Price drop to 1.1 with yield of 5 percent. Fixed dividend payout of 6 cents for the past 8 years regardless of good and bad performance. Defensive balance sheet with low debt ratio.
Nav is 2.8 vs price of 1.1 indicating low valuation. Dividends largely financed by recurring income from its property investment and hospitality business and not from its property development arm.
Their developed properties are almost done and ready for launch. For example in Singapore wood square and UK west minister. Expect to turn these holdings into cash once they commence selling at a profit. Properties in overseas are freehold so they can hold long without worry.
Current debt of 400MM will be refinanced to longer tenure. Interest coverage on the low side at ard 5-6 times (5mm interest expense vs net profit of 30mm) which is near our requirements of at least 5x. If we consider interest income of 3mm from their cash holding, the coverage will be much higher. Hence, we don’t see significant debt financing issue.
Moreover they can pay off debt easily by selling off their assets. Cash on hand is 260MM while properties held for sale is 160mm. Investment properties and JV total around 1B. Not concern of liquidity.
Current yield of 5% is attractive which pay investor to wait for future upside.
Potential candidate to be take provide. With the large discount from NAV, chances of upside is high. Market Cap is 500mm while cash on hand is 260mm.
Control shareholder owns 60% of company. To pay off minority shareholders, they need to pay 300MM. Basically they only need to top up 40 MM to pay off minority shareholders. They can easily finance it with debt. With the recurring income from their business, the debt can be paid off easily and there is no need to pay dividends to minority shareholders once it was taken private.
Potential risk/red flag that company may not pay a premium to prevailing stock price during a market crash (for example down to $0.5 compare to $1.15 now) and take company private as they are major shareholder. Recent privitisation deals indicate a 20-50% premium. Refer to Hupsteel and Memtech. We expect such premium should FEO be taken private.
If company not taken private, it remains an attractive yield play given its track record of consistent payment though not increasing. Dividend is sustainable based on its recurring income.
If there is bad year and recurring income not sufficient to cover dividend, it can be finance from its cash holding of 260mm vs yearly dividend of ~30mm which explains why they can pay dividend every year.
Ability to pay dividends is confirmed. With its defensive balance sheet and easy to understand business model of buying properties to rent out for yields, we felt we can invest more into this business.
Estimated fair value is $1.5. Entry price @ 30% discount is $1.05. However, historical fair value margin is 13% while current discount is ~21% indicating a value gap to be realised by the market. Current price of $1.15 is interesting. Potential entry in general weak market conditions.
No comments:
Post a Comment