Coronavirus (COVID-19) Presents An Opportunity For Cheap SIA Rights/Shares But Is It A Good Deal?

SIA halted yesterday and has resumed today with an announcement for more cash through a mixture of rights issue and convertible bonds. A few friends came asking if it is attractive (opportunity to enter at $3) since it is our national airlines with the government backing/support right? I glanced through the announcement, there was no fundamentals/numbers presented, so I decided to calculate them instead and have extracted the important information below.

The rights shares will be issued at an issue price of S$3.00 for each Rights Share (the “Issue Price of the Rights Shares”) on the basis of three (3) Rights Shares for every two (2) existing ordinary shares.

The Issue Price of the Rights Shares represents a discount of approximately 53.8 per cent. to the last transacted price of the Shares on the Official List of the SGX-ST of S$6.50 on 25 March 2020, being the last trading day on which trades were done on the Shares prior to this announcement, and a discount of approximately 31.8 per cent. to the theoretical ex-rights price (“TERP”), of S$4.40 per Share.

Before I even start the calculations, a general rule of thumb is that heavily discounted rights issue is a red flag. Regular readers will know that I have a rights issue calculator so let's just use that - KPO Rights Issue Calculator but we will need a few information (NAV, DPU, etc.).

The latest NAV I found was $10.25 from their FY2019-2020 Q3 presentation slide.

The current number of issued shares is 1,183,665,134 based on their FY2018-2019 Annual Report. We need this number to calculate the new NAV and PB after the rights issue.

If you are wondering how the theoretical ex-rights price (TERP) is calculated, simply take the existing number of shares multiply by the current price and add the new rights/shares that will be issued multiply by the issued price divided by the total number of shares. Similarly, we can use that to calculate the new estimated NAV which fell from $10.25 to $4.09! Having said that, the actual NAV is probably lower because they took on more debts, hence highly likely to be < $4.

Now we enter the relevant information to the calculator to determine if it is a good deal. What is a good deal? I look at it in 2 ways - yield on cost and PB on cost. Assuming that there is no rights issue and SIA does not have any cash flow issue, based on the current/entry price of $6.30, my yield would have been 4.7% and the PB would have been 0.615.

However, after the rights issue, my assumption that dividends will remain constant (we know that is definitely not happening. In fact, there will probably be no dividend this year) which would be diluted due to more shares meant a drop of dividend yield to ~1-2%. In addition, with the significant drop in NAV, without oversubscribing the rights issue, I would end up buying the shares at a premium or much more than the initial 0.615 PB. As you can see, the calculator is simply screaming bad deal everywhere.

I would also like to point out that the above calculations did not take into account the convertible bonds. To put it simply, it means that the bonds can be converted into shares which means more dilution in the future...

Last but not least, if we were to look into the purpose of the cash call, unlike REITs, SIA is not expanding the business or buying more property, the cash is used for their operating expenses and to repay other debts. If the coronavirus (COVID-19) pandemic does not end soon, with fixed operating cost and no way to generate revenue, will history repeats itself (more rights issue)? Sorry to dash some of your hopes but SIA has been trading around its NAV historically, hence it will never go back to $10 or anywhere near it anymore with this rights issue.

Yes, we love playing the miles game to take SIA First/Suite/Business flight but definitely not as a shareholder. Personally, I would rather put my precious cash in REITs now. On the bright side, this is a renounceable rights issue which means you can sell the rights or sell the shares now.

All the best to the shareholders!

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Soilbuild Business Space REIT (Not) Bad Preferential Offering

I received an SMS earlier today from SCB - corporate action.

The first thing that came to mind was will this be dilutive or accretive? You should be able to guess it from the title of my post. To be honest, I have not been keeping up with the market news so this is new to me. Went to dig through the announcement and wanted to do a quick summary.

Soilbuild REIT will be acquiring a new Grade A office building in Australia - 25 Grenfell Street, Adelaide for A$134.22 million (S$127.51 million) but will be paying approximately A$142.01 million (S$134.91 million) due to various fees, out of which S$101.8 million will be raised through this preferential offering.
Every 18 New Units will be issued for every 100 existing units in Soilbuild REIT (the “Units”) held as at 5.00 p.m. on Thursday, 29 August 2019 to Eligible Unitholders (as defined herein) (fractions of a New Unit to be disregarded) at an issue price of S$0.530 per New Unit.

Let's take a look at the illustrated Pro Forma DPU and NAV. Focus on Scenario B and also note that these are illustrated numbers assuming acquisition happened in 2018.

Decreased in DPU.

Decreased in NAV. Only OUE REIT can do better worst? If we were to look passed the DPU and NAV dilution, this may actually be a decent/good move for Soilbuild REIT...

Let's face it, Soilbuild REIT's DPU has been declining over the years after facing a few defaults (NK Ingredients and Technics Oil and Gas), decreased occupancy and negative rental reversions. As a result, this preferential offering has minimum damage but actually improves its portfolio (out of Singapore + Grade A office building vs its existing industrial buildings).

In my 5 minutes researching time, I believe Soilbuild did not overpay for the building. Credit Suisse put it up for sale earlier this year and it was speculated to be worth as much as A$150 million - Credit Suisse to check out of Adelaide tower.

Their latest 1H financial results are already showing clear signs of declining DPU by another ~10%. Assuming we extrapolate the DPU for FY 2019, it will be 4.628. At an issue price of $0.53, that translates to 8.7% dividend yield for an existing shareholder. If you choose not to subscribe, you will just be diluted and since this is a non-renounceable offering, you cannot even sell the rights. In another word, you are stuck. Just exercise it :)

On the bright side, depending on your entry/average price, this may not be a bad offer for you. In my case, my average price was very high ($0.701) and it became accretive if the calculations are based on cost/average price. Needless to say, I will exercise all of them and apply in excess!

You can use my google spreadsheet/calculator to see how would this rights issue work out for you - KPO Rights Issue Calculator

Fun fact: Soilbuild REIT is buying the building from Credit Suisse who bought the at A$125 million in 2016. They made A$9 million in just 3 years!

References:
- PROPOSED ACQUISITION OF 25 GRENFELL STREET, ADELAIDE, AUSTRALIA
- LAUNCH OF FULLY UNDERWRITTEN PREFERENTIAL OFFERING TO RAISE GROSS PROCEEDS OF APPROXIMATELY S$101.8 MILLION
- 25 Grenfell St, Adelaide CBD, sells for $125 million to Credit Suisse

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OUE Commercial REIT Rights Issue - Very Very Very Bad Deal

If you are an existing shareholder, you should be aware of the proposed acquisition of the office components of OUE Downtown. You might be aware that I actually do like rights issue as they present an opportunity to accumulate more shares at a lower price. However, I have sold all my OUE Commercial REIT today (8,000 units @ $0.605) and these are the reasons why I will not be participating this extremely bad deal (at least for my case).

Some important numbers to take note:
- 83 rights units for every 100 existing units
- issue price of $0.456
- TERP of $0.570
- Pro Forma DPU of $0.0354 vs Current DPU of $0.0467
- Pro Forma NAV of $0.70 vs Current NAV of $0.91

My average price was $0.70 and before the rights issue, the yield on cost was around 6.67% and with a NAV of $0.91, it was trading at >20% discount. However, after the rights issue, even with a huge oversubscription, I can no longer get back the same yield. Besides not being yield accretive, this proposed acquisition/rights issue reduces the NAV significantly! You can use my google spreadsheet/calculator to see how would this rights issue work out for you - KPO Rights Issue Calculator. Just fill in those in yellow and the rest are formula-linked.

OUE Commercial REIT IPO in 2014 and based on historical data since then, it has been trading at mean/median PB of 0.78/0.75 and mean/median dividend yield of 6.48%/6.59%. What does that mean? After the rights issue, with a lower NAV and lower DPU, the price will have to fall further in order for it to reach its mean/median PB and dividend yield. My REIT Scanner is predicting $0.54 which is lower than the TERP of $0.57.

Example:
Before the rights issue was announced, it was still trading at around $0.68 and with a NAV of $0.91, the PB would be around 0.747. Take this PB and multiply by the new NAV of $0.70 and we will arrive at the estimated price of $0.523.

In addition, note the falling NAV and DPU over the years since 2014. There was some safety margin when my entry price was way below the NAV but with the rights issue, it would simply disappear! One thing which I cannot understand is if there is a need to issue so many rights/shares and price it at such a low price. Theoretically, they can issue lesser rights at a higher price (e.g. $0.60 as compared to $0.68) to achieve the same result + the NAV/DPU would not have dropped as much @_@

On the bright side, after holding it for ~1,200 days (> 3 years) and including all the dividends collected over the years, the total return is 8.5% and the annualized return is 2.9%. Should have just top up this amount to CPF SA 3 years ago instead.

Good luck to the existing shareholders! Those that are planning to enter, my advise is to avoid it first and wait till it falls further. This rights issue is not attractive at all. Do not make the same mistake as I did previously - Mistake on Rights Issue - CapitaLand Commercial Trust.

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KPO Analysis on Ascott Residence Trust (REIT) Rights Issue

Ascott Residence Trust (REIT) announce 29 rights units for every 100 existing units at a discounted price of $0.919 per share few weeks back to raise gross proceeds of approximately S$442.7 million. If you do not know what is a rights issue, you can read about it here. It is one of the way the company raise more fund to do all sort of things (acquire more property, expand business, pay debt, etc.).

People generally do not like rights issue because it would dilute the equity/value that belongs to existing shareholders and it feels like the company is asking for more cash/taking the dividend back. KPO is rather neutral (secretly likes it), I guess it depends on each and every individual situation. For example, rights issue would not be good for people at later stage of their life, people using CPF or people having tight cash flow.

Let's take a look at the numbers:

Latest Annual Report 2016 (’000):
Total Assets = 4,791,281
Total Liabilities = 2,109,018
Unitholders' Funds = 2,200,625
Shares Outstanding = 1,653,471

Net Asset Value (NAV) per Unit attributable to Unitholders = 1.33

My average price for Ascott REIT is $1.188 for 5000 units. There is room (~11.9%) for the share price to move nearer to its NAV and assuming DPU (Dividend Per Unit) is around $0.0743 (decided to be more conservative by using the lower DPU as estimate after dilution), I will be getting around 6.3% dividend yield.

After Rights Issue (’000):
Total Assets = 4,791,281 + 442,700 = 5,233,981
Total Liabilities = 2,109,018

Unitholders' Funds = 2,200,625 + 442,700 = 2,643,325
Shares Outstanding = 1,653,471 + 481,688 = 2,135,159 2,136,615(4)

Net Asset Value (NAV) per Unit attributable to Unitholders = 1.23

There is a fine print!

(4) Includes adjustments to include approximately 0.9 million new Units issued as payment of the acquisition fee and Manager’s management fees for the German Acquisitions. The Manager’s acquisition fee was assumed to be paid in Units based on an issue price of S$1.19 on 1 January 2016. The Units issued as payment of the Manager’s fees were assumed to be issued at the same prices as those that were actually issued as payment for management fees for the existing properties for FY2016.

Hmm. They paid themselves around S$1 million (0.9 million x 1.19) for acquiring the German asset and diluting our shares... I guess this could be the reason as to why B said they are aggressive? 

Assuming if I were to subscribe for the rights:

My new average price would be (5000*1.188 + 1450*0.919)/(5000+1450) = $1.12 with about 9.8% room for share price to hit NAV and the new dividend yield would be around 6.6%.

KPO likes to buy things that are in discount and taking free GrabShare ride in KL but the one thing KPO really like about rights issue is that I get "buy" more shares without paying any commission as well as over subscribe for more discounted shares!!

Assuming if I were to over subscribe by double of my rights:

Average Price = (5000*1.188 + 2900*0.919)/(5000+2900) = $1.09 with about 12% discount from NAV and dividend yield of 6.8%. The number gets better and better if you are given more discounted units.

Given that the current market price is at $1.065, I am sitting at a loss of -$395.62 (-6.66%) :'( I will subscribe to my rights and over subscribe by at least 2850 units to turn it green!