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.