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Why Accordia Golf Trust (AGT) can't be trusted.

Rosesyrup Research

Call: Short Upon Opening                     Target price = $0.623

Why Accordia Golf Trust (AGT) can't be trusted.

1.    Japanese market for golf course has been shrinking drastically since 1991. Further projected to suffer for the next 5 years.

2.    Although there are some increasing interest for golf in the niche markets (Women, handicapped etc), there is still not much hope for a recovery. Reason being these are niche market (small in size) and the memory of 1991 golf bubble is still fresh.

3.     Accordia 2014 profit halved as compared to profit from 4 years ago.

4.    Accordia owns 135 golf courses of which 89 courses will be sold to AGT.

·         If golf courses business is expected to benefit from aging population, as claimed in the prospectus, why Accordia chose to sell 2/3 of its business?

·         The price paid for this 2/3 of  Accordia's business is only SGD 782 Mil or 46% of Accordia's market capitalization. It is either this 89 golf courses are mainly made up of worthless lands (ie. inconvenient location) or they are sold at a large discount due to unfavorable prospect.

5.    Accordia was once a failing company and owned by Goldman sach, who dumped it in 2011. Goldman sach can't see any more upside to this business.

6.    Lands in Japan, which are currently occupied mainly by agricultures, will worth much lesser after economic reform and opening up to world trade. Thus capital injected into AGT is expected to depreciate rather than appreciate.

7.    AGT profit and cashflows are in JPY while the REIT payouts are in SGD, this will lead to a foreign exchange risk. For your information (refer to the following chart), JPY has depreciated by about 25% (or 5% per year) against SGD for the past 5 years. This mean that the actual yield from AGT won't be the promised 6.8% -7%. In fact the real yield will decrease by 5% each year. We can assume this trend to continue as PM Abe tries to stimulate Japan ailing economy and boost export.

8.    The reason, claimed by Accordia, for selling and leasing back its 89 golf courses is to be asset light. However Japan is currently in a low interest rate environment which should encourage businesses to own more rather than less asset. Why would Accordia go against the trend?

·         Thefinance.sg observed that since 2013, Accordia has increased its dividend payout by 4 times to 55 yen per share. This is even more than its net income per share of 45 yen per share. (REFER TO http://thefinance.sg/2014/06/30/accordia-golf-trust-6-8-to-7-distribution-yield/)

·         My own deduction from the information above=>

o   The deal was meant to help Accordia's shareholder to cash out and exit the business by obtaining cash upfront which is then paid to Accordia's shareholders as fat dividends. Obviously, subscribers of AGT become the scapegoats.

9.    AGT is totally undiversified: Golf courses are the only asset of AGT and all the golf courses are located in Japan. Meanwhile AGT's main customer, Accordia, is highly leveraged at 65% of total asset. In short AGT is a very risky asset which defy the stable and conservative nature of most REITs we see in Singapore.

10. Despite exposing its investor to significantly higher risk, unfortunately AGT does not offer higher return.  For example, Keppel Reit offers a slightly lower 6.6% yield but

a.    Its properties are well diversified in both Singapore and Melbourne

b.    Its office towers are rented to a diverse customer base

c.    Much lower leverage: Debt stands at only 42% of total asset.

Valuation

Model: DCF              r = 4.817%                 g = -5%          CF (perpetuity): 6.8cents

Optimistic Price: $ 0.693                                       Pessimistic Target Price: $0.554***

Call: Short Upon Opening                                   Target price = $0.623

Return from subscribing to IPO ( @ $0.97) = -28.6%  to - 42.8%

***$0.693 is considered an optimistic valuation. One likely factor which might threaten this TP is the pending hike in Singapore's interest rate which would cause AGT's risk/reward ratio to be much less attractive- since AGT's value mainly comes from its yield as it has negative growth. For this reason, I personally think it is prudent to discount the TP by another 20% and the lower end of the value would be $0.554

Conclusion

All in all, AGT is a REIT involved in a troubled industry and promised yields that are unlikely to materialise.  Furthermore, it exposed subscribers to huge amount of risk but fails to offer a fair return. What it does offer is an exposure to a new and interesting class of asset known as golf course. Instead of losing their mind to the excited generated from owning a new class of asset, savvy investors should pay more attention to how AGT add value to their portfolio.

As an ending joke: If AGT were to  successfully float after IPO, I might consider listing dustbins and toilet bowls as REIT next.

POSH (PACC)- Initial Assessment

POSH (PACC)- Initial Assessment 

Call: Sell 

Target Price : 86cents
WATCH OUT for POSH tomorrow. It might post some significant gain but be prepare to short it afterward.  

Some people might claim that it is undervalued as they usually based their reccomendation on the following flawed reasonings:

• Low Ratios Argument.  
  • Yes POSH has got low ratios (Cheap) compared to most smaller firms. But aganist firms of comparable size, POSH has got slightly higher ratio (expensive).
• Industry Leader Argument
  • ​ This is THE MOST common reason I heard from those believers. In fact this is the highlight of the IPO and DBS vickers also applied this in its reccomendation. While it is true that size does matter and provide some comepititve advantage (Economies of scale etc), being market leader also means that there is limited growth opportunity.
• 76% increase in net profit  
  • ​ My opinion is someone trying to window dress his statement. Take a closer look and you will find that the entire 76% increase comes from 138% increased in other operating income!   According to the company: " This increase was due mainly to recognition of gain ON SALE of 5 vessels, upon completion, to a  Joint Venture."
  •     Before we decide on how much faith to put upon this 76% jump in profit, allow me TO SHARE an accounting fact here. In the construction and building (including vessel, oil rig building etc) industries, they often adopt a revenue recognition method known as percentage of completion method, which gives them much flexiblity in choosing when to recongnise profit and revenue. In layman term, it means there are lots of window dressing in the construction industry to smooth out performance.
  • The fact that the vessels are sold to JV enable more control over the revenue recongnition schedule. More ROOM FOR WINDOW DRESSING.
  • BECAREFUL ABOUT WHERE YOUR PROFIT COMES FROM!

4 insights giving me the urge to short POSH

1. 8 Years to IPO
   • According to the history from POSH website, POSH started in 2006 and only listed in 2014
   • A common knowledge in the INVESTMENT BANKING sector=> Companies and their financiers often aim to go IPO and cash out within 3-5 years.
   • 3years or less is usually the case for Tech firms. Most other firms usually listed within 5 years.
   • Those who took more than 5 years before listings are usually weaker or less ATTRACTIVE firms. Reason being these weakers firm can' t sell their shares during economy downturn, when investors all flight to quality. Thus they have to wait and drag till economy recovers and market has better appetitie.
   • Now look at our POSH, which is listed at the start of 2014 when economy just started showing sign of recovery. 
2. Serious oversupply in the industry
   • ​ ​ In case you are not aware of this: before 2007 when the economy is still good and nice, our maritime friends believed that good time last forever and decided to order vessels as if they were free. The consequence is industry wide oversupply and some maritime buddies went bankrupt while other started scraping vessels.
   • While economy recovery is expected to increase demand and alleviate the pain in the industry,the serious overcapacity issue means that it going to be some time (Probably years) before the industry can start enjoying growth again.  
3. Expecting a big fall in ROE
   • ​ ​ POSH used proceed from IPO to PAY OFF DEBT ! NOT TO EXPAND! The following is quoted from POSH financial statement:
     • " As per the Company' s SGX announcements on 25th and 29th April 2014, the Company has disbursed  the full amount of estimated net proceeds of US$298.6 million (S$374.8 million) raised from the Initial  Public Offering to reduce its bank borrowings. As at 30 April 2014, the Group' s OUTSTANDING bank debt  amounted to US$492.4 million."
   • This kind of support one my above claim regarding limited growth opportunity for POSH.
   • Besides that the reduce used of cheap source of funding (DEBT) also means lower ROE.
   • LOW ROE= Avoided by most long term investors = unsustainable rally, if any.  
4. Dim Prospects

• Our dear DBS VICKER expects  FY15 will be a game changer for POSH and earning to double ! Wow what an expectation. 
• I probably mentioned this before, after Fed completed reeling in its QE, commodity price like OIL will start falling. There is a minimum price (If I remember correctly it was $90) below which those Oil companies would halt new projects.
• No new projects =   no new contracts =   no need for so much vessels = no revenue growth or probably even falling revenue.
• But those capacity POSH possessed cost money to upkeep ! 
• Oh yeah, did I mention POSH has much higher debt as compared to its established peers?

Anyway I did a simple valuation using FCFF model=> 86cents is most I am willing to pay for this counter.  

Valuetronic: Too Much RISKS To Ignore

Rosesyrup Research

Call: Sell       

Target Price: $0.34

Valuetronic: Too Much RISKS To Ignore

Instead of analyzing the macroeconomic forces in action, AmFraser spent large amount of its report describing what the analyst saw inside the production plant. The followings are 2 majors risks which AmFraser failed to consider in deriving at its 69cents "CONSERVATIVE" valuation

1.    Major Oversupply in the LED market

Over the past years, heavy investments have been pouring into China LED industry which ultimately lead to a serious oversupply. This explains the thin profit margin of 1-3% as mentioned in AmFraser report. Nevertheless most suppliers produce low quality LED, thus ValueTronic's higher margin of 5% is most probably due to its ability to manufacture higher quality LED (which enable it to seal a deal with international brand like Phillips). AmFraser went further to assure the readers that such competitive advantage can be maintained in the coming years.

"Valuetronics has consistently shown superior net margins (5‐ 6%) vis‐ à ‐ vis its other EMS peers (1‐ 3%) and we expect this key competitive advantage to be maintained in the coming years.  "

With quick advancement in technology, huge investment in R&D (for LED industry), and weak patent law in China, it is highly doubtful to claim that Valuetronic's superior technology could be maintained for long (>2years). AmFraser conveniently describe the advantage "to be maintained in the coming years" without quantifying it. The fact that China LED industry is reaching maturity means that the once unique and superior technology will now be a common technology adopted by all players in the industry and the competition will now rest on incremental innovation instead.

Should Valuetronic loses it competitive advantage (which is what we believe), it will be exposed to very intense competition with the other industry peers in an oversupply market. Thus the assumption of CAGR (compounded average growth rate) of 10% for the next 3 years dreamt up by AmFraser would not be achievable and overstated.

Perhaps this explains why the management "currently maintains that there is still no need to build on the empty plots of land at Daya Bay for THE NEXT couple of years as there is still idle shop floor space at the existing plant". Management decision to uphold a generous dividend payout of 30-50% also signalled that expectation for any significant growth isn't realistic. After all high growth is possible only if the company plough back large portion of its earning, which naturally means low dividend policy.  

2.    Anti-Dumping Policy From Western Countries

When Chinese's solar panel industry grew so huge that it started to threaten its US and Europeans' peers, the western governments imposed tariff on China manufactured solar panels. This resulted in billions of losses to the industry and aggravate the already oversupply condition in China.

Similarly, China LED industry has grown quickly and is starting to takes market from western players. Although most Chinese suppliers produce lower standard LED (different market from premium LED produced by western counter parts), experts have estimated that Chinese suppliers will start to threaten the premium market within 1-2 years. Thus there is a risk that western governments will once again impose costly trade barrier on the oversupplied LED industry. Trade barrier is a very significant risk, afterall it even killed an once largest Solar panel manufacturer in China. However this risk is not even mentioned in Amfraser analysis.

Valuation

As the above mentioned 2 risks have high possibility and high impact, we revalue the company's shares using FCFF model and made the following adjustments:

High Discount rate:  20.256% (Similar to that of an Chinese Solar Panel firm)

Growth rate = 3% (for next 2 years)

Growth rate = 0% (for perpetuity)

Target Price Per Share = SGD $0.34

Conclusion

Apparently this was AmFraser analyst first visit to an automated plant. He was so overwhelmed by big machines and modern production lines that he forgotten about companies do not operate in vacuum. In fact for most companies and businesses, macroeconomic (external) forces accounted for nearly 80% of their performance. Few companies are able to buck macro trend and even fewer firms are able to persistently buck that trend in longer run (> 5 years).

With such serious risks to valuetronic's prospect, it is even doubtful that valuetronic is able to upkeep a stable dividend (in absolute term) payout for long. Thus AmFraser might want to re-think whether DDM is an appropriate model for valuing Valuetronic at all.

RE: Share Junctions

Hi,

This blog shall contain my fundamental analysis on some of the stocks on SGX. I have previously adopted the nicks Rosesyrup and NobleRose at ShareJunction.com. You can check out most of my views posted there, under the thread named "Jarabe De Rosa".

Nevertheless, I have been unfairly banned by the admin from Sharejunction. Instead of appeal and begging the admin, I have created this blog to host my future analysis.

As I am pretty busy now, there won't be any new reports for the next 1 months and the blog will be kept simple. I will add more interesting features and reports later on when time allows.

Thanks!