Brief Singapore: REIT Discover: Sasseur Sizzles with 9% Yield and more

In this briefing:

1. REIT Discover: Sasseur Sizzles with 9% Yield
2. The Week that Was in ASEAN@Smartkarma – Widodo Leads, a Retail Conundrum, and Indonesian E-Commerce
3. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive
4. Last Week in Event SPACE: MYOB, Lynas, Versum, Jardines

1. REIT Discover: Sasseur Sizzles with 9% Yield

REIT Discover is an insight series featuring under-researched and off-the-radar REITs in an attempt to identify hidden gems and gems in-the-making. In this issue, we follow up on the first China outlet mall REIT listed in Singapore, Sasseur Real Estate Investment (SASSR SP) , whose share price is down 7.5% from its IPO price of S$0.80 since its debut on 28 March 2018. Its distributable income exceeded its IPO forecast for FY2018. Annualized distribution per unit (DPU) yield for FY2018 was 9.1% based on current price. Moving forward, FY2019 DPU projection is S$0.06, translating into a DPU yield of 8.1% compared to FY2018. It is likely that the DPU for the projection years are conservative and the REIT manager will endeavour to beat the IPO forecast for FY2019 and even the annualized DPU for FY2018.

Sasseur REIT’s business model differs from other typical retail malls which lease out assets and receive rental income based on an agreed rental rate. Instead, it has structured a complex form of master lease, called the Entrusted Management Agreement (EMA), where it received a percentage of tenants’ sales turnover as the rental. As such, income generated its portfolio of properties are mainly sales-driven and hence may be unstable.

Essentially, the EMA encompasses a set of obligations that binds the sponsor to a two-year income support to Sasseur REIT in exchange for a long-term master lease which limits DPU upside. This is because a large chunk of the portfolio’s potential revenue growth will go to the sponsor. 

We are not saying this is all bad; the master lease under the EMA provides income stability to the REIT given that gross revenue is sales-driven. Rather, we acknowledge the resilience of the outlet mall business model as seen from the long and successful track record of Tanger Factory Outlet Centers Inc (SKT US) in the United States and strong growth of Bailian Group’s outlet business in China.  What is striking is China’s small outlet market size relatively to the mature regions despite the sheer size of its growing middle to upper-middle class population. This suggests that China’s outlet industry could grow significantly.

At 29% gearing ratio, Sasseur REIT has additional debt headroom of S$283mn to tap on its right-of-first-refusal (ROFR) pipeline of assets to grow its S$1.5bn initial portfolio. Even without inorganic growth, two of its properties, representing 43% of total portfolio valuation, are relatively new assets in their third year of operation, suggesting strong potential for growth. Sasseur REIT looks promising based its results in the last three quarters. Sasseur REIT’s premium P/NAV of 1.03x at the point of listing was surprisingly expensive given that its properties are non-prime outlet malls in China’s Tier-Two cities. P/NAV has since fallen to an attractive 0.8x.  

2. The Week that Was in ASEAN@Smartkarma – Widodo Leads, a Retail Conundrum, and Indonesian E-Commerce

Macro Insights

In Politics, Uncertainty and Bad Policy: The Third Wheels of Profits and the Investment Cycle, Dr. Jim Walker discusses the outlook for Asian Markets in light of a rising profit upcycle. 

In Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested, CrossASEAN Insight Provider Kevin O’Rourke analyses the most important political and economic developments over the past week. 

In Philippines: February Inflation Eases Back to BSP’s Inflation Target Range, Jun Trinidad comments on the latest inflation numbers out of the Philippines. 

Equity Bottom-Up Insights

In Matahari Department Store (LPPF IJ) – A Retail Conundrum,  CrossASEAN Insight provider Angus Mackintosh circles back to this beaten up retailer post FY18 results, which represents a retail conundrum. 

In PT Bank Rakyat Indonesia (Persero): Rather Rich for a Bargain Hunter, Paul Hollingworth takes a close look at Indonesia’sbiggest micro-lender. Bank Rakyat Indonesia Perser (BBRI IJ) seems to be doing a great deal right to perhaps satisfy a punchy valuation. 

In OCBC – Difficult to Square, Daniel Tabbush zooms in on this Singapore lender and finds it less than attractive with some conflicting numbers. 

In MINT’s First Post-Acquisition Update, our Thai Guru Athaporn Arayasantiparb, CFA circles back to leading Thai hotel operator Minor International (MINT TB) plus updates on Bangkok Dec Con (BKD TB). 

In Delta Electronics (DELTA TB): Little Option but to Accept the Tender Offer, Arun George revisits Delta Electronics (2308 TT) and its ongoing takeover situation. 

In Sea Ltd Placement – Capitalizing on Momentum, Zhen Zhou, Toh looks at this internet retailer following the announcement of a placement, which is larger than its IPO. 

In Sea Ltd: Follow-On Public Offering an Opportunistic Fundraising?, Johannes Salim, CFA circles back to Sea Ltd (SE US) following up on his recent Insight on the company. 

In Sea Ltd (SE US): Placement a Good Opportunity to Enter an Attractive Story, Arun George comments on the recent placement by the company. 

In Sea Ltd (SE US): Placing Price Leaves Money on the Table, Arun George revisits the company following confirmation of the price and size of its placement. 

In Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?, Rickin Thakrar takes a more negative stance referring to earlier insights from Arun George. 

In RHB Bank Placement – A Little Less Surprising but Little Bit Bigger Deal, Sumeet Singh zeros in on the latest placement in RHB Bank Bhd (RHBBANK MK).  

In M: Trimmed 2019-20E Earnings Forecast by 12% and 19%, our friends at Country Group revisit Mk Restaurants Group (M TB) post the company’s results. 

In Accordia Golf Trust (AGT): Buy but Please Consider This…, Henry Soediarko zeros in on this golf play. 

Sector and Thematic Insights

In Thai Telcos Struggle as All Three Seek to Gain Share While Spectrum Risk Looms Again in 2019., our friend at New Street Research revisit the Thai Telecom sector following recent results. 

In Vietnam Market Update: Deep Value Found in Salient Themes, Frontiersman Dylan Waller seeks out attractive investment themes in Vietnam. 

3. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive

• Capital flows are strongly Granger causal
• Gross capital flows lead World shipping activity by 4 months
• Capital flows have been slowly rising since June 2018: in February they jumped
• Reinforces out pro-Asia and pro-China investment message

4. Last Week in Event SPACE: MYOB, Lynas, Versum, Jardines

Last Week in Event SPACE …

• Not a bad reward/risk as Manikay greenmails KKR’s MYOB Group Ltd (MYO AU) offer.
• If the Malaysian government impasse cannot be resolved, Lynas Corp Ltd (LYC AU) will be left holding just a bunch of rocks.
• Antitrust issues are not deal breakers, while the strategic logic of the Versum Materials (VSM US) acquisition for Merck KGaA (MRK GY) is compelling.
• The ongoing circularity creep as Jardine Matheson Hldgs (JM SP) increases its stake in Jardine Strategic Hldgs (JS SP).
• Plus other events, CCASS movements and upcoming key dates for M&A transactions.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

MYOB Group Ltd (MYO AU) (Mkt Cap: $1.4bn; Liquidity: $10mn)

While not new news, US-based hedge fund – somewhat well-known for being involved in M&A situations – started accumulating a position in MYOB in January and has now reached a stake of 11%. The last chunks purchased appear to have been done at (or around) A$3.40/share, which is equal to terms. The Manikay letter to the Board asks the Board to consider the market movements since December and posits a fair value in excess of A$4.00/share.

• Manikay says that it is interested in becoming a long-term shareholder. But the letter seems to level its criticism of the deal price most pointedly at the fact that the deal was offered and agreed to just a few days off a two-year low in the S&P/ASX200 Index and since then the index has rebounded to within 1.5% of an 11-year high.
• A “market context” bump is not a bad case in and of itself because of where peers have moved and where the market has moved, and we won’t know whether that point is taken up by the IER in the Scheme Document. 
• This strikes Travis Lundy as not a bad reward/risk to buy up to 1-2% through terms. The back end “undisturbed price” has risen and the recent earnings release shows online penetration continues to grow. 

(link to Travis’ insight: MYOB Setting Up As A Riskier Trade)

Lynas Corp Ltd (LYC AU) (Mkt Cap: $758mn; Liquidity: $6mn)

Irrespective of whether the Malaysian rare earth processing licence provided to Lynas was without adequate due process (as has been speculated) or whether the facility is indeed an environmental concern; the fact remains the Malaysian government has reneged on the previously agreed-upon three-step licence process – imposing unachievable pre-conditions by the licence renewal date this September – and that is wrong.

• Ongoing negotiation with the Malaysian government is the only course of action by which Lynas will achieve the renewal of its operating licence (unencumbered or with “acceptable” caveats). The agreed management pathway for NUF provides scope for a positive outcome from extensive consultation. 
• But even if a viable resolution is reached, it would only serve to temporarily manage Lynas out of its current predicament – given the vocal domestic opposition, the long-term prognosis is likely the shuttering and removal of the LAMP.
• Shares are down 45% from the pre-general election (for Malaysia) peak and ~24% down from when the Review Committee was first mooted in September 2018, and roughly a similar % compared to the 3 December closing price, the day before the pre-conditions were introduced. That still appears too optimistic. Resolving the Malaysian government roadblock will quite likely be a stop-gap measure, at best.

(link to my insight: Lynas: Between a Hard Place and Just Rock)

POSCO Chemtech (003670 KS) (Mkt Cap: $758mn; Liquidity: $6mn)

Posco Chemtech is to merge with POSCO ESM through a stock swap at a ratio of 1 to 0.2172865. The merger will be effective as of April 1. The merged company is planning to move from KOSDAQ to KOSPI. These proposals will be put to the vote at the upcoming AGM scheduled for March 18. 

• KOSPI 200’s re-balancing reference date is after the close of the last trading day in April and the change takes effect on the next trading day after the 2nd Thursday of June. If the KRX approves it before the end of April, Chemtech’s KOSPI inclusion will happen this June. If not, it will have to wait until next year. 
• New passive money flowing into Chemtech is estimated at ₩68bn. This represents 1.69% of market cap and 4.82% of float market cap. This is less than twice total daily trade value.

(link to Sanghyun Park‘s insight: POSCO Chemtech: Merger, Renaming, KOSPI Move & Joining KOSPI 200)

Versum Materials (VSM US) (Mkt Cap: $5.3bn; Liquidity: $75mn)

In a follow-up note John DeMasi provides an update of events, looking into VSM’s corporate governance documents, reviewing relevant landmark Delaware takeover case law, and elaborating on a possible path to control of Versum for  Merck KGaA (MRK GR). 

• Merck has now filed form DFAN14A filed with the SEC. The talking points/Q&A confirm that the VSM/Entegris Inc (ENTG US) deal caught Merck by surprise as they had not been contacted by Versum as part of any market check.
• Other important takeaways include number 7, where Merck stress (yet again) they are fully committed to pursuing their proposal; number 11, where they don’t rule out raising their price; and number 21, where they answer whether they have purchased any VSM shares with “The number of shares of Versum common stock held by Merck … does not exceed a level that would require disclosure.”
• Merck continues to speak and act like a bidder who is not going away, and its upcoming roadshow in New York with shareholders underscores its commitment to the deal, adding to the pressure on the Versum Board. 

(link to John’s insight: Versum Materials – Merck KGaA Not Going Away (Part II))

Briefly …

Bristol Myers Squibb Co (BMY US) has responded to Starboard Value’s (& other critics) opposition of its perceived overpaying for Celgene Corp (CELG US) with a comprehensive and substantive presentation, increasing the likelihood this deal gets up. (link to ANTYA Investments Inc.‘s insight: Bristol Myers Squib & Celgene–Starboard Objections Addressed Today- Successful Deal Closure Probable)

Jardine Matheson Hldgs (JM SP) / Jardine Strategic Hldgs (JS SP)

JM has bought 662k shares in JS since the beginning of March, averaging 47.5% of daily volume, narrowing the simple ratio (JM/JS). JM has consistently bought back shares in JS over the years. Since December 2011, buybacks have taken place at an average price/book (for JS) of 0.75x (it is currently at 0.70x according to CapIQ) and at an average JM/JS ratio of 1.75x. The current ratio is 1.70x, bang in line with its 7+ year average. The 20-year average is 1.82x.

• Presumably the Keswick family’s long-term plan is collapsing the circularity. But given the significant costs involved – either JM privatizing JS or vice versa – for now, the family will likely opt for the circularity creep, by continuing to chip away at minority ownership as JS takes its dividends in-specie, JM acquires JS, gradually increasing the inter holdings of the two entities.
• JS is also trading “cheap”, at a 42% discount to NAV, adjusted for cross-holdings. JS is now around 25% points “cheaper” than JM (which has a discount to NAV of 17%), compared to a one-year average of ~24%.  A year ago, the % difference was 6%.
• JM has bought 1.8mn shares YTD compared to 2.5mn for the same period last year, while 4.9mn shares were acquired in 2018, compared to 7.6mn, 8.2mn, and 2.1mn in 2015-2017 respectively. The very long-term ratio is marginally in favour of JM, yet the more recent yearly average suggests it is line. JS looks cheap on a discount to NAV basis and it makes sense for JM to continue to acquire shares, favouring JS near-term. I also tilt in favour of this outcome.

(link to my insight: StubWorld: Matheson’s Strategic Buying of Strategic)

Briefly …

• Sanghyun estimates HDC Holdings (012630 KS) and its major sub HDC Engineering & Construction (294870 KS) are at 247% of σ on a 20D MA for the first time since mid Nov last year, and recommends to go long the Sub and short Holdco. (link to Sanghyun’s insight: HDC Holdco Trade: Holdco Re-Rating Should Be Transferred to Sub, Time to Long Sub/Short Holdco)
• Orion Holdings (001800 KS) /Orion Corp (271560 KS) is now above +2σ on a 20D MA and is currently at a 120D high. Sanghyun recommends it is time to go long Sub and short Holdco. Plugging in Sanghyun’s numbers, I back out a discount to NAV of 46% compared to a the 12-year average of 48%. The parent is, though, very illiquid. (link to Sanghyun’s insight: Orion Holdco/Sub Trade: Holdco’s Price Catching up Was Overworked, Time for Sub to Catch Up)
• Youngone Holdings (009970 KS)‘s 50.5%-held sub Youngone Corp (111770 KS) accounts for 70% of NAV. On a 20D MA, they are now at 312% of σ while the current price ratio is at a 120D high. Sanghyun recommended a set-up. The parent is up 9% this week vs 12% down for the sub. The NAV discount is now out of whack – plugging Sanghyun’s numbers I get a discount to NAV of 35% vs. an average of 48%. The parent is very illiquid. (link to Sanghyun’s insight: Youngone Holdco/Sub Trade: Price Divergence Got Too Wide)

• ISS and Glass Lewis are understood to have recommended the offer for Hopewell Holdings (54 HK).

• Restaurant Brands Nz (RBD NZ) has announced “Consent has now been granted in respect of the Partial Takeover by certain subsidiaries of Yum! Brands“. The remaining condition is receipt of acceptance from 75% of shareholders. Acceptances currently total 40.68%.

• The circular for China Goldjoy (1282 HK) has been delayed to the 26 March from 5 March.
• The Yungtay Engineering (1507 TT) Tender close has been extended to April 22 – big extension. Hmmm….
• NASDAQ raised its bid for Oslo Bors VPS Holding ASA (OSLO NS) to NOK 158 and lowered its minimum acceptance condition from 90% to two-thirds. The offer period is extended to 29 March. The Long Stop is extended to 4 Mar 2020.
• Panalpina Welttransport Holding (PWTN SW) has decided to call an EGM for April 5th, and approves the One Share One Vote amendment to the Articles of Association.
• Anta-Led Group Says 94.38% of Amer Sports Oyj (AMEAS FH) shares tendered.
• Hong Kong International Construction Investment Management Group Co., (687 HK)‘s possible MGO at $3.00/share.
• Michelin has acquired a 88% stake in Multistrada Arah Sarana Tbk (MASA IJ) and will make a mandatory offer for remaining shares.

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions.  These may be indicative of share pledges.  Or potential takeovers. Or simply help understand volume swings. 

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.