almost everyone

I am pretty sure many readers will be following the Hyflux restructuring.

In my view, it is unfortunate that many external  parties are taking advantage of the situation and in turn, making the 34,000 stakeholders of Hyflux less well of - many of whom are ordinary Singapore Citizens and retirees who have their CPF/SRS or even retirement money in Hyflux's financial Instruments. Chief of this is Salim or Sembcorp who have tried to swoop in to take advantage of having a controlling stake in Tuaspring, a jewel in Hyflux asset despite it being  claimed "toxic".

For basic background information, the current deal is that Salim (SMI) is offering $400 million in equity injection for 60% of Hyflux with the condition that junior bond creditors, perpetual and preference shares stakeholders relinquish their current debt claims. This puts Hyflux at an overall value of $667 million, without needing to pay financial expenditure and cash outlay to bond and perpetual/preference shareholders.

Profitability and Cashflow Generation of Tuaspring

In Hyflux annual report FY2017, Hyflux made a loss of $81.89 million and if we are to strip off the financial cost of $46.6 million, the plant only made losses of $35.2 million. Tuaspring's revenue is greatly dependent on the Uniform Selling Electricity Price in Singapore (USEP). Next, in Hyflux's CEO court affidavit on14 Feb 2018, she revealed that spark spreads has turned positive in February 2018. This meant revenue earned from USEP covered the operational cost before financing cost at Tuaspring. This was when USEP is $99.5/Mwh.The USEP value fluctuates according to the power demand and supply of Singapore's needs. Below is a summary of USEP prices and Tuaspring profitability:

2016- USEP was $63/Mwh-- Tuaspring made losses of $114.4 million and if financing cost is excluded, the plant made a loss of $64.5 million.

2017 USEP was $81/Mwh-- Tuaspring made losses of $81.8 million and if financing cost is excluded, the plant made a loss of $35.2 million

Feb 2018 USEP was $99.5/Mwh-- according to Hyflux's CEO affidavit, it's points to the fact that  Tuaspring would have made only slight losses ignoring financing cost.

If we are to observe for every increase of about $18 in USEP, Tuaspring generates about $30 million more in profitability. Based on current USEP prices of $105 (as of 12 Feb 2019). The plant is definitely profitable (before financing cost) and cash flow positive, in terms of operating cashflow.

Bidding Process Of Tuaspring

Unfortunately, despite the upturn in USEP prices of Tuaspring, the regulatory bidding process for Tuaspring affected Hyflux's attempts to maximise the value of Tuaspring for its shareholders. In Hyflux's reply to townhall question by investors, it is revealed that only 2 out of 8 interested bidders were approved by PUB to bid for Tuaspring. The end result was that Sembcorp bidded in the region of $500 million for Tuaspring which had a book value of $1.3 billion. This greatly eroded the value of the most valuable asset in Hyflux' book.

If we are to view the timeframe of 2018-2019, USEP prices have been generally stable in the region of $100/Mwh.This means a significant portion of its $1.3billion book value is realisable under current circumstance. Furthermore, as Genecos have now stopped their construction of more power plants in the face of a power overcapacity in Singapore, it is plausible that USEP will remain at this $100+ level or even drift higher over time. Hence in my view, the plant does have a value in the region of $1 billion

Given that there were also indicative bid received of $1.3 billion from UAE or PRC business parties, it is unfortunate that the full realisation of Tuaspring's value was curtailed by regulatory approval process. If all 8 bidders had been pre-approved by PUB, the likelihood is that Tuaspring would have received a higher bid than Sembcorp's lowball bid. To add salt to the wound, when PUB called for an open tender to build Tuaspring 2011, there were no restrictions and companies from various countries were allowed to bid for the construction of Tuaspring.

Salim's Low Ball Bid

Salim was not one of the two pre-approved bidders for Tuaspring, however what Salim did was to mount a takeover for the entire of Hyflux (including Tuaspring) under the condition that it will offer $400 million in equity injection for 60% of Hyflux with the condition that junior bond creditors, perpetual and preference shares stakeholders relinquish their current debt claims. This put Hyflux at the value of $667 million.

If we are to assume that the rest of Hyflux's operation is of zero value and that Tuaspring contributes to the entire profitability of Hyflux. Paying $667 million for Tuaspring is a steal because of the current USEP environment etc. This is indeed higher than Sembcorp's bid of $500+ million, but in my view is an offer to take advantage of Hyflux's financial malaise.

Being Taken Advantage of

Undoubtedly, if Hyflux had not been forced into a financial corner, the company would have realised most of the $1.3 billion in book value throughout Tuaspring's remaining lease. Because of the regulatory approval process which only allowed 2 out of the 8 interested parties to bid, it gave Sembcorp the opportunity to take advantage of Hyflux, who wanted to have Tuaspring to reap the plant economic value; after this failed, it was Salim's turn to attempt to take advantage of Hyflux's financial predicament.

Thus, many retirees and other stakeholders face the rude shock of losing close to 90% of what they have put into supposedly low risk financial instruments. This is the cruel reality of the world where people take advantage of the failings of others. Things don't seem fair.

Why Hyflux Perpetual and Preference Holders should Vote "No" to the Restructuring.

Hyflux has released its offer to bondholder, perpetual holders towards restructuring of the company after the Tuaspring's offer. 

Details of Offer for Perps and Pref Shareholders

To summarise, Hyflux has offered to exchange the $900 million in value for Perpetuals and Preference shareholders into 10.26% of the restructured company + a $27 million cash repayment.

Based on Salim action of injecting $400 million to obtain 60% of the restructured company, it can be seen that 10.26% of the company, worth roughly $67 million, was given to perpetual and preference shareholders. This means Preference and perpetuals holders will get about $94 million back for their $900 million

While the CEO and board of directors has made a goodwill gesture by giving their shares to retail holders, I think the current deal is not good to the current group of perpetual and preference holders and should be voted against. 

Voting "No" to the restructuring may result in getting more capital back

In Hyflux's reply to the Townhall questions, it was singled out that the company received an indicative bid which valued Tuaspring at $1.4 Billion (inclusive of Maybank's $518 million debt attached to Tuaspring) from parties of UAE or China, this is shown in the screenshot below, source

Hyflux Answer to the Townhall Question on Tuaspring Value

As mentioned, only two companies were pre-approved by PUB to bid and this resulted in Sembcorp submitting a bid less than $518 million (inclusive of Maybank's $500+ mil debt). Judging by the description of events, if more bidders had been pre-approved by PUB, Tuaspring could potentially fetch up to $900 million should Tuaspring be put into the market again.

Secondly, it is worth noting that in recent times, USEP in Singapore had been inching upwards and this means in future, Tuaspring will be worth more in value. The majority of Tuaspring's revenue is derived from selling electricity (via USEP); and since 2015, USEP prices in Singapore has increased from $60+ to that in the region of $110. The near doubling in electricity price in Singapore means a potential re rating of Tuaspring value and  possible realisation of a larger proportion of the stated $1 billion plus book value valuation.

To perpetual and preferences shareholders, an increase of $400-500 million in realisable value is a significant amount of money and points to a potential increase in capital recovered. Even if there are only given 25% of the extra money, it will mean a doubling in amount of capital they can recover.

During the townhall, Perpetual and Preference shareholders were offered the worst case scenario where in the event of liquidation they would receive nothing at all. However, this might not be true given that we are now aware that the value of Tuaspring is more than what Sembcorp has offered. Due to the restrictions imposed by PUB and the need for them to approve the buyers,  this has resulted in a massive loss to perpetual and preference shareholders 

It is strongly advised that the first offer be rejected. In my own opinion, a minimal 20% recovery rate is a possibility, considering all known facts