I bought MacArthurCook Industrial REIT on 18 Nov --- a bet gone wrong?

Some history

1. 6 November 2009: MacArthurCook Industrial REIT (MI-REIT) announced a severely value destructive recapitalisation plan on the 6 November 2009.
2. 11 November 2009: Cambridge Industrial Trust (CIT) annouced the usage of $10.5m out of $28m from recent private placement to acquire 9.76% interest in MI-REIT.
3. 16 November 2009: CIT alerted MI-REIT unitholders to the value destructive nature of the recapitalisation plan and urge them to vote against the resolution at the EGM on 23 November. They intend to vote out the managers of MI-REIT and install themselves as the manager of the REIT.
4. 17 - 20 November: Separate rallying announcements, newspaper ads by CIT and MI-REIT to seek support against and for the recapitalisation plan respectively
5. 20 November: MAS announced that it will not approve managers of CIT to manage MI-REIT due to potential conflict of interest.
   

The recapitalisation plan

1. Issuing 78.5m new units to AMP Capital Investors (AMPCIL) at 28 cents
2. Issuing 142.9m new units to Cornerstone Investors at 28 cents
3. Issuing 975.6m rights at 15.9 cents (2 rights for 1 MI-REIT unit) to all unitholders, including AMPCIL and Cornerstone Investors.
   

With 266.4m outstanding units as at 30 September 2009, new units constituted a hefty 83% of existing units! No wonder the dilution and value destruction are so severe!

Value destruction

From the proposed recapitalisation plan announced on 6 November, the financial effects pre and post recapitalisation are stated as follows:

Before

NAV per unit: 92 cents
DPU (half year): 3.45 cents
Yield (annualised): 16.8% (based on MI-REIT unit traded at 41 cents)

After

NAV per unit: 31 cents
DPU (half year): 1.04 cents
Yield (annualised): 9.3% (based on MI-REIT unit traded at 41 cents)

Issuing new units to AMPCIL and Cornerstone Investors at 28 cents a share at a discount of 30% to traded price of 41 cents before the recapitalisation plan was announced and 70% discount to NAV was upmost unfair to existing shareholders!

Better to let it fail?

Before the announcement of the recapitalisation plan, MI-REIT was trading at about 40 cents, or 56.5% discount to NAV. After the recapitalisation, if the market continue to value it at the same discount to NAV, it would mean a share price of about 13.5 cents!

Allowing MI-REIT to fail would mean a fire sale of its properties. Though the process will take some time and most, if not all, would go at a huge discount to last the valuation on Sep 2009, existing unitholders can use the NAV per unit to guage how much they will get back. Assuming a 50% discount to NAV, each unit can still fetch 46 cents! This is already much higher than the 31 cents NAV per share after recapitalisation and even higher than the 41 cents before its announcement!

A bet gone wrong?

It was only after CIT highlighted the severe value destructive nature of the recapitalisation plan that I find out more about it. Satisfied that the ridiculous plan is indeed a totally unfair deal for existing shareholders, I am willing to bet that they will not support such a deal. Since it was a bet, I decided to risk less and bought less than what I normally would for other investment. Thus I bought some on 18 November.

I was hoping that the plan will be rejected, CIT take over MI-REIT, and come up with a fairer recapitalisation plan, e.g. rights, new loan facility etc; restructure it, sell off unperforming assets and ulimately merge the two REITs.

However, that hope was dashed when MAS announce it would not approve CIT's managers to manage MI-REIT on concerns for conflict of interest. Thus my only hope left was to see the recapitalisation plan get voted down and have MI-REIT liquated to unlock its value for existing shareholders.

Conclusion

Investment is all about risk and I am willing to take calculated risk. I did my sums and theoretically, the ridiculous recapitalisation plan should be voted down. However, as there are sometimes no logic in market behaviour, I can't be too sure until the votes are counted.

Cut loss on United Food and Ocean Sky, invested into Suntec REIT on 28 Oct 2009

United Food Holdings

Mistakes are mistakes, no matter how they are packaged. United Food Holdings is one of the most spectacular value destructing business on my portfolio. Starting with a huge cash horde which translates into a large cash per share, it can easily qualify as one of my best cigar butt. But as time go on, the management demostrated outstanding capability to drain it with seemingly failed but huge investments (land, soya beans).

Ocean Sky International

Unlike United Food Holdings, I did not classify Ocean Sky as a cigar butt in the beginning. However, just like any typical manufacturers hit hard by the falling orders due to the ongoing economic recession, they are driven into quarterly losses.

Suntec REIT

Looking at the falling office rents, sliding occupancy rates, Suntec REIT might not seem to be a good investment option. However, even at current dismal rents and occupancy, Suntec REIT already offer nearly 10% yield based 3Q DPU and the price I bought.

Going forward, I have reasons to be optimistic about rising rents, occupancy rates and hence DPU. Looking at the Prime Grade A Office Rental Trend posted in the 3Q presentation slides, rising and falling rents just mirror cycling economic trends. As such, once the economy regains firmer footing, the demand for office space and retail space will resume, and especially after the completion of Marina Bay financial centre and Sands IR that further bring more vibrancy into the area. But in the short term, rents and hence DPU for Suntec REIT could worsen before it get better.

Action

I can choose to sit on United Food and Ocean Sky, especially the latter, and wait for them to recover with the broader economic situation. But going through my options, I see more potential in Suntec REIT than Ocean Sky, in terms of recovery.

Took profit on Cambridge Industrial Trust and Courage Marine on 2nd October 2009

Rationale

Both had almost doubled in share price since I acquired them. For past investments, I would have sold 1/2 of my holdings to recover my capital and let the 'profit' grow. But for Cambridge Industrial Trust (CIT) and Courage Marine, I decided to trim my holdings by about 1/3 each instead.

I decided to keep more of their shares because I am still confident of their potential to grow much further once the regional and global economy recover strongly.

On the other hand, I still took some profit because no matter how big that potential is, I prefer to diversify and raise cash for future investments.

Reinvested remaining proceeds from SPC into KS Energy on 29 September 2009

Motivation

Despite the recent oil price correction from above USD $147 last year to current level fluctuating around USD $70, I believe the demand for crude oil for energy needs, and accompanying support services will surge again as the world economy gets back on its footing.

KS Energy

KS Energy operates in the oil & gas industry. It has 2 main core business segments, trading of capital equipment and provider of capital equipment chartering, drilling and rig management services. It is the latter that I see potential.

Business Performance


Ignoring other operating income that normally arose from divestment of investment or interest income, profitablitiy seems to turn the corner since 3Q 2008. With a lower base in 3Q 2008, 3Q 2009 should see a better improvement in earnings.

Reason to be optimistic - leveraging on more economic locomotives

The surge in world demand for resouces in 2007 to 2008 might be only a prelude to a much bigger one in the next decade, 2010-2019. The global economy used to be pulled by one major (US) and several smaller (Eurozone, Japan) locomotives. The next decade will see, for the first time in recent history, several huge locomotives in operation together. These include US (awaiting recovery), China, India and Brazil. Together with the support locomotives from Eurozone and Japan, the pulling force in the next decade could be very powerful.

The consequence is a surge in demand for resources and services the world can ever produce. Unfortunately, the demand cuts both ways. On one hand, asset and security prices will be boosted and the next bubble that dwarf the one that burst in 2008 may well occur. On the other hand, inflation will break through the roof and governments around the world will have a hard time containing it.

Unless there is a concrete switch into alternative sources of energy, demand of oil and gas and its supporting services surge again, on a much larger scale. This is where I believe KS Energy, CH Offshore (that I invested earlier) and many other (currently more expensive) providers will stand to benefit.

Risk

One of my main point of concern for KS Energy is its debt, though it manage to reduce it somewhat via recent fund raising activities. KS Energy's growth and expansion strategy is much more aggressive than CH Offshore and I hope it does not more grow broke. Even though the recent credit crunch is easing, there is still a high chance it can occur again in the near future.

Conclusion

With the investment in KS Energy, my investment in oil & gas industry is more or less completed. I'll turn my attention to food commodities now, for the same reason I go into oil & gas segment.

Investing in gold, a worthwhile option?

As gold price rose past USD 1,000, there seems to be a renewed interest in investing in gold. I am pretty curious to find out whether this is a worthwhile adventure.

USD quoted commodities

As with many commodities such as crude oil, gold is quoted in USD. When USD depreciates against major world currencies, gold prices tend to rise in assumption that value of gold remains unchanged (neglecting inflation to keep the discussion simple). If this assumption is true, then investing in gold for anybody leaving outside United States becomes more of a forex investment than a commodity investment.

Is gold expensive now?

The following charts shows the gold prices in USD and USD/SGD exchange rate over the same period.
source:

1. gold prices: http://www.goldprice.org/gold-price-history.html#36_year_gold_price
2. currency: http://sg.finance.yahoo.com/currency

Indeed, for Singaporeans, the gold price looks like a mirror image of USD/SGD exchange rate chart. Thus, is gold expensive or cheap now?

In January 2005, gold cost about USD $430 an ounce and 1.63 SGD fetch 1 USD then, thus it was about SGD $700 an ounce. Today, 18 September, gold cost about USD 1,014 an ounce and now 1.4149 SGD fetch 1 USD, thus gold cost $1,434.70 now (about twice as expensive). That is a growth of slightly over 100% versus inflation of about 10% in the corresponding period. Thus I do think gold IS expensive now.

A different conclusion might be derived using data stretching beyond 2005 but I could not find these historical figures. Nontheless, looking at historical gold prices:


gold was never more expensive.

Investment opportunity?

As with ANY rationale investment, I aim to buy low and sell high and profit from the difference. While buying high and selling higher can be potentially profitable, the risk could be disportionately higher and not a route I am keen to take.

However, assuming quoting gold in USD is a thing to stay (similar problem afflicts crude prices), as USD budget deflicit widened and current account deficit worsen as US try to spend their way out of recession (essentially printing USD), USD against major currencies (incl. SGD) could continue to slide, thus providing a strong lift for gold prices.

How far US deficit will grow, how far USD will continue to slide and how much lift could be provided for gold is anybody's guess and I'm NOT comfortable with betting on it.

Alternative investment?

On the assumption that US cannot allow fiscal deficit to grow indefintely and hence USD will not depreciate beyond gross cost of paper it's printed on, USD (against SGD) could be a better bet. i.e. an even riskier bet of buying 'cheaper' USD now, wait for the US recession and budget deficit storm to blow over (how long?) and buy gold when USD regains its strength. By then, gold price will have come down and USD will have traded much higher against SGD. Gold becomes cheap once more.

Physical Gold, anybody?

It is quite apparent I'm not keen on gold as an investment. But I did toy with the idea of buying some physical gold for fun, i.e. just to feel shiok. No, I'm not talking about gold jewellery, but real, solid gold.

Phyiscal gold can be purchased from UOB at a premium above traded price and prevailing GST. While a kilo-bar is too expensive to buy and crazy to leave it at home, a bullion coin is nice to keep as a souvenir. Maybe I'll get one when the gold becomes cheap, again.

Reinvested funds from SPC divestment in Thomson Medical Centre on 28th August 2009

Motivation

I see potential in SPC and was prepared to hold on for the long term since I got it when the oil industry was in its doldrums. I was still hopeful that more than 10% of minority shareholders of SPC could hang on to their shares. Unfortunately, PetrolChina easily collected more than 90% of SPC's shares and 'forced' me to divest my holdings. As a consolation, at least I'm fortunate to make slightly over 120% on my investment in SPC.

Anyway, with funds I raised from my sale of SPC, I plough some back into the market and bought Thomson Medical Centre, my 2nd investment into 'growing or recovering' but neglected businesses, after Food Junction (all in one day).

Thomson Medical Centre, TMC

One can read about TMC from their website and financial reports. In short, they aim to be a leading healthcare provider for women and children and its developments over the years indeed indicate that they are moving in the right direction. Other than the usual obstetrics and gynaecology (O&G), paediatric services and fertility treatment services, they set up the Thomson Women Cancer Centre, TWCC. TWCC is dedicated to the prevention, diagnosis and treatment of breast, gynaecological and colorectal tumours in women. Recently, they announced the setting up of the Thomson Chinese Medicine Pte. Ltd.

Performance


Is it explicitly mentioned in TMC's 1Q 2009 financial statements that the group seeks to grow organically. That explains its low gearing below 5%. As such, the fact the TMC can grow steadily over the years is quite impressive, at least to me.

Reasons to be optimistic

Branding (Singapore, not TMC)

Singapore's status as a Medical Hub in the region boded well to attract a healthy load of clients for TMC's services. Though the fertility rate of Singaporeans is pretty low, the countries in the region are still very productive. Given the growing affluence in the regional countries, especially the higher income group, more will come to Singapore and TMC will be one of those to benefit.

One of the first choice among private hospitals

Among my friends and colleagues, if not KK, TMC is the overwhelming first choice they choose for O&G services. It seems to me that TMC is the most affordable private hospital if couples choose to pay more. To gather more clients, TMC actually have 7 Thomson Women’s Clinic spread across the island to refer perspective mothers to TMC.

Risk

TMC seems to be more like a hotel than a hospital. In an attempt to grow, their services become more commercialised than personal. A few couples I know choose not to go back to TMC for subsequent child and instead headed to Mount Alvernia or Gleneagles Hospital (basic package is just slightly more expensive than TMC). Hopefully TMC will take note of all customer feedback and improve their services as they grow.

Conclusion

As the region's economies grows out of the current recession, there should be more babies to come along and help TMC to fulfill is dream to be the leading healthcare provider for women and children.

Traded Tsit Wing for Food Junction on 28th August 2009

With this, I officially threw in the towel on Tsit Wing, making a meagre 8.5% (taking dividend into account) over 3 years. I could either continue to wait for their restructuring efforts to pay off (assuming they aren't taken private successfully) or look somewhere. I chose the latter given the lack of visibility on how long the wait could be amid deteriorating performance, beginning even before the financial crisis started.

Food Junction

As the world economies embark on the uneven road towards recovery, opportunities to invest in cyclical businesses trapped in cyclical doldrums get harder to come by. After SPC, Courage Marine and CH Offshore, I had to look elsewhere and turned my attention towards stable, recovering businesses that is still thinly traded to signify lack of interest... yet. Re-investment into Super Coffeemix marked the beginning to this change of approach and Food Junction is the second one.

Business performance


If profit after tax (excluding other income) for 4Q exceed $595,000, I will be quite confident they are on the road towards a more convincing performance in 2010 and beyond, riding on the wave of economic recovery in Singapore and the region.

Reasons to be optimistic

Mass market food provider

Despite its effort to upgrade its existing food courts into lifestyle food courts, it is nonetheless a mass market food provider. However, I don't really see anything wrong with such a business plan. Food courts are a natural successor to hawker centres in Singapore. Given the current inflation level and upgrading of coffee shops (means rental to increase), the price to pay for a 'simple' meal is almost the same everywhere.

Friendly neighbours

Food junction, along with other major operators, Kopitiam, Food Republic seems friendly to one another, I seldom see food courts from different operators locating in the same building or beside each another. If they do, the crowd in the area will justify it. Thus, during meal times, all major food courts are always packed with people.

Renovation mostly completed.

Most of the renovation works were already completed and without further disruptions to operations, revenue and profit for forward quarters should be better compared to preceding ones.

Risk

One of the few risk I see is its attempt to venture overseas. Food Court culture (born from hawker centre style of eating) is still quite a Singaporean thing. Replicating this concept to the region is not so smooth sailing, as seen from their failure in Hefei Food Court in 2007. Thus I view their acquition of Malone’s American Cafe & Restaurant chain in Shanghai, China as a risky one. Incidentally, they had to delay their Malone expansion plan in Suzhou until market condition improve.

Conclusion

Signs are pointing that many businesses are picking up from their doldrums in the last few quarters. However, judging from the volume and jumps in prices in many counters in general, the market consensus seems to be pointing to a remarkable economic recovery. Refusing to subscribe such irrational optimism, I'm still looking out for neglected businesses trying to stand up from recent injuries.