Path to prosperity: 2020-06-07

Ascott Residence Trust (Ascott) owns 88 hospitality properties across 15 countries globally with a range of offerings like serviced residences, hotels and rental housing. Post-merger with Ascendas Hospitality Trust in 2019, it is currently the largest hospitality trust in Asia Pacific and has a market capitalization of S$3bn and S$7.4bn of assets under management. We think that its share price has been beaten down badly by the Covid-19-induced market turmoil and offers investors good value due to:

Highly geared to domestic travel rebound

As economies gradually reopen, governments are encouraging domestic travel to revive their fallen hospitality sectors as borders remain tightly controlled. Given Singapore’s small size and population, domestic travel has a far smaller role in reviving our hospitality sector, in our opinion. We therefore think that more globally diversified hospitality stocks like Ascott, which has exposure across 15 countries, could be more geared to the recovery in domestic travel.

For example, in Japan, which contributes 12% to Ascott’s FY19 gross profit, the government has announced a campaign to stimulate domestic travel by offering subsidies of up to 20,000 Yen per day through discounts and vouchers for hotels and attractions for residents taking domestic trips.

Ascott Residence Trust income diversity (Source: Ascott)

Strong balance sheet positioning it for growth

Ascott has a strong balance sheet due to its 35.4% gearing which implies a S$2.1bn debt headroom before reaching the 50% regulatory limit. It has ~S$300m cash on hand and will be receiving an additional S$163m cash proceeds from the divestment of Somerset Liang Court in 2H20. This strength could allow it to make opportunistic acquisitions, from either third-parties or its sponsor, without an equity fund raising at a time when property valuations could be taking a hit due to the lower cashflow projections from valuers.

Apart from inorganic growth, Ascott’s strong balance sheet allows it to undertake development and asset enhancement projects without putting too much strain on its financials. Examples include the development of lyf@one-north, and the redevelopment of Somerset Liang Court.

Somerset Liang Court (Source: Ascott)

EPRA NAREIT Index inclusion

One of the benefits highlighted by Ascott for the merger with Ascendas Hospitality was the potential for inclusion into the EPRA NAREIT Developed Index which could lead to a wider investor base (higher visibility) and higher trading liquidity. Despite the decline in Ascott’s share price, its market cap of $3bn allowed it to qualify for index inclusion in Jun20. We think that the inclusion could be a further boost to Ascott’s share price due to inflows from institutional funds, like what FLT and KDCREIT experienced when they were included in 2019.

Key risks to be aware of

As only 11% of its FY19 gross profit is derived in S$, Ascott is exposed to FX risks if the S$ significantly appreciates against the basket of foreign currencies Ascott has exposure to. Additionally, like most other businesses, Ascott would also be negatively impacted if the downturn from Covid-19 is longer than expected or if a second wave of infections materializes.

1 comments

Earlier today Sembcorp Marine (SCM) announced a recapitalization of S$2.1bn via a rights issue of 5 SCM rights shares for every SCM share currently outstanding at an issue price of S$0.20 per rights share. The amount raised will be supported by an undertaking by Sembcorp Industries (SCI) and Temasek to subscribe for up to S$1.5bn and S$0.6bn respectively.

What is Temasek's endgame

It would be interesting to see what Temasek is planning for SCM as orders have been declining over the past few years since the industry downturn started in 2014. Last year, Temasek did a partial offer for Keppel at $7.35 during which there was chatter that there might be some sort of reorganization of Temasek's offshore marine portfolio by potentially merging Keppel O&M and Sembcorp Marine. There could also be some reorganization of the various portfolios under Keppel and SCI as both do have some other overlapping areas like renewables and infrastructure.

My guess would be that Temasek consolidates the various industries that Keppel and SCI have such that each can be a national champion in that particular area rather than having overlapping competencies and thus having redundancies from a national standpoint. Interestingly, Keppel also released its 2030 vision a while back and this came before the completion of Temasek's partial offer (expected in 3Q2020).

With Keppel's partial offer still yet to be completed, my guess is that any further moves by Temasek would come after the completion (expected 2H2020). The current move of recapitalizing SCM and demerging it from SCI helps to simplify the org structure and strengthen SCM's balance sheet. This could make SCM a more palatable target for Keppel to take over once the partial offer is completed.

As this deal makes Temasek a direct shareholder of SCM, I am also wondering if the eventual intention is to privatize SCM. Post-deal, Temasek would own between 30-58% of SCM. My guess would be that Temasek could eventually own ~50% since I expect there will be a number of minority shareholders that do not wish to subscribe to the rights as the industry is declining or shareholders simply do not have sufficient capital set aside for such a large rights issue.

Shareholding post-rights issue (Source: SCM)

This deal, like the Keppel and SIA deals, has also made clear that Temasek will not hesitate to step in to support its portfolio companies in times of need and could provide further comfort for shareholders of other Temasek-linked companies that this can happen for them if they are in trouble. Whether this deal is good or not is hard to assess without knowing the future steps that Temasek would take.

Deal details

For every 1000 SCM shares owned, the SCM shareholder will need to cough up $1,000 to subscribe to the 5000 rights shares. To maintain their shareholding percentage, SCM shareholders would have to put up more cash than the value of their SCM shares. As of last closing price, 1000 SCM shares would be worth $850 and shareholders would have to come up with $1000. The figure below also shows that this deal is massively dilutive, although in this case, it appears good because SCM was in a net loss position so the loss per share was reduced.

The use of proceeds will be split into the same S$1.5bn and S$0.6bn:

S$1.5bn - To repay outstanding principal on the credit facility of S$1.5bn provided by SCI to SCM

S$0.6bn - For working capital and general corporate purposes

Subsequent to the rights issue, there would then be a distribution of SCM shares by SCI to SCI's shareholders. SCI shareholders would receive between 427 and 491 SCM shares for every 100 SCI shares they own.

Why this is being done

To enhance SCM's balance sheet by deleveraging and lowering interest expense while also doubling its Net Tangible Assets from S$1.9bn to S$4.0bn. This would allow SCM sufficient capital to compete for more projects.

Pro-forma financial impact of recapitalization (Source: SCM)

What shareholders need to do

SCM shareholders need to decide on whether to approve the rights issue and whitewash resolution separately. For the rights issue, it appears that it is a given granted SCI has >50% and will be voting in favour. Minority shareholders will have more say in the whitewash resolution for the proposed distribution. If the resolutions are approved, SCM shareholders need to decide if they want to sell the rights as they are renounceable or subscribe to the rights for $0.20 per rights share. For every 1000 SCM shares owned, the SCM shareholder will need to cough up $1,000 to subscribe to the 5000 rights shares.

For SCI shareholders, they need to approve the proposed distribution of SCM shares to them. If the resolutions are all approved, SCI shareholders will receive X amount of SCM shares depending on the subscription rate by SCM shareholders.

In effect, since the 3 resolutions are inter-conditional, minority shareholders still have the ability to block this deal.

Shareholder Resolutions (Source: SCM)

No comments

Path to prosperity

Popular Posts

Tags

Blog Archive