Ascendas Hospitaly Trust: The Buying Spree Has Began

View From Y-Heritage Hotel Dongdaemun

I have been eagerly waiting for Ascendas Hospitaly Trust (AHT) to make their acquisition since their divestment of their china properties. Today, AHT announced that they are buying a hotel in Korea.

AHT is buying Y-Heritage Hotel Dongdaemun at a discount of 3.2% to the hotel's valuation, paying S$89 Million fully funded by debt. The selling of the 2 china properties translate to a net property income (NPI) yield of 3.3% while this acquisition provide a net property income yield of 4.1%

AHT highlighted that the acquisition is expected to be accretive. Assuming AHT had owned the hotel since April 1, 2016, on a pro forma basis, the distribution per stapled security for FY2016/17 would have edged up from 5.68 Singapore cents to 5.69 cents

DPU contributioned by 2 china properties : 1.77 cents provide a value of S$218.7 Million after expenses upon divestment.

DPU to be contributioned by Y-Heritage Hotel Dongdaemun : 1 cents at a cost of $89 Million by debt.

Although that the acquisition only increase a miserable 1 cents. We can see that the cost for that 1 cent DPU is lower. Base on AHT total property value as at mar 2016 is S$1624 Million, a S$89 Million debt is equal to 5.48% in gearing. Hence gearing will be increased from 33.2% to 38.7%.

The sale of China properties are estimated to be completed in 1H 2018/2019. Looking forward to more acquisitions ahead.

Y-Heritage Hotel Dongdaemun

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Duty Free Internatioal Result 2017/18

FY2017/2018 

Results are stable at a revenue of RM620 million vs RM6323 million in FY 2016/2017, I have a personal target of RM599 million. If we compare net profit year on year excluding Forex, the results are flat compare to last year's. Forex lost is unrealized, RM is strengthening. Still a money machine generating cash.

Cash increase about RM100 million from last quarter to RM373 million from RM276 million. RM373 million translate to S$127 million at the time of writing. A dividend S$0.0185 (S$22.6 million) were declare as dividend, a mere 20% of current cash pile. I expect the dividend this year to maintain. Cash per share now stand at S$0.104. Almost 50% of the share price. Looking forward, HAP has yet to exercise their call option for the 3rd tranche of DFZ.

SMSB and the custom of Perak.

From the latest announcement:

The said Bills of demand were raised by the Customs Department who alleged that SMSB did not comply with certain conditions of a duty-free shop located at the border. 

The Company, after consultation with its solicitors, strongly believes that there is no legal and/or factual basis for Customs Department to arrive at their decision to raise the said Bills of demand. This is especially so when SMSB’s duty free shop is located after the last customs station en-route out of Malaysia and before the first customs station en-route into Malaysia, where no duties are payable. The solicitors of SMSB are taking the necessary defence actions on its behalf. 

The High Court has on 4 January 2018 fixed the case for hearing on 12 April 2018 and subsequently postponed to 17 April 2018. During the hearing on 17 April 2018, SMSB argued that the Bills of demand are illegal and are raised beyond the scope of

The High Court subsequently fixed for decision of the matter on 25 May 2018. In addition, the High Court also granted interim stay of enforcement of the Bills of demand until the date of decision. 

On 12 December 2017, SMSB had also appealed to the Director-General in respect of the sales tax pursuant to Section 68 of the Sales Tax Act and had submitted an application to the Director-General in respect of GST pursuant to Section 124 of the GST Act. To-date, the matter is still pending a decision from the Director-General. 

So the day of reckoning is on 25th May 2018.

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Tat Seng Packaging AGM 2018

I was 30 mins late for the AGM, held at Hanwell Holdings. Remembered the wrong time. A small AGM, nothing exciting. I think there is less than 30 people attended. I will write about the things I can remember or interesting. I find Mr Loh, the CEO to be very sincere as he answer questions from the shareholders after the AGM.

1. Why dividend is cut? Is there a cash flow problem?

The board said that they are embarking on a new investment. Hence they need the cash for it, so they decided to have some reduction.

Probably the acquisition of Nantong Plant.

2. What is the reason from the better performance for 2017?

This is due to better selling price and new customers but mainly from higher selling price.

3. Will the price of Tat Seng's products fall?

Due to volatility of raw material price. and competition in china, the management always try to improve their productivity, enhance efficiency and manage of cost. They will try very hard to get better return for the shareholders for the future.

4. What is the plant utilization rate in China?

The Board said this is sensitive information. Told us not to worry, they know they are utilizing properly. The fact that they upgrade their machine show that there would be bigger volume due to higher demand.

5. Is Singapore operation profitable?

Singapore operation has improved but the loss is due to corporate cost of the corporate office located in Singapore.

6. Regarding illegal discharge to public sewer. 

The incident happened in 2016 and earlier. The recent report is dug out by the press, it did not happened this year. New equipment was installed to resolved the issue and has engage Singapore test service pte ltd to inspect/test for the past 2 months and had met the regulation standard. They said they are caught off guard by the change in Singapore environmental regulation.

7. Does the plant in China face the same issue regarding the illegal discharge?

No issue in China. China requirement is less stringent than Singapore as Singapore has a much higher standard due to NEWwater.

Interesting Facts

• Raw material price is highly volatile.
• Raw material paper pulp up > 25% since 2016 Sept.
• Request a readjustment in price with customer if raw material increase more than 10%.
• Not fair game in china where contract might not be honor, if customer reject the increase in price, they can find another company.
• Logistic is very important. Require 100 trucks to delivery goods. Thus has to pay the worker well.
• Once deliveries are done, the next delivery will be prepared. Logistic will just pick up and go, hence no wait time, increase efficiency. 
• Cost of workers are keep below 10% and are confident to remain stable.
• Cost of workers has increase but volume of sale has mitigated with even higher sales volume.
• Plants are run 24hrs, which allow a huge capacity from Tat Seng. Few (20%) of competitor can do so.
• There are about 5000 competitors in china.
• China has tighten regulation, more inspections. This level the playing field. Companies that ignore the capex to meet the requirement will be force to spend. This also weed out weaker companies.
• Has the big capacity to handle eCommerce demand on special days like the 11.11 single day. 
• Plants that are invested with money from Singapore is consider a Singapore company. Whereas plant invested by money make from Singapore company in china is consider a china company.
• Impairment is due to fair value change of raw material
• China private investors are GM in company.
• China top customer contribute between  5% to 10% of revenue.
• R&D is important. If they can reduce amount of raw material used for the same product. This will save on cost.

Food

Good thing about a small AGM.  No body rush in to eat or da bao. Everything is very causal. Food by Neo garden. Best bee hoon so far I had eaten from a caterer.

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Invest in QAF to have free bread supply annually?

QAF is having a bad bad period in their business owing to bad Forex, cynical pork price and divestment of 20% of Gardenia Bakeries (KL) Sdn Bhd. (GBKL)

QAF consist of 3 market segments:

1.     Bakery,
2.      Primary production and
3.      Trading & logistic.

For bakery, Gardenia is a top selling brand in Singapore, Malaysia and the Philippines and many other brands. Primary production, Revalea producing pork and animal feeds. Trading & logistic segment is marketed by Ben Foods with brands like farmland.

QAF is trying to spin off Primary production, Revalea and focus on the Bakery business. I find this is a good decision. Revalea took up 46% of the group’s revenue yet it has the lowest margin. Focusing on the Bakery segment with 13% EDITDA margin is a better choice.

Wavering Economic Moat

Strong branding and demand for their product across major supermarket and convenient stores. Well this what I like to say but apparently this moat has been weakened probably due to in house brand snatching away the market share.  A lot of report has been factoring QAF bad performance to Primary production. However, from the graph below, we can see that bakery did worst in 2016 and 2017, although Primary production has a sharp fall in EBITA. If history is to repeat, Primary production will continue to do badly for a few more years.

QAF to utilize their network effect across different brands and segments

              

“Going forward, the Group will strive to utilize the strength of each company to grow the food business totally. There will be closer collaborations and potential synergy within the Group will be tapped. For example, a product may be created in a laboratory in one group, made by another, branded by a third group and finally distributed group-wide by all. Ben Foods proprietary products are being distributed in Gardenia’s group network. This has started in the Philippines via 50 franchised Big Smile Bread Station stores and nine Bakers Maison Cafes. Likewise, Gardenia frozen garlic breads and par-baked frozen bread products are sold via the marketing outreach of Ben Foods.”   ---- From AR2017

Growth Factor

QAF has 3 more bakery plants to be completed in 2018, 1 in Malaysia and 2 is the Philippines. This will ramp up productions.  Future spin off of Revalea will give QAF more cash to further expand their Bakery segments. Increasing total plant for 12 to 15.

Business Risk

With the plans to spin off Revalea. Growth will be focus on Bakery segment. Looking at the graph, the bakery segment is not doing so well. Ramp up production doesn’t mean more revenue if consumers don’t buy. As bakery growth from 2008 to 2015, EBITDA dropped going the opposite direction, probably due to higher expenses. Will QAF manage to grow their bread business well? Profitability is not consistent with Net Profit Margin below 5% most of the time. Net Income seem to going into a down trend over the years. 

NOTE: Net income for 2016 exclude one off item from the 20% divestment of GBKL

Conclusion

I do not think this a growth company. Net income is lower than 9 year ago. So far, the annual report talks about ramping up production by building more plants but no concrete plan is being shared. How about QAF as an income stock? Dividend payout of 5cents out of 5.6 cents seem unsustainable but they need only payout 28million. QAF has cash reserve of 92 million (cash minus current debt). However, a 117 million capex is expected to build the new plants.

In addition of Primary production and bakery continues to drop in 2018, we may see an EPS lower than 5cents.

They finally have a new website.

Not Vested.

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