Looking at Frasers Commercial Trust

I have been eyeing on Frasers Commercial Trust(FCOT) for awhile since I divested CapitaCommercial Trust back in 2017. However the news of Hewlett-Packard moving out of FCOT hold me back. I was informed recently that my office is moving to Alexandra Technopark.  This prompt me to take a fresh look on the REIT.

Alexandra Technopark
I believe Hewlett-Packard risk has been fully priced in. Hewlett-Packard now only occupy 3.7% of gross rental income of FCOT portfolio. AEI on Alexandra Technopark to be finished 2H2018, got some new facilities and exercise areas. Too bad no gym doh. Assuming Alexandra Technopark will continue to attract tenants, this is a catalyst for DPU growth.

55 Market Street Divestment
After the divestment completion in Aug 31 2018, gearing is reduce to 26.5% assuming proceeds are used to pay down debts. This allows more rooms for acquisition, RORF from sponsor Frasers Property. NAV pro forma is $1.70 as at 30 sept 2017, adjusted to current price, NAV should be $1.60. At current price of $1.41, PB ratio is 0.88.

Conclusion
The completion of  AEI at China Square Central and Alexandra Technopark (as well as tenant growth) will be near term catalyst. In addition there will be room for more acquisitions.

However, management fees are 100% paid in units compare to 12% in 2017. Reversing this may halt DPU growth but remain stable. In 2Q2018, 1,884,606 units were issued at $1.4192 as management fees worth $2.675 Million which is equivalent to $0.031 per unit if taken in cash. 

DPU for the pass few years has been stagnant, probably due to FCOT' plans for Hewlett-Packard's departure as well as the cost for the AEI. At DPU of 9.6cents, current price of $1.41 give a yield of 6.81%. With adjusted pro forma of $1.60, PB ratio 0.88. Assuming a yield of 7%,  TP to be set at $1.37 or below. I believe the worst is over for FCOT.

Vested @ $1.37

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Owning Infrastructures: Beijing Capital Int'l Airport

An Edge Singapore article " Airport a proxy to Asia's rising middle class" sparked my interest in the airport business. (You can read a short Edge article here). If only Chang Airport is listed, I will definitely invest, a better option than SIA and maybe SATS. 

The International Air Transport Association (IATA) expects 7.8 billion passengers to travel in 2036, a near doubling of the 4 billion air travelers expected to fly this year. The prediction is based on a 3.6% average Compound Annual Growth Rate.

Singapore just opened T4 and is planning for T5 to prepare for the growth in air traffic.

When T5 is completed by 2030, it will increase Changi’s annual capacity by 50 million passengers initially and up to 70 million if needed – which would mean 150 million passengers a year, compared with the current capacity of 82 million. By the mid-2020s, China is set to become the world’s biggest aviation market and India the third largest. By 2035, the number of people flying to, from and within China and India will be 1.3 billion and 442 million respectively. (Source)

Here are the PE of some of the airports in the region:

What caught my eye is Beijing Capital Airport , the world 2nd most busiest airport.The current low PE is due to:

• Exclusion of booking airport fees as revenue in its books from Nov 2018
• Capacity overload, the airport is running over its max capacity. Hence growth is limited.
• Beijing Daxing Airport to be operational 2H2019. Some airlines will be shifted from Beijing Capital Airport. Expecting a decline in revenue due to the shift.

Beijing Capital Airport is trading at great discount compared to its peers. As reason stated above, 30% of Beijing Capital Airport's revenue will be affected, therefore the adjusted PE can be estimated to be 18.16x, calculated with 70% of current EPS. In comparison,  Beijing Capital Airport is trading at a very cheap valuation. But expect short term impact from transiting into “one city, two airports”.

NOTE: All Value in RMB other than NAV.

Beijing Capital Airport non-aeronautical business has growth substantially, while the aeronautical business is growing well but limited to its capacity.

The aeronautical business includes the following:

• Provision of aircraft landings and take-offs and passenger service facilities,
• Ground support services
• Firefighting services for domestic and foreign air transportation enterprises.

Non-aeronautical business includes the franchise-based operation of:

• Ground handling agent services supplied for domestic and foreign airliners
• In-flight catering services
• Duty free and other retail shops in the terminals (rental and a cut in profits)
• Restaurants and other catering businesses in the terminals
• Leasing of advertising spaces inside and outside the terminals and other businesses at Beijing Capital Airport.
• Leasing of properties in the terminals
• Car parking services
• Ground handling facilities for ground handling agent companies.

With the opening of Beijing Daxing Airport, the aeronautical business segment will shrink, probably to 38% if this segment is to affected by 30%.

Business Moat

Business moat for running an airport is super high. Running an airport requires license from the state hence usually are state run. Each airport also build to serve a particular region, due to land and environment constraint. It is unlikely to build multiple airports near one another. This provide a monopoly for the airport business.

Growth Factor

Short term, growth will be hammered down thus the low PE. Longer term, Beijing Capital Airport will continue to grow and has the option to buy over Beijing Daxing Airport from its parent company when the new airport matures. 

Business Risk

Economic slowdown will hamper growth at a slower rate. Logically, air traffic will increase over the long term as more people can afford to travel, just like more people buying cars or use private hires like Grab and Uber. 

Conclusion

Beijing Capital Airport current payout 40% of its earnings, giving a current yield of  3.16%. Not in the best shape with current ratio lesser than 1 but from the chart, it show that debt is being repaid and current ratio has gradually recovered. DBS Research projected debt to be fully repaid by end of 2019, Debt/Equity has come down significantly.

ROE and Net margin has been gradually improved over the years, ROE is above 20% net margin above 10%. Revenue will be affected in in the short term but I believe long term wise aviation will grow. Will be looking forward for Beijing Capital Airport to buy over Beijing Daxing Aiport when it is profitable in the future.

Moreover, China Passport holder amounts to 9% of their population. Even an increase of 1% will increase huge traffic growth. The same can also be said to the tourism industry or hotels.

This investment is for the long term, I am expecting a minimal of 10 years. As I think airports still a necessity for a nation/state for traveling world wide even if automated plane took over. Manufacturer or service provider companies may get disrupted. Just today I read that Serial System loses Texas instrument distribution agreement which affect 50% of its revenue.

I am Vested at HKD8.063, HKEX:694

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Pondering about my CPF. Am I working it right?

Point no. 3 is what most Singaporeans have in mind and I have always feel that I cannot let the money in CPF OA to idle receiving the minor 2.5% interest compare to investing in equities. But the 35% limits on your OA account is really limiting. Looking at 20k interest @ 3.5%, 35% of OA invested in stocks @ average of 6% yield and the rest at 2.5% interest. The following table states the yield for OA at their level.

What if transfer all OA to SA every month with first 60k of SA at 5% interests.

Assuming with an OA account of 50k. How will it pan out with the above 2 methods.

Plan A:Investing CPFIS

Plan B:Transferring to SA

Plan A gives an average of 3.98% yield while Plan B give a 4.69% yield, almost 18% more than Plan A. Plan A could have lower yield as the CPFIS portion cannot be deploy fully at all times and also capital gain/losses Plan B will be a hassle free pumping in of funds will do. However, with Plan B, SA fund cannot be touched.

Below is a table from CPF. By 2020, the Full Retirement Sum(FRS) will hit $181,000. For simplicity, let's assume a increment of $5000 for a man who will hit 55 of age in 20 years needs to hit $271,000.

If the man has salary of $4000, his CPF contribution is $800 and his employer's $680, a total of $1480. This is split into OA, SA and MA with the amount $920.56, $239.76 and $319.68 respectively. Using TVM calculator, We can calculate the Future Value. For simplicity, compounding is done p.a instead of by month and compounding using the average yield.

Assuming a13th month and 1x bonus, one year contribution to SA is $3,356.64, OA $12887.84. Using Plan A, OA will have $463,740 and SA $139,935.07 after 20 years. Total of $603,675.07($529,779.34 if compound at 2.5%).

OA Compounding

SA Compounding

Similarly, if He uses Plan B and a year of contribution to SA is $16,244.48. To hit $271,000 this time requires about 10 years. By the time He reach 55. SA has $644,920.50.

Apply Plan B for 10 years to hit estimated FRS

Applying Plan B till 55

Plan C

Hitting a critical point ASAP to allow SA to compound to $271,000 without contributing a single cent. By applying Plan B for the next 4 years. The SA will compound to $271,000 when He hit 55. No need to worry if hit by unemployment.

Apply Plan B for 4 years.

Compound till Age 55

Conclusion

The table shows the amount in the CPF at age 55. There is not much significant between Plan A & B if the CPFIS portion is manage right. With no plan, CPF basic compounding still give and substantial amount but about 20% lesser returns. I believe Plan A is the best as it provide flexibility of OA. One can follow Plan C then switch to Plan A so as to secure the FRS by age 55. 

FRS at $271,000, one can expect standard payout to be 50% more than the current rate. $2000 per month would be nice. As price double every 20 years due to inflation, a plate of carrot cake will cost $8 in 2038, $16 in 2058. When the payout starts, $2000 is worth less than $1000 today. Ouch!

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