Thursday, February 1, 2018

Portfolio Update

It's been 6 months since I last updated my portfolio. I realize time flies so quick once working life started. I told my church friends about it and they said it will get even faster after I turn 30. On top of just updating my portfolio, I also wrote about Stock Monthly Investment Plan (SMIP) for those who wish to do dollar costs averaging in HK and also my goals before hitting 31.

Before that, here's my portfolio for Poems Sharebuilders Plan. (commitment of $2,000/ mth)

I increased the monthly commitment from $1k to $2k a month since Sept last year after getting more disposable income. I also found that valuation for ST Eng and STI pretty attractive. 

Based on Motley Fool's article on 16th Jan here, PE ratio for Straits Times Index (STI) is 11.6. Compared to Hang Seng Index at 16 and Dow Jones Industrial Average at 26.57, STI still has long way to go. I have thoughts of reducing the monthly commitment to $1,000 a month as I applied for Kim Eng Monthly Investment Plan and SMIP with HSBC HK but will consider scaling down when STI goes above pe ratio of 15. For ST Engineering I am still sitting at a loss but I believe will do just fine for long term investment.

What I like most about Sharebuilder Plan is dividend reinvestment. As I am in my stage of building my wealth, I would rather maximize my return my reinvesting my dividends for a small fee.

POSB Invest Saver (commitment of $200 monthly)

I signed up this plan back in Apr 2014, when I was a university student and working part time. It was the time when my parents officially handover all my Angpow proceeds to me and it has been sitting on very little interest in that bank account. Since then the plan has been on GIRO. I last checked in Oct 17 and the bank account has started to dry and I decided to continue funding that account via my salary account. I could have merged it with Share Builder to save costs and so but decided to keep it that way for sentimental reasons.

Maybank Kim Eng monthly investment Plan (commitment of $500 monthly)

It's the only investment plan in Singapore that allows me to do dollar cost averaging for overseas stocks. Hence, I signed up to invest in Tencent Holdings. The stock price has been going upwards after a small dip at 300 HK$ levels. It's hard to do valuation and calculating it probably won't make much sense too, especially pe ratio is at its 57. To me, its safety margin is its ability to accelerate growth and I continue to believe in its growth story.

HSBC HK Stock Monthly Investment Plan (commitment of 6000 HK$ monthly i.e. $1,000 monthly)

I opened this account in Dec last year when I made a trip to HK for Christmas. Back then, I was searching for an investment plan which allows me to DCA for Hong Kong Index. Turns out that HSBC and a many HK banks allow me to do so. The stock code for it is 2800, Tracker Fund of Hong Kong. You can check out the Fund Factsheet here .It tracks the index pretty well with only tracking error of  0.0514%. I invested a lump sum of 5,000 HK$ and monthly investment of 6000 HK$, i.e. 1,000 SGD/month . As a non-HK resident, the only downside is the inconvenience to convert and transfer money to HK$. For those who are keen to invest through HK banks, also do note that most Singapore banks charge a transfer fee and foreign transaction fee hence the best way for me is to change HK$ in local money changers and deposit into HK bank account. My relatives and I travel to HK often so won't be much of an issue.

Here is the list of HK banks which offer monthly investment plan, or 月供股票 they call it. Currently, HSBC is undergoing a promotion where handling fee and brokerage fees etc, are waived and only charge a monthly Custodian Fee of 25 HK$ (note that dividend handling fees/ corporate action fees do apply). I did up a comparison table on the plans offered by banks and brokerage firm. On top of banks, I included Chief Securities because they are the only firm which offers DCA for US ETF- Vanguard S&P 500 ETF (3140). Another way to DCA US ETF is to open a Standard Chartered Priority Banking account with brokerage fee of 0.2%, no min brokerage fee.

Comparison chart for banks/brokerage firms offering stock monthly investment plan.
Do note that the promotions , fees, and securities available for investment may change with time. If you are viewing this few years after this post was published, kindly refer to their respective website for more updated info.

After account opening, I added 80 Tencent Holdings shares 0700:HK in 2 batches: 40 at 436.60 HK$ and 40 and 457.40 HK$. This is in addition to the Maybank Kim Eng Monthly Investment Plan. For those new to Tencent Holdings, its owns a popular messaging app, WeChat and it started listing at 3.7 HK$ in 2004 and current price of 460 HK$ has been adjusted for 1 to 5 shares split on 2015. It's PE ratio of 57 seems very rich, but richly priced stocks can actually defy gravity and continue to rise for a prolonged period of time. When a stock is hot and everyone is clamouring to buy, the stock can continue to sustain lofty valuation. After all valuation is a guide, and if there is any safety margin to talk about, it would be its strong growth. 

SG Portfolio

As we all know, 2017 is one of the best years to invest and stay invested, with STI returning 22.08%. My portfolio main drivers are OCBC and DBS shares bought during at 2014 and 2015 and I still remained committed to holding them. Back in 2016, I sold most of my shares for property investment which didn’t materialize and managed to buy back subsequently to ride on the bull run. Due to much work and travel, I have not been actively managing my portfolio but I am quite blessed with banks and property stocks boosting my overall portfolio returns. 

There are many different strategies to build wealth and my investing approach is more of a buy and hold. I do my best to pick stocks with good fundamentals and invest for the long haul i.e. companies which have economic moats that I can hold for many years. In times when the stocks or general market seemed overvalued, I may continue to hold them. Over the years, I realized that I have made more money holding on to the winners that cashing out on my early profits.

In my opinion, great companies are actually rare to find, and if I were to sell away a stock and my expectations about future lower valuation does not actually materialize, I might have missed one big boat. One example would be Riverstone. I bought them at $0.485 and sold at $0.585, and the feeling was great until it went to $1.10 after 1 for 1 bonus issues and many rounds of dividends. Similarly, I am certain that there are times Coca Cola shares are overvalued but if one continues to hold a share of Coca Cola trading at $40 in 1919 is now worth $9.8mil. Check it out here

Secondly, if I exit my long-term investments in anticipation of a lower valuation to come, it equates to leaving a business that I know well; or business with developments which I can interpret with some levels of confidence. If the price continue its upward trajectory after selling and I am unable to re-enter, I may have to find new companies and opportunities, and that means spending additional time to do research and bring the understanding of the companies to a similar level.

That would also mean that I will not invest in down and out companies with poor fundamentals selling at dirt cheap price expecting a turnaround situation. The time that I will sell my stocks is when the company's fundamentals starts to deteriorate, especially when free cashflow becomes negative or a dividend cut.

I have always been net buyer of stocks and for 2017, my only sell transaction is Sanli Environmental after the release of half year results. It was a stock which I got it during IPO. The prospectus showed growing revenue trends, increased FCF, experienced management and overwhelming support from institutions. However, the results reported lower revenue, decrease in net profit and even negative FCF. The only saving grace is lesser debt. Though the lack of price movement after earnings release suggested that the price must have factored into the earnings prior to the report, I felt that I don't really understand the company well enough. So, I divested to lock in some small profits.

By the way, don't get me wrong. I am not against anyone who trades or does short term investment. It's just that buy and hold suits me better especially when I have very limited time to monitor my portfolio. Everyone should find their own investment strategy which suits them best.

Buy/Sell Transactions & dividends collected since June 2017 (CDP portfolio)

Buy/sell Transactions
Dividends Collected (page 1)
Dividends Collected (page 2)

Also, I divested all my US stocks and invested in 37 shares of Robotics and Automation ETF at US$37.20.

Some stocks in the red

I am still holding on to 8,000 shares of ComfortDelgro. Its recent tie up with Uber has drawn much mixed reactions but whether it will yield positive results is anyone's guess. For now, I will continue to hold for its dividends and I am pretty sure they can sustain its dividend with payout ratio of about 0.7. At the price of $2.08, its yield is close to 5%.

Raffles Medical
I continued to accumulate Raffles Medical on price weakness for the long term. The reason for its underperformance was due to its stagnant growth coupled with softening medical tourism. Its catalyst for growth is in the opening of Chongqing and Shanghai Hospitals. In my view, till they began operation, profit will continue to stay muted. Even when they began operations, it will also take few years for its business to breakeven. Hence, it is not a stock for short term. Its price of $1.12 translates to a pe ratio of 28 which is attractively priced in my view considering that it is a defensive sector and serves as a good hedge for rising healthcare costs.

Total Portfolio Value= $415k 

Poems Sharebuilder Plan = $18,795
POSB Invest Saver =$10,292
MayBank Kim Eng Monthly Investment Plan=$468
HSBC SMIP =$10,365
SGX Portfolio 1= $224,263
SGX Portfolio 2= $119,195
Standard Chartered Online Trading Acc=$2,220
Cash= $30,000

Goals before 31... a portfolio of $1mil 

If a ship leaving its harbour without destination, no wind is favourable. At best, the crew can navigate to stop crashing into things, but the ship could just be mindlessly floating in the middle of the ocean.
The same can be said of human mind. If we do not have a goal in mind, or any targets to achieve, we will behave like a ship which floats through life but goes nowhere in particular. 

There are two schools of thought (or more) for goal setting. The first one is about setting S.M.A.R.T. goals: Specific, Measurable, Achievable, Relevant and Timely. Then the goals can be broken down into small steps which can be achievable daily so we can track our progress. Another school of thought believes in setting goals which can be unachievable or unrealistic through visualizing your success daily that you have achieved your goal. This will trigger your creative subconscious mind which will generate ideas and means to achieve your goal. It makes you more motivated, energized and looking forward to every new day. This is not unproven or merely daydreaming as Michael Jordan had always visualized himself taking the last shot before he ever took one in real life and Muhammad Ali had also imagined himself victorious in life even before the fight began.

I am leaning more towards the latter way to set goals but that being said, there is no right or wrong ways and you can also use a combination of both methods.

Since this a blog on investment, I will share my financial goals. Currently, my stocks portfolio is about $400k and my goal is to reach $1 million before hitting 31. Assuming dividend yield of 5%, that would generate about $4.2k/mth of passive income, which will cover about 80% of my monthly expenses (see below). It's also an easy number to remember and a good 7 digit target to look forward to.

I will be turning 29 in Nov this year so I have about 34 more months to go. I can work hard to earn a more income, do more research for better stock picking skills, or be more disciplined with money but the rest would be up to how the stock market performs. I can’t eliminate systematic risks or predict the next financial crisis. 

Hence, other than hard work, my returns will also depend on how STI performs or the indices of the countries I am investing in.

My average monthly spending:
Food/Transportation/Tithe/Parental allowance = $2,200 mth
Income Tax/ Medisave contribution= $1,100 mth
Insurance premiums (Protection and savings & investment plans)= $1,500/mth
Travel= $3,600/ year i.e. $300/mth

Total = $5,100/month.

Moving Forward

Buy more each transaction
When my stocks perform well, my total profits aren’t substantial because I only bought 2000 or 3000 shares. Since I spent much time to do research on a particular stock, I should be more confident about it. I bought 5,000 shares of MicroMechanics at $1.035 in April with 120% till date. However it only consisted only 2.75% of my overall portfolio and my hard work resulted in insignificant gains. I had a writeup on Micromechanics which you can check it out here.

On top of the returns, buying more also reduces my transaction costs as a percentage of total value.

Investing more Aboard
To improve my returns further, I will be increasing my position in US and Hong Kong shares to have more exposure to growth stocks, especially ETFs tech companies.  Last year, Hang Seng Index achieved gains of 35.99% compared to STI returns of 22.08%. Its stellar performance was partially due to gains from Tencent, which constitutes 11.57% of index(before 1st Dec 2017), returning 124.91%  over a year. Subsequently, it had a quarter rebalancing and the stock weighing on Hang Seng Index dipped to 10%.

It’s almost 10 years since our last financial crisis and US market has been on a bull run since then, with Dow Jones Industrial Average (DJIA) exceeding its previous high of 15,000 points by 70%. In comparison, local markets are still having a hard time matching the performance. Hence, having exposure to foreign markets helps to boost my portfolio when local markets are facing downward pressure or any possible geopolitical risks.

There are definitely risks to investing overseas, such as currency volatility, or even taxes on dividend gains, but my view is that the benefits in general outweigh the risks.

If you would like to join me in my journey towards a $1mil, you may follow/Like my Facebook page here. I will update my Facebook on any new posts.

Smart Goals

Visualization Success Technique:

STI Returns

Saturday, January 13, 2018

One of my favourite REITs

Hi, hope everyone has a good start for the year.

I spent my 2017 Christmas in Kowloon Hong Kong and stayed at Cordis. It was formally known as Langham Place. I had a relaxing trip and the hotel experience and the shopping centre around Mongkok was really great. Despite having a good time, another purpose of going Hong Kong is to actually open a SMIP (Stocks Monthly Investment Plan), which uses dollar costs averaging concept to buy into stocks. Maybank Kim Eng offers such service, but only Hong Kong offers the option to purchase 2800 Stock Tracker Fund of Hong Kong. It's managed by SPDR, and tracks the index pretty well. (Will share this more in my next post on Portfolio Update )

As I love to look out for opportunities in investment, the crowded and lively shopping environment in Langham Place caught my attention. The Langham Place Shopping Mall is owned by Champion REIT, together with the Langham Place Office tower just next to it; whereas the hotel is separately owned by Langham Hospitality Trust, which also owned a portfolio of hotels in central region as well as overseas. However both Reits are actually investments spunned off by Great Eagle Holdings, -a Hong Kong real estate company listed in HKSE.

After returning to Singapore, I looked through its annual report on Champion Reit. As it currently owns only 3 properties- two proprties in Langham and Three Garden Road in the heart of Hong Kong's financial centre, it makes it easy to analyse each property too.

All under one roof
Langham Place is an integrated commercial development consisted of the shopping mall, office tower as well as the a 5 star Cordis Hotel. It is also easily accessible by MTR (HK's MRT), which is connected to Mongkok station. Closer to home, it's probably quite similar to Raffles City, with City Hall station, Raffles City shopping centre, Raffles City Tower, and Fairmont Singapore connected together. They properties are intelligently combined such that they complement each others businesses. For instance shopping mall gets to capture traffic from the hotel guests, office staff as well as train passagers alighting at Mongkok station, be it for dining or shopping or catching a movie or even a drink with friends at the sky bar. Having that convenience and accessibility to hotel guests is also what attracts them to become repeat customers. Additionally, they are one of the few malls which closes at 11pm in the evening (up to 11.30pm during Christmas season) compared to popular shopping centres in Tsim Sha Tsui which closes at 10pm. I visited the mall during my stay, and it was actually very crowded up till 11pm.

Busy District with Attractions
Even the name by itself 'Mong Kok' in cantonese, means busy corner. In fact, calling it a busy district is an understatement. By Guiness world records standards, it was described as the world's most densely populated place, with population density of 130,000/sqkm. (Average population density in HK stands at 6442.65/sqkm and Singapore 7987.52/sqkm) , and yet we are feeling crowded already. Being crowded is not without it's reason. Its famous Ladies Market, known as 'Lui Yan Gai', is also one of the most visited places in Hong Kong. Another reason which attributed to it's densely population area is the high density housing. Hence, situated in the city area which is busy, packed and vibrant, it naturally leads to more passerbys and visitors shopping in Langham Mall.

Focusing on shopping experience and clear positioning strategy
Today, online shopping provides consumer more convenience than ever. Goods could be easily bought even with mobile on the go and delivered to your doorstep. These days one could shop in brick and mortar stalls to check out the items just to purchase it online at a discount. When it comes to pricing and wide products selection, malls will never get to compete with online shopping. Hence, retail malls have to focus on the shopping experience and convenience. For instance, making it a hub for local community by positioning itself as a place for young couples to date, or even a place for quality time for family bonding.

In the case of Mongkok , its location is known as a playground for the young people, and a term 'MK people' is use to describe teenagers or young adults who hang out in Mongkok often and a high affinity to 'Mongkok culture'. In the 90s to early 2000s, the street was once dominated by Japanese pop culture, but was overtaken by Korean pop culture, from fashion, to food and music.
To ride on this Mongkok culture, Langham Mall has new concepts and pop ups stores, as well as a revamp of live stage in level 12 to bring in live performance and celebrities which potentially attracts more young people. The popular Nene Chicken also officially first opened it stall in Langham Mall with popular television personality Yoo Jae-Sul as spokesperson. Its opening attracted long queue.

When I was doing my shopping in Langham Place, I did notice that 'almost all' of the shops do cater for the young people. Unlike Ion Orchard, they don't see high end retail goods such as LV, Hermes or Prada. Instead the shops are mainly catered for youngsters such as retail chain Log-ON- a mega lifestyle specialty store catered for busy young professionals, and Line Friends Store.

Last Christmas season, they had an exhibition called Line Friends Christmas Planet at Langham Place, which has a playground ,interactive games and featuring a 7m illuminated BROWN at the Atrium (popular for selfies) .There's also this this Create Your Own Planet interactive photo design game, which you get to choose your favourite LINE friends 'Planet' and 'Costume' (Brown, Choco, Moon or Sally) which you wish to be transformed into. Your exlcusive photo with Line costume & planet will be on display in the venue which can also be downloadable via a Line App. Although, I am not a fan of Line and don't really enjoy taking selfies, the interesting concept captured my attention.

If a picture is worth a thousand words, a video is probably worth a few thousands more. You can check out the youtube video to have a better idea of what I am talking about:

The results also speaks for itself, as you can see the chart below suggests that retail sales for Langham Place Mall grew by 1.9%, outperforming the general market which is down by 0.9%.

More room for Rental Reversion of Three Garden Road

Not forgetting its office property in Central- Three Garden Road, which got its name in June 2016 after a renaming exercise and publicity campaign. It went through an extensive Asset Enhancement Initiatives (AEI) with improvements in carpark facilities, lobby design and decorative greenary elements resulting in a more dynamic and healthy work-space. It also enhances the property's reputation.

Despite the facelift, it rental psf is still much below the average rental for commercial properties in HK. Currently, average rental psf for Three Garden Road for 1H2017 is 84.65 HK$ psf.

Rental Reversion during 1H 2017 for Three Garden Road

The chart above shows the widening rental gap between Hong Kong and Singapore. Though it be seen that that there's more room for Singapore's commercial rental growth, my point is that the average rent in HK for Q2 these days is above HK$100 (1USD: 7.81HKD), which means Three Garden Road's passing rent is still significantly below current market levels.

You can check out this article:

Champion Reit 1H 2017 Interim Results

Next, I will be working out its potential yield should its rental improves.

Total Rental Income- Net Property Operating Expenses = Net Property Income

The annual report suggested that the ratio between Operating Expenses and the Total Rental Income improved due to higher average occupancy. As the Property Expenses is pretty stable relative to changes in total rental income, we can project future expenses to be the average of three years, 277 HK$ mil, rather than its ratio.

Profit for the year, before distribution to shareholders=
Net property Income + Interest Income +Manager's Fee + Trust & Other Expenses + Increase in Fair Value of Investment Expenses + Gain on Repurchase of Medium Term Notes + Finance Costs - Income Tax

Profit for the year, before distribution to unitholders - Adjustments*=  Total Distributable Income
(Basically is adding non-cash expenses/losses i.e.manager's fee paid and payable in units, and minusing off gains that doesn't affect cashflow, i.e fair value gain in investment properties)

Total Distributable Income X Effective payout ratio = Distribution to unitholders.

*Adjustments: 1. Manager's fee paid and payable in units
                        2. Increase in fair value of investment properties
                        3. Non-cash finance costs
                        4. Deferred Tax

For calculation, we can assume effective payout ratio of 94.5% (which has been pretty consistent over the past few years)

To project distributable income, it would be quite tedious to add all the fees and valuation gains to adjust the non-cash expenses. We can work out the relation between Net Property Income and Distributable Income by calculating its ratio.

We can either take the average or use the lower figure, at 0.679.
In our case, let's be conservative and use 0.679.

Manager is entitled to receive a fee equivalent to 12% of net property income: 50% payable in units and 50% payable in cash. Hence there will be a dilution of units yearly.

As retail sector is still facing challenging times ahead, one of the catalyst for growth for Champion REIT would be its rental income of Three Garden Road as current rental psf is 'significantly' below market price.

This was how rental income for Three Garden Road was derived
(For this exercise, we will assume Champion REIT price to be HK$ 5.68, based on closing price on 10th Jan 2018)

Total rentable area: 1,268,000sq. ft.
Occupancy Rate: 92.6% (as of 30th June 2017)
Effective rent per sq. ft: 84.65 HK$

Total rent for 1H 2017= Total Rentable area X Occupancy Rate X Effective rent psf X 6 months
                                    ≈ 596 HK$ mil

Should it hit full committed occupancy in a year and 100 HK$ psq, and keeping other rentals constant,

Rental Income (Three Garden Road)= 1,268,000 X 100% X 100HK$ psq X 12 = 1,521 HK$ mil
Rental Income (Langham Place Mall) = 412 HK$ mil X 2 = 824 HK$ mil
Rental Income (Langham Place Office) = 175 HK$ mil X 2 = 350 HK$ mil.

Total Rental Income= 2695 HK$ mil.
Net Property Operating Expenses= 277 HK$ mil
Net Property Income= 2695 - 277 =2,418 HK$ mil
Distributable Income= 0.679 * Net Property Income= 1,614.822HK$ mil
Distribution to Unitholders= 0.945 * Distributable Income =1,551.52179 HK$ mil.
Total Units as of 1H 2017= 5,811,998,520
Total units after potential dilution= 5,811,998,520 + 0.06(2,418,000,000)/5.68= 5,837,540,773 units
DPU= Distribution to shareholders/ total units after potential dilution= 0.266 HK$

Potential Dividend upside=(0.2658/2 - 0.1173)/ 0.1173 X 100% = 13.3%

If we are looking for 5% yield for 100% occupancy,

DPU= 5% X 5.68= 0.284 HK$

I have worked out the fomula to derive the DPU and simplified it,

DPU = 0.945 X 0.679 NPI / (5,811,998,520 + 0.06 NPI /5.68)
          = 0.641655 NPI/ (5,811,998,520+  0.06 NPI/5.68)

NPI = 2,584,505,844 HK$

Assuming Net Property Operating Expenses= 277 HK$ mil,

Total Rental Income= 2,861,505,844 HK$

Assuming Rental Income for Langham Place Mall and Office remains unchanged,

Rental Income for Three Garden Road= HK$ 2,861,505,844 - 824 HK$ mil- 350 HK$ mil = 1,687,505,844 HK$

Effective Rent psf/ yr= 1,687,505,844 / 1,268,000 =1,330 HK$
Effective Rent psf/ mth= 111 HK$ /month.

5% yield at 92.6% occupancy,

Effective rent = 1,687,505,844 / (1,268,000 *0.926)= 1,437 HK$
Effective Rent psf/ mth = 120 HK$/psf , which is still below the rental price in Central.

Just to give you an idea on the rental rates at  Central: Cheung Kong Centre, which is just two mins walk away from Three Garden Road currently has an average rental of 159 HK$ psf.
Here it is :

If you check out the curent listings of Three Garden Road here, they are asking for 125 HK$ psf. Its  average rent is still below 100 HK$ psf because many expiring leases have yet to undergo a rent review. It's just a matter of time.

Possible Sale of Langham Office Tower
On 5th July, Champion Reit announced its potential divestment of its Langham Office Towerin light of current favourable commercial market condition.

As of 30th June 2017, Knight Frank, independant principle valuer of this Reit, valued 8.734b HK$.
Current 6months NPI (Jan- Jun 2017) is 163.280m HK$ up 13% from previous year. Annualizing its rental brings about a NPI yield of 3.74%, with potential upside in rental reversion.

Although I believe management will only consider a dispoal at an exit NPI yield below 3%, but assuming if the deal went through, and it still trades at 0.5 pb ratio and management decides to give up special dividend, expected special dividend= 8.734b HK$/ 5.81b units =1.5 HK$.

For 6 months
Expected Total Rental Income =1,183-175=  1008m HK$ mil
Expected NPI = 1064/1183 X 1008 =906.6 HK$ mil
Distributable Income= 0.679 X 906.6 HK$ mm = 615.58 HK$ mil
Distribution to Shareholders = 0.945 X 615.58 HK$ = 581.73 HK$ mil
DPU= 581.73 HK$ mil/ 5.81 bil= 0.10 HK$

DPU for the year= 0.10009065 X 2 = 0.2001813HK$.
Based on 11th Jan's closing price of 5.68 HK$, price after special dividend would be 5.68-1.5= 4.18 HK$
Dividend yield = 0.200/4.18 X 100% = 4.8%, which is above 4.17%.

Please note that this is just a rough gauge. There are also transaction costs and management may not distribute 100% of the proceeds of sale & may consider other commercial properties which are more yield accretive.

Thanks for spending your time to read this long post. I will write on portfolio update in the next post, which is long overdue.

If you are keen to follow my posts or get updates, do like/follow my FB page here where I will update it when there's a new post.

Sunday, November 19, 2017

My thoughts on Mapletree Industrial Trust and Dividend Discount Model Valuation

Few weeks back, Mapletree Industrial Trust released their quarterly earnings and at the same time, announced a joint venture with Mapletree Investments to acquire 14 data centres. This shouldn’t come as a surprise, as they have made known their investment strategy on 26th Sept 2016 to explore established data centre markets. 

It was funded via bank borrowing and private placement of 68million shares to institutions and other investors at the issue price range of $1.83 to $1.90. It was 3.3x oversubscribed and price at the top range at $1.90, suggesting strong institutional demand.

MIT was the first share I have ever own and bought it during it’s IPO. Back then I was in my final months of NS and I went to subscribe 3,000 shares at the ATM machine using all my savings. I was lucky that to be alloted 1,000 shares because I was told that a good IPO with Temasek backing is hard to get. It opened at $1.00 and I thought I was even luckier by selling it at $1.20 months later after collecting more than 2 rounds of dividends. I thought of buying back when it dips below it but it had gone upwards since then. However, I added 2000 shares at $1.84 in August after having some spare cash for that month and they announced the acquisiton after. Here are some of the reasons why I find the acquisition makes sense.


One of the concerns I had all the while was its short leasehold. As of March 2017, the weighed average unexpired lease term is about 39.3  (38.8 as of Oct 17) years. It's calculated based on land area. However, that's also the reason that it's able to obtain a higher yield compared to other Reits as leasehold properties require lesser capital to purchase, and tenants are not affected by the leasehold years. The downside is having to constantly acquire properties to improve the average lease term. 

If we were to calculate based on Gross Revenue, for FY16/17, total revenue collected for leasehold properties less than 21 years would be $41,699,000 of total revenue of 161mil, which is about 25%. 

After the data centre acquisition, it would strengthen it's porfolio by lengthening the land lease as it now forms 24.4% of its total portfolio by land area.

Accretive Acquistion

The joint venture is also said to be yield accretive, as the acquistion of the data centres increases the distribution per unit (DPU) despite the dilution effect.

This means more distributable income to shareholders without the need to fork out additional cash. Although the loans would increase net debt to 34.7%, it is still averagely lower compared to other industrial reits. 

MIT's net debt to asset is below the average after the acquisiton

Rental Escalation
If you have been monitoring First Reit and Parkway Reit in Singapore, you will realize that their DPU increases every quarter (when compared Year on Year).

Here's how the rent review mechanism is calculated, which explains why PLife Reit managed to grow their DPU every year, consistently.

The reason is because of the build in mechanism for rental escalations. In the case of the data centre, it's an annual rental escalation of at least 2%.

Recently I read a Business Times article about the way Reits compute rental reversions. There is no uniform way of calculating rental reversions and it's not mandatory to disclose it.

For instance, Keppel Reit's rent reversion only applies to new, renewal and foward renewal leases. Review leases, which refers to long leases, are not included. This was mentioned in the regulatory filing earlier this year. However in Q3 reporting, it was mentioned that rent reversion were positive at 3% for the first nine months.

As for Mapletree Industrial Trust, they didnt specifiy any rental reversion policy. Basically they just disclose the gross revenue and net property income in every financial period. As to whether they have any reversion for review lease or just renewal lease, your guess is as good as mine. I will write to Investor Relations team (suggested by Kyith from Investment Moats) and update you if they reply. 

Other positive points: 
-reduced maximum risk exposure to a single tenant
-increased WALE

Growing Dividends

In the past few years, it had dividend reinvestment plan (discontinued) which allows shareholder to automatically reinvest dividends and capital gains distributions. Investors who chose to take cash instead would see their shareholdings diluted by the new issued shares. Some reits reported higher distributable income after rights or drip, but dpu drops because of the dilutive effect. As for MIT, despite share dilution, its dpu has been always higher than the previous year's quarter since it's listing. The industrial REIT that sees dividend growing every quarter when compared year on year is Ascendast REIT. (with an exception in Yr 2013). Thats also the reason that it's trading at a premium to NAV of 1.4X

MIT's quarterly DPU (in cents)

In my opinion, it all boils down to the management, who has been very prudent in their investments to enhancing shareholder's value.

Being in the sales line, I do know that tomorrow's success is determined by our efforts today. Like what Warren Buffett had said, someone is sitting in the shade today because someone planted a tree a long time ago.

In the case of MIT, it is able to grow it's dividend partly due to AEI through funds from Dividend Reinvestment Plan (DRIP) and alwyas having visible pipeline of projects coming up. The coming ones will be 30A Kallang Place and Kallang Basin 4 Cluster (AEI) and a new data centre for HP. The management are able to ensure that new projects are able to contribute to the distributable income to offset any loss of dividends from lower occupancy or drop in rental yield. 

There is a saying that you can't have your cake and eat it. If Mapletree Industrial Trust has good management, growing dpu, low gearing, what's the catch?

1.4x book value
In my opinion, the downside is that it's trading quite above book value, 1.4X, and since it's listing it has never traded at a discount to book value. I guess that's the premium for good management and a reputable sponsor. You got to give it to them for growing the dpu in challenging times and enhancing shareholder value. I am often more inclined to buy Reits managed by a reputable Reit Manager. My favourites are: Parkway, Capitaland, Fraser and Mapletree. 

Lower dividend yield compared to peers
Secondly, it's dividend yield is lower than it's peers. At $1.97, MIT is trading at a premium to book value, hence it's yield is lower.

However, the dividend growth is equally important too as MIT managed to grow it's dividend at a rate of 6.87%


For a company with reputable sponsor, I thought the valuation is likely to be the Archilles' heel analyzing it's value. Though great companies are likely to be cheap especially in the bull market, we have to calculate and ensure we aren't overpaying or else we are unlikely to receive a decent return on investment.

As the purpose of buying Reits is for stable dividends, we would use dividend discount model.

Share price = Dividends one year from now / (Discount rate- Dividend Growth Rate)

For individual investors, we can use Capital Asset Pricing Model (CAPM) to determine the discount rate.

Discount Rate= Risk Free Rate - Beta (Market Return - Risk Free Rate)

E(R)= Rf + β (Rm - Rf )

For this exercise, I'll use Risk Free rate, Rf to be 10 Year Singapore Government Securities (SGS), which is 2.13%

Beta, β to be 0.43

As for markets return, R, I will be using STI ETF's return since inception till 30th Oct, which is 7.52% (with dividends reinvested).

10 year STI returns is about 1.83%. To be on the conservative side, lets use the higher return, 7.52% 

This gives us a discount rate of 4.4477%.

Since inception till end 2016, the dividend growth rate of MIT is about 6.87%.  If applied to dividend discount model, the value price per share becomes negative.( Dividend Growth Rate > Discount Rate) However, this is the assumption that it will keep growing it's dividend forever at this rate which may not be sustainable. Even as the growth rate approaches cost of equity i.e. 4.4477%, the value approaches infinity.

To find growth rate which market is current valuing, we can do up a value per share as a function of expected growth rate graph. In this case, the implied growth rate would be about -1.32% to justify the share price of $1.980. So market is pricing MIT at -1.32% drop in yearly dividends if all my assumptions hold.

Two stage dividend discount model
Perhaps I am being too optimistic by assuming dividends are going grow at 6.87% forever. In most cases, companies go through two or more stages of growth, where it begins with an extraordinary growth stage and gradually to a stable growth phase which lasts forever.

MIT was listed in late 2010, so lets assume 10 years of growth stage (since listing in 2010) at rate of 6.87% and subsequent perpetual growth rate of 3%. In this calculation, we will ignore any capital gains.

Discounted Dividends (Year 1 to Year 3) = $0.1190 + $0.1217 + $0.1246 =$0.3653

Total Equity value= Discounted Dividends (Year 1 to Year 3) + Discounted Perpetuity Value= $8.85

$8.85 is extremely high and it's definitely overvalued. The yield will become 1.3% and paying 12X book value.

I relooked at my calculations and the variables used yet I find the assumptions used are quite reasonable. I searched online on CAPM model and found an article about it's limitations. As the CAPM calculates the required return for risky assets, it measures risk based on the beta. Beta is actually the relative volatility of the investment compared to the market and a more volatile stock gives a higher beta value. 

However, value investors like Warren Buffett, do not associate risk based on its volatility. Rather they assess its fundamentals to determine it's risk. Hence, investors who uses CAPM model are not getting the required return based on true measure of risk..

To test it out the extent which beta affects the valuation, we can try out some sort of sensitivity analysis and we can also find out the implied beta at current market valuation.
Using a two stage dividend discount model and same assumptions,

Present value of dividends for the first 3 years:

Discount factor= 1 +Rf + β (Rm - Rf )
=1+ 2.13% + β (7.52%-2.13%)
=1+ 0.0213 +0.0539β  (above)

Present value of terminal price= $(0.1420* 1.03)/(0.0539β-0.0087)/(1+0.0213+0.0539β)⁴

(discount rate- growth rate)
=2.13% + β (7.52%-2.13%)- 3%
=-0.0087+0.0539β (above)

=1+ 0.0213 +0.0539β → discount to present value (above)

Hence adding all up: 

Price= Discounted dividends for 3 years+ Present value for stable growth

Price= 0.1243/(1+0.0213+0.0539β)¹ + 0.1328/(1+0.0213+0.0539β)² + 0.1420/(1+0.0213+0.0539β)³+0.146212/(0.0539β-0.0087)/(1+0.0213+0.0539β)⁴

Implied beta at $1.98 is about 1.32

The analysis suggest that the dividend discount model gives a very high valuation for low beta stocks, and the valuation derived is very sensitive to small increments in beta. This is why sometimes I avoid using valuation fomulas in calculating intrinsic values as some fomulas gives the theoretically right answer, but doesn't work well practically.

A better way is to determine the discount rate based on our perceived risk on the industry or the stock, rather than measure of volatility. For instance, I would use a higher discount rate for cyclical industries i.e. Oil&gas, whereas for more defensive sectors such as healthcare or companies that consistently generate free cashflows, I would apply a lower discount rate. Another suggestion for discount rate in valuing reits is to use the rate that I should be minimally compensated for. I would compare the returns to SGX-S-REIT 20 Index. You can check it out here. → Indices → Search for SGX S-REIT 20 Index and download it's fund factsheet. The 5 year asnnualized returns are about 11.9% as of June 2017. 

Thanks for reading my posts. I have been adding more shares during these past few months as the market is trending up.I hadn't got time to update my Facebook on my stock transactions because of work commitment and I was overseas last month too. Will be travelling again next month and the month after.. 
Will do an update and list out all my buy/sell shares hopefully by this month.

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In these few months of bull market, how has your portfolio been performing?