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Monday, January 9, 2017

Recent Action - Sabana Reit

I made my first transaction for 2017 that I've monitored for quite some time.

Sabana Reit is probably one of the most hated Reits in the whole universe of S-reits at the moment. And they are rightfully so. Investors who has been with them since the IPO has seen the share price go up to as high as $1.3+ before plunging all the way down to today's post-rights price of around $0.34.

I was waiting and observing and waiting further to get this real cheap and I finally managed to get them today after queuing for the stock on a GTD basis since last Friday.

I managed to purchase 30,000 shares of Sabana Reit at a price of $0.34




Reasons Why I'm Buying

1.) This is a classic example of buying a company at a cheap price. To me at least, I find it compelling enough to add this to my portfolio.

Pre-rights - Equity is at $596m, while outstanding shares is at 778m. Divide them and you get the NAV of about $0.766.

Post-rights - Equity raised about $80.2m, so new equity will be at $676m, while outstanding shares will increase by about 310m to 1,088m. Divide them and you get the NAV of about $0.62.

They are using the funds to buy the 3 properties which is near or slightly less their market valuation, so that will not help the NAV by much unless industrial sector recover as a whole.

Buying them at my purchase price would mean that I'm buying them at 45% discount to their book value. That gives me sort of margin safety. They have proven that in some cases, they are still able to divest their industrial properties at market valuation. That's a relief for the industries as a whole.


2.) Dividend yield is also compelling. I'm talking about sustainable dividend yield here.

The management did not guide whether the acquisitions via rights will be accretive in nature, but a quick guess should be it's not.

Pre-rights TTM DPU is at $0.0477 while I'm expecting a 15% impact to the DPU for post-rights to come at $0.04 since they are on master lease and they provide more visibility in terms of lease renewal.

The property in Eunos comes with income support for 5 years while the property in Changi comes with income support for 3 years.

Based on the current share price I bought, it provides an earnings yield of 11.7%. Since they are distributing 100% of their earnings via cashflow method, that would constitute a dividend yield of around 11.7%. That's pretty good to me in terms of dividend yield.


3.) Gearing has come down as a result of this financing from pre-rights of 41.5% to around 39% post-rights issue.


4.) There's a strategy to getting the mother share of a Reit that asks for rights issue that are not accretive.

First level plunge - This is the usual normal plunge once rights issues are announced because investors are typically not perceptive to put more cash into an existing "lousy" stock.

Second level plunge - This plunge is made worse if investors can ascertain that the funds used for the acquisitions are not accretive. This usually happens when the mother share is trending down and is typically a bad idea to raise cash via rights. This is when the bulk of investors holding the mother share are all dumping their stocks, sending a spiral wave together with the short seller. As investors, we should still wait for more meats to come. We should never try to buy the mother share and apply for excess rights here because the game for that 1,000 vs 100 shares are now no longer favorable to investors.

Third level plunge - This plunge is when the mother share goes ex-rights and the rights start trading on the market. Typically, we are left with investors who just want to hold on to their battered mother share but doesn't want any further involvement with the rights, so they are selling the rights. The rights get sold cheaper which means that the mother share would continue to go down, otherwise there would be arbitrage opportunity.

Finally, if you are still crazy enough wanting to go in like me, this is when you get in - Monitor the rights trading for a few days, and the mother share price will stabilize at some point. To me, this is the best opportunity because all the crap has hit the fans and has happened, so the bulk of the news is over. 

This is also when I start buying them, when no one bothers to look at it and the news has died down.

My call is that at $0.335/$0.34, the share price has stabilized and bottomed and that's where the risk reward would come into play.

Unless there's new development or news that has not come into play yet, I don't think it'll drop much further, supported by their fundamentals (someone asked me if Sabana still has fundamentals, lol).

I decide to give the management another chance to repent and atone to make it better.


23 comments:

  1. Hi B
    great post!
    I love the tear down on the various stages of "panic" and when you decide to enter, at the peak of the pessimism.
    No idea about Sabana REIT so can't comment much
    but I love the explanation on the breakdown.
    All the best on this.

    Cheers
    TTI

    ReplyDelete
    Replies
    1. Hi TTTI

      Many thanks for your kind words.

      Its a bit chronological that when something really bad happened, usually market will react a lot more seriously than they should.

      I do hope though that from a net asset and yield point of view it does provide some kind of support, otherwise im set to lose this portion of the money.

      Delete
  2. Hi B,
    Thanks for the sharing and analysis,,,after seeing this,, I have more confident to add more ,, haha,,,just kidding ,,, for me ,,I am buying just because of deep discount,, , as you said ,,, there might be margin of safety after price corrected so much ,,,,but my average cost is higher as I buy just right after the ex right ,,, too quick to take action,,,, " Kia su",,,, hope we are right ,,,
    Cheers ! :-)

    ReplyDelete
    Replies
    1. Hi STE

      Yeah i saw that you bought at around 38 cents, not too far from here. I have a feeling though that you will continue to add onto them. You have unlimited funds, the power of keep averaging down!!! Hahaha

      Delete
    2. Yah ! my first trade was $0.39 cts and bought 70 lot nil pay right to average down ,,, now have 90 lots at cost of $0.36..
      Cheers ,,, hope we are right this time !! :-)

      Delete
  3. Good luck B. Hope the management does better for this Reit

    ReplyDelete
    Replies
    1. Thanks SR.

      I do hope also they can surprise on the upside.

      Delete
  4. Hmm...The most under-valued REIT. Hope it is another Saizen not Indiabulls. Good luck B!

    ReplyDelete
    Replies
    1. Hi PIF

      I do hope that its another Saizen and hope there is a takeover soon at a premium haha

      Delete
  5. thanks for sharing. Maybe i can tikam based on deduction !

    ReplyDelete
    Replies
    1. Welcome Cory.

      Gd luck with this one!!

      Delete
  6. Sometime ago, Sanbana renewed the lease of 3 properties with its sponsor at 1 year term with renewal option. Presumably the new rental income will be lower for the 3 properties. Its impact is unknown.

    ReplyDelete
    Replies
    1. Hi thinknotleft

      Yeah i read about that. They are trying to tie up master leases instead of individual leases but at a lower rate. I hvnt take that impact into consideration, thanks for reminding.

      Delete
  7. The management's track record at renewing of (master) lease is atrocious. I have not monitored Sabana for a long time and am really surprised that its now at 33 cents now. kudos to you for analyzing this and giving their management another chance!

    ReplyDelete
  8. B,

    looks another well played move here!

    be fearful when others are greedy ; be greedy when others are fearful !!

    ReplyDelete
  9. Hi,

    Nice article on Sabana. I would just like to know why you bought the Sabana shares instead of the Sabana R or R1 shares now trading at around $.085/share which are way cheaper than $.345 for Sabana.

    Thanks

    ReplyDelete
  10. Thanks for sharing, it's nice post of analysis

    ReplyDelete
  11. Hi B,

    Nice article! Your articles always provide interesting views. Just would like to ask for your opinion on the increasing leverage ratio vs last year with falling debt (Meaning their value of their assets are dropping), sliding DPU and the tough industry for 2017. They seem to be an ailing business with no improvements seen. What are your views?

    ReplyDelete
  12. This comment has been removed by the author.

    ReplyDelete
  13. Thanks B for the nice analysis. Vested at 0.345c :)

    My company is actually one of it's tenant and I have to say that they are doing a better job now getting tenants to improve occupancy. Btw, where did you get info on how long the income support is? I don't think this is mentioned in their quarterly report (slides).

    ReplyDelete
  14. Once the subscribed shares start trading, there would be one more level of plunge.

    ReplyDelete
  15. Rights are not the same as shares. You are simply buying the right to buy the discounted shares. So you still need to fork out an additional 25.8c.

    ReplyDelete
  16. Vested at .35 before i read this article. Always good to know like minded retail investors.

    ReplyDelete

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