Rowsley (Remisier King Midas Touch)

The Remisier King is waving his Midas touch yet again. His earlier moves have so far been disappointing. The solar story was full of promise with supposedly guaranteed profits seems to be now just a castle in the sky situation. Next was the Iskander grand plan which seems to have wind down given the huge oversupply situation.

Currently, Rowsley operations are mainly in the hospitality business in UK, their architect business through RSP and their real estate development in Vantage Bay Healthcare City.

With the recent deal of injecting Thomson Medical and TMC Life Sciences, could it be the winning touch for a sustainable uptrend in the stock?

Let's look at the numbers. Rowsley is going to purchase Mr Lim's stake of Thomson Medical and TMC Life Sciences at 1.9 billion sgd dollars. The takeover of Thomson Medical in 2010 was at a price of 513 million dollars and at a valuation of around 3.4X book value and 30x PE. TMC Life Sciences are currently trading at a PE of 66X.

In a Business Times article dated September 13th 2016, it was revealed that the revenue growth of Thomson Medical went up by almost a fold and assuming profits went up by the same rate. The current state of Thomson Medical should be worth close to 1 billion with the same valuation that Mr Lim took over considering the growth of their earnings. It seems to be a fair value as Raffles Medical is trading at 30x PE and 3.2x book value currently. Also, in the article, the CEO was saying if they were to list, they are able to get a valuation of 2 to 3 billion dollars but they are aiming for a 5 billion dollars valuation. I am not sure how did he get such a valuation unless they are intending to list at an inflated valuation and there are takers for it. 

Here is the article:

http://www.businesstimes.com.sg/companies-markets/thomson-medical-eyes-spore-listing-in-near-term-0

For TMC Life Sciences, it is trading at a PE of 66X which is even higher than IHH of 56X, so i presume Rowsley is paying a high price for this asset and Mr Lim's stake will be worth around 320 million Sgd dollars based on their current market capitalization.

Doing up the sums, a fair value for the assets could be around 1.3 billion dollars but he is injecting it in at a valuation of 1.9 billion dollars. The deal is structured by issuing 25.3 billion of Rowsley shares to Mr Lim at a price of $0.075. Given the recent decline in healthcare stocks, perhaps it was an optimal move to try to do the deal at a good valuation.

Valuation

To make things simplistic, we will assume that 1.9 billion dollars is a fair value (After my analysis, I think Rowsley overpaid thou) for the assets and assuming their current business will be trading at their book value (Around 400 million) given that it is loss making. We will have total shares of 30.5 billion excluding the warrants that will be issued with the deal. The valuation of Rowsley should be around $0.0755 (1.9 billion plus 400 million divided by 30.5 billion). Their warrants are going to be issue at exercise price of 9 cents and 12 cents for piggyback version. Currently, the price of Rowsley seems to be defying my valuation. 

As with all the Midas touches so far, the price of Rowsley have shot up tremendously and eventually came back to reality. Unless, there are further positive developments in their existing business or the profits or growth prospects of Thomson Medical are way above my estimates. My view is at best Rowsley is worth 10 to 12 cents and this valuation is consider rich.

Do take note, lots of assumptions goes into this valuation and so kindly do your own due diligence. I would term this as a trading stock at the moment and usually trading stocks do not follow fundamentals when the animal spirits are high. Do have a proper risk management in place.

Disclaimer:

The information contained in this publication is provided to you for general information only and is not intended to nor will it create/induce the creation of any binding legal relations. The information or opinions provided do not constitute investment advice, a recommendation, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person or group of persons acting on this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise.

You may wish to obtain advice from a financial adviser before making a commitment to purchase any of the investment products mentioned herein. In the event that you choose not to obtain advice from a financial adviser, you should assess and consider whether the investment product is suitable for you before proceeding to invest.

Any views, opinions, references or other statements or facts provided in this publication are personal views and shall disclaim any liability for damages resulting from errors and omissions contained.

US Market- On a Roll?

With the US indices (Dow and S&P) scaling all time highs, the Trump presidency has led to a surprisingly positive outcome for the equity markets. In a recent seminar, I was going through the US market outlook and i summed it up through the following points:

1) Valuation
2) Quantitative Easing Ended
3) Trumpnomics
4) Debt Levels
5) Monetary Policies
6) Global Economic Conditions
7) Technical Charts 

Valuation

Firstly, valuation of the S&P index is at the higher end of their recent range (2006 to 2016) and their PE is around 22 at the moment. We are actually not far off from the high (PE:24) during the Lehman crisis in 2008. Looking at the Price to Book Ratio, we are near 3 which was last registered in 2008 before the huge crash. Last but not least, looking at the Cyclically Adjusted Price Earnings Ratio which could smooth out outliers, we are at around 30 which is the highest level comparable to the levels before the Great Depression in 1928-1930 period. It however did reach close to 45 during the Dotcom Bubble. Enclosed are supporting charts to justify my analysis. In summary, the US indices definitely do not seem like a bargain from a valuation aspect.

Source: Bloomberg S&P Historical PE Ratio 

Source: Bloomberg S&P Historical Price to Book Ratio

Source: www.multpl.com

Quantitive Easing Ended. Start of a new era?

The quantitative easing (aka fossil fuel that has been driving the Dow Jones Index up from their abyss after Lehman crisis till 2015) has since taken a back seat. Now replacing it and driving the index higher in recent times will be Trumpnomics. 

Trumpnomics (explained in 4 parts):

1) Taxes- Reduction in Corporate Tax and Repatriation Tax Consession

With reduction in corporate taxes and repatriation tax concession (Companies like Google and Apple have lots of funds stash in overseas tax haven places), it will drive up business and investment activities and hopefully led to a multiplier effect that will out weigh the reduction in tax revenues. However, my personal belief is that big corporations would not take the bait and repatriate all funds back as the regulation could easily change if Trump do not get reelected in the future and they would not want the US authorities to have full disclosure of their overseas funds.

2) Fiscal Policies- Infrastructure Spending with notable investment such as "Great Wall of America"

There have been plans to spend close to 1 trillion dollars on infrastructure ( ie. revitalize America's aging roads, bridges, railways and airports) over a 10 year period to create jobs and sustainable growth for the US economy.

3) America First- Trade Protectionist Measure to drive up sectors such as Car Manufacturing

There have been concrete plans to bring back jobs such as car manufacturing back to US and if necessary, trade tariffs to protect the industry. There are talks with corporate honchos to bring jobs and investments to America. Companies such as General Motors, Hyundai, Walmart, Bayer AG and Alibaba have already committed to step up investments in US. My own thoughts are trade protectionist measure tends to work in the short run and might not be sustainable. According to Adam Smith’s "Invisible Hand Theory", it is best to let countries focus on what they are most efficient in producing and it will lead to an increase in overall output. Rather than sprucing up industries which US does not have a competitive advantage, they should invest into skill training and migrating workers to other industries which US has an edge or the indispensable services industries.

4) Dodd Frank - To deregulate or to regulate?

There have been talks that there will be deregulation of the Dodd Frank Act which was enacted after the Lehman crisis. Dodd Frank Act has consumers’ interests at heart, this in turn made it extremely onerous for banks and thus affected their bottom-line. The talk of de-regulation had US financials rallied after Trump was elected. Nevertheless, this would be easier said than done - this can’t be just a one man show and it will need Congress' approval which would take a long time before they can come up with some consensus.

Debt Levels and Monetary Policy

Looking at Margin debt and Government debt level, the US is currently on a high note at around 500 billion dollars and 19 trillion dollars (106 percent to GDP) respectively. The highest level registered was around 120 percent during the 1940s. We are facing the passing of the lifting of the debt ceiling on March 15th which has been set at around 20 trillion dollars and if the debt ceiling is not lifted, the US government could not borrow anymore.

With such a huge debt load and inflation within control, I feel that the US Federal reserve would not be in a rush to lift interest rates aggressively as a lower interest would make it easier to pare down the debt level. Nonetheless, the guidance from Fed will be for 3 rate hikes this year. In general, lower interest rate will be good for the equities markets but a gradual increase would signify that the economy is doing well. What we do not wish to see is an aggressive hikes policy such as during the late 1990s under Greenspan period.

Source: www.economicshelp.org

Source:Dshort.com

Source: CNBC

Global Economic Conditions

Global market conditions have been pretty stagnant and we are looking at around 1-2 percent growth for most regions whereby China has also slowed their growth to around the 6 percent region. Moreover with America First Policy, growth in other regions seem to remain status quo. Thus given such a backdrop, there is no real catalyst for sustainable growth Ex America regions.

Technical Charts

Looking at the Technical Charts, it certainly is a on a good uptrend and having breach their all time high of around 18,500, it seems the stage is set for further upside. Using Fibonaci projection, we could be looking at a potential target of 22,000 for Dow Jones in the near future.

Source: IT-Finance.com

In short, weighing the different factors, I will be cautiously bullish and choice entry level will around 19,500-20,000 levels and a break below 18,500 would require us to revisit our bullish thesis. However, is this going to lead to multi years of bull run? My thoughts will be that the Trump policies are pretty short term positive in nature. At this juncture, I doubt it will pan out well as protectionist measures are usually not effective in the long haul. Therefore, there might be another bullish leg but the indices seems to have priced in most of the positives at this moment.

Disclaimer:
The information contained in this publication is provided to you for general information only and is not intended to nor will it create/induce the creation of any binding legal relations. The information or opinions provided do not constitute investment advice, a recommendation, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person or group of persons acting on this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise.

You may wish to obtain advice from a financial adviser before making a commitment to purchase any of the investment products mentioned herein. In the event that you choose not to obtain advice from a financial adviser, you should assess and consider whether the investment product is suitable for you before proceeding to invest.

Any views, opinions, references or other statements or facts provided in this publication are personal views and shall disclaim any liability for damages resulting from errors and omissions contained.

Sabana Reit (On A Skyfall)

Source: NextView 

Looking at the price action of Sabana Reit, I was quite astonished by the steep fall whereby their peak was around $1.20 in 2013 and is currently trading at $0.35. It have been on a steady decline since 2013.

Part of the recent fall is due to a rights issue of 42 for 100 at $0.258 which will be used to finance the purchase of 3 new industrial properties.

Background:
Sabana Reit was listed in 2010 at an IPO price of 1.05. It plunged on opening and was trading as low as $0.75 before recovering where income generation assets became a favorite asset class in the late 2012 to 2013 period. Their sponsor and manager is the Vibrant Group which is previously Freight Links [Freight Links Express Holdings Limited (now known as “Vibrant Group Limited”) is an investment holding company established in 1986 and listed on the SGX-ST in 1995. Headquartered in Singapore, the Group has over time grown its business from that of being an integrated logistics solution provider offering a comprehensive range of integrated logistics services including international freight forwarding, chemical storage and logistics, warehousing & distribution and record management ("Freight and Logistics Business") to include the business of fund management, financial leasing services and asset and trust management services ("Financial Services Business"), and the business of property management services as well as real estate development and investment ("Real Estate Business")]

Sabana holds 23 industrial properties if all their recent acquisition and disposal across Singapore goes through and will manage them in line with Islamic principles. To be Shari’ah Compliant, the premises cannot be used for gambling or the production of pork or alcohol for human consumption.

Ratios:
Price to book: 0.53
Price Earnings Ratio: Negative (Making a loss in terms of Earnings per unit)
Dividend Yield: 10.7% (Based on last year payout)
Net Debt to Equity: 0.7
Current Ratio: 0.23
Price to free cash flow: 11
Source: Shareinvestor.com

Analysis:
Sabana Reit was having good occupancy rate of 100% since listing till around Q3 of 2013. Occupancy rate started to fall to high 80s and 90 percent level since then which affected their distribution per unit. The distribution in 2012 was 9.3 cents and the payout for 2016 was 4.7 cents. One of the reasons for the fall in distribution could be that more master leases were converted to multi tenanted leases as according to JTC ruling, master lessor have to take up 70 percent of the lettable space. Therefore, it is tough to get master leases into the portfolio. Currently the ratio is around 44% master leases and 56% multi tenanted leases. Moreover, with oversupply of industrial spaces and competition from Iskander region coupled with bleak economic conditions, it will be challenging to get tenants and rental rates are likely to revise downwards. Currently, multi tenanted leases occupancy rate is at around 82%.

Their average weighted lease for master leases is around 2.5 years and for multi tenancies is at around 2.6 years. Their average weighted tenor of their loans is at 2.1 years with average financing cost at around 4.1%. We could foresee there could be lots of refinancing needs ahead and in a rising interest rate environment and with a deteriorating industry landscape, the financing cost could see a steeper increase in the near future. The leases renewal could also be an issue given the competition and the sponsor is taking up just around 15% of the lettable space.

Their earnings per unit were negative since 2015 but they managed to generate free cash flow through sale of properties and factoring in revaluation losses which allowed them to distribute dividends. Going forward, they have to ramp up their occupancy rate to be able to maintain their distribution per unit which I feel would be a challenge and thus there could be further downside to their distribution per unit.

Conclusion:
The lack of a strong sponsor is a crucial factor for the confidence level and investment merits in Sabana Reit. Given the general outlook and oversupply situation, we might have to monitor the occupancy rate for multi tenanted leases and the refinancing rate for their debt (An indicative based on my checks, the bonds expiring in 2018 is having a yield to maturity of around 5.5%) before we might want to consider an investment in this Reit. For better alternatives in the industrial space, we could look at Ascendas Reit with assets such as Science Park which is their niche and is therefore relatively more resilient. Also, we can look at Frasers Logistics Trust with assets based in Australia that could see a potential good upside if the commodities recovery is intact.

Disclaimer:
The information contained in this publication is provided to you for general information only and is not intended to nor will it create/induce the creation of any binding legal relations. The information or opinions provided do not constitute investment advice, a recommendation, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person or group of persons acting on this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise.

You may wish to obtain advice from a financial adviser before making a commitment to purchase any of the investment products mentioned herein. In the event that you choose not to obtain advice from a financial adviser, you should assess and consider whether the investment product is suitable for you before proceeding to invest.

Any views, opinions, references or other statements or facts provided in this publication are personal views and shall disclaim any liability for damages resulting from errors and omissions contained.