Sunday, 19 November 2017

MindCamps Preschool Limited



MindChamps Preschool Limited ("MindChamps" or the "Company") is offering 30,449,600 shares at $0.83 per share in which 2m shares will be for the public and the balance for placement. The market cap of the Company will be $200.5m. The IPO will be subject to over-allotment option. Separate from the offering, the Company also entered into an agreement to sell 28,930,800 shares to Cornerstone Investors.

The IPO application will close on 22 Nov 2017 at 12pm and you can start trading on 24 Nov 2017. You can apply for the shares at the ATM and internet banking platforms of DBS/POSB, OCBC and UOB, as well as the mobile app of DBS. You can find the prospectus here.

Principal Activities

The Company is currently the largest operator and franchisor of premium range preschool centres in Singapore and currently operates 6 company-owned-company-operated ("COCO") preschool centres, 30 franchisee-owned-franchisee-operated ("FOFO") preschool centres and 8 FOFO reading and writing centres in Singapore.
(Note: Premium pre school child care centres charges > >$1,700 per month for a 5-day week or 5.5 day week full day programme)

The Company has also developed a franchise model overseas, where it has 4 COCO and 2 FOFO centres in Australia, one FOFO Centre in UAE and 3 FOFO centres in the Philippines. 

Mindchamps is the only preschool operator globally to nurture children using Champion Mindset, an intellectual property owned by MindChamps that was researched by award-winning neuroscientist, Professor Emeritus Allan Snyder FRS. 

According to the prospectus, the curriculum is the result of over a decade of research and development in the 4 domains of early childhood education, neuroscience, child psychology and theatre. 


The Company operates in 3 business segments of education, franchise and others as presented below:


Financial Performance

The revenue has been growing at a CAGR of 30% and has grown from $10.8m in FY2014 to $18.4m in FY2016. The revenue is likely to continue growing as the Company steps up its franchising arrangements globally. Revenue continue to grow from $8.8m to $9.2m in 6M2017


While revenue has increased, net profit has also grown in tandem with improving margins. The net profit hit a high of $5.8m in FY 2016. However, it seemed like 6M 2017 profitability has taken a hit. Let's see if we can find out more.

According to the prospectu (page 82 and 83), the reason for the drop in net profit was because the 6M 2017 revenue is mainly due to recurring revenue stream from its operations and does not enjoy any master franchise license fees that occurred in 6M 2016. This will probably improve in 2018 when the master franchise agreements are finalised with China First Capital Group and Hillhouse.


Based on the adjusted EPS of 2.23 Singapore cents for FY 2016, the Company is listing at a historical PER of 37x! Considering the drop in profitability in 6M2017, unless the 2nd half picked up significantly, the performance is unlikely to beat that of FY2016. The only positive takeaway is that the recurring revenue of the Company has been trending upwards, while the non-recurring revenue can be quite erratic.


The Company also prepared a pro forma financial statements assuming it has acquire 80% equity interest in MindChamps Serangoon, 75% of MindChamps Zhongshan Park, Australia acquisition, 49% in MindChamps Changi and 6.42% of MindChamps PreSchool Franchise as part of its listing as shown below.


Based on the pro forma financials and the enlarged share capital of 241.6m shares, the EPS for FY2016 would be 2.58 Singapore cents. This would translate into a listing PER of 32x.

According to the balance sheet as of 30 June 2017, the Company has an intangible assets of $21.8m and bank borrowing of $11.4m, shareholders' equity of $4.54m. After accounting for the IPO proceeds, the shareholders equity improved to $54.3m with cash of $49m and debt of $66m. See pro forma below.

The adjusted NAV per share of MindChamps is $0.218 versus its IPO price of $0.83, implying a price to book of 3.8x.

Use of Proceeds

The Company intends to use proceeds to repay Acquisition Loan and to fund expansion plans.


Dividend Policy

The Company will keep all the profits generated for FY2017 for its operations but intends to distribute at least 40% of its net profit after tax generated in FY2018 as dividends.

What I like about the Company
  • Largest operator and franchisor of premium range preschool centres in Singapore - You need a strong base to grow and Singapore's pursuit for high quality education forms a good foundation in which the Company can then expand regionally and globally. I like the ambitious target which the Company set for itself. It is not just Asia and China, it wants to conquer the world! (of course whether they can achieve it is another story but at least they show strong ambition). See the potential key strategic markets for global expansion below

  • Strong intellectual property - The preschool owns its own IP and "MindChamps" curriculum to nurture our future generation. They are in control of their own destiny if the curriculum is proven to be of real value, parents would be most willing to spend on their children's education
  • Scalable business model - The franchisee model is highly scalable once you own the intellectual property that is well sought after. The Company has shown that it was able to establish franchisee operations in Singapore, Australia and UAE. The model can be replicated to a more homogeneous country like China as well as United States where quality preschools are very expensive. The franchising model of charing a fixed % of revenue allows high financial returns without the capex! 
  • Clear growth path - The number of centres has grown from 26 in FY2014 to 54 at the date of the prospectus. According to the prospectus, there are 35 FOFO centres yet to be established and some be commencing operations in 1Q 2018. There are clear growth path outlined for the different regions. The Company has also signed MOUs to grow globally.
  • Reputable partners for Global Expansion - MindChamps have signed exclusive business partnership with China First Capital Group and Hillhouse Capital. The parties intend to operate preschools and kindergartens under the MindChamps brand in China, Hong Kong, Australia and United States. These business partners also invested as cornerstone investors in MindChamps and there is strong alignment of interest
  • Blue Chip cornerstone investors - The cornerstone investors are of excellent quality. Please see more detailed analysis on the cornerstone investors below
  • Infection point - This Company is in an inflection point where it needs capital to grow and a listing will help achieve both credibility and provide the funds for which it can execute its business plans. The listing will allow it to grow faster through mergers and acquisitions
  • Competent management, well connected Board and world Class Advisory Board - The management and board comprise competent individuals and the founder, David Chiem, surrounded himself with an esteemed advisory board who will help "brand" the Company and provide knowledge and credentials to the Company. The advisory board is presented below.


Some of my Concerns
  • Loss of IP / Rise of Competition - The Intellectual Property developed by the Company can be "stolen" from unscrupulous franchisees and re-marketed by them. This would be one of the major risk and the mitigant will probably be careful scrutiny by the Company and operating in jurisdictions with known legal recourse (not sure about China). Also disclosed in the prospectus, the Company is currently in legal lawsuit in Australia for breach of term sheet. (not sure why a term sheet can be breached as it is usually non-binding in nature).
  • Partnerships fail to work - Other than loss of IP, the biggest risk is execution risk where partnerships with CFCG and Hillhouse fail to work out and the expansion plans are derailed, especially in the China or elsewhere. The mitigant is that if the partnership fail to work, then the "cornerstone" investments made by CFCG and Hillhouse will suffer as well. There is at least some alignment here. 
  • Intervention by government for preschool segment in Singapore  - Government intends to raise the quality and affordability of preschools here and public spending in this area will hit $1.7 billion by 2022. While MindChamps target the higher end segment, the availability of better quality preschools at more affordable pricing may result in competition and pricing pressure. The preschool segment is currently not regulated or mandated by government. If the pre-school segment is regulated, it will likely kill off all the premium schools in this sector
  • High valuation and high leverage- The IPO valuation is as premium as its school fees. It doesn't come "cheap". Investors are paying a premium for the business. Is it still a value buy?  The cornerstone investors seemed to think so even though there is much indebtedness at the Company
  • Competition - This is a fragmented market with many competitors, including EtonHouse, Pat's Schoolhouse, Brigton Montessori etc. While MindChamps currently has the largest market share, it does not mean the market share can be maintained in future
  • Non big 4 auditor - The auditor is Nexia TS  Public Accounting Corporation. While not belittling the smaller accounting firm, i would prefer to see a more established auditor with more resources as the Company scale up its operations globally

Cornerstone Investors

Let me spend a bit more time on the cornerstone investors today as it forms the key part of my investment decision and chilli ratings.

China First Capital Group is listed on HKSE (ticker code 1269) with a market cap of ~ USD 2.3b. It has a few business lines and since 2016, expanded to education and schooling services business both within China and abroad. It is currently trading at lofty valuation on the HKSE and will be a "natural acquirer" if the founders of MindChamps decide to exit the business in future. You can find some of their investments in this space here.

Hillhouse Capital Group was founded by Zhang Lei and his own life story has been a very interesting journey. He is a highly respected both in China and abroad and set up Hillhouse in 2005 with the backing of Yale Endowment. Fast forward to today, Hillhouse is a well known name in both the public and private equity world . You can read more about his speeches here and his investment in MindChamps is a good endorsement of the the Company and its future business. Hillhouse invests with a long-term time horizon and employs a fundamental, bottoms-up approach. The funds managed by Hillhouse has generated good returns to its investors.

Target Asset Management was established in 1996 and practise value investing strategy. According to Motley Fool Singapore, Target Asset Management's founder, Teng Ngiek Lian is one of the 4 great investors in Singapore which you need to know. You can find more about Target's investment philosophy here

While I wouldn't call Singapore Press Holdings a great investor, they have showed conviction by increasing its stake in MindChamps. They first invested $12m in MindChamps in 2014 and they followed up with an additional 4.84% for the IPO.  SPH now owns about 26.84% of MindChamps and will own about 20% post IPO.

With the ringing endorsement by 4 different parties and some with "value investing angle", it seemed like this is an investment which you can hold for the long term and their presence is of great value to me.

Shareholders


From the table above, the founders (husband and wife) continue to hold about 51.65% of the Company, with SPH owning 20%, the 3 cornerstone investors holding 11.97% and the public holding the remaining 13.35%. 

Considering the founders are locked up and the other investors are long term investors, the free float will be tightly controlled with only 13.35% of the share capital in public hands.

Peer Valuation


The valuation of MindChamps is expensive by any historical metrics! I frankly don't know how to "value" this company since i am not privy to its future projections but the "growth" must be exciting enough for the cornerstone investors to invest in this. The presence of Target Asset Management is particularly "disturbing" given the perceived lack of "value" in the IPO valuation. ๐Ÿค” Is there something of value which we don't know? 

My Chilli Ratings

I like the sector and the growth projectory presented by MindChamps. It seemed like it is at an inflection point where growth and profitability will pick up in 2018 when the Company scales up globally. The key risk will be execution. Can the Company execute its growth story? The 3 cornerstone investors and SPH seemed to think so, should we take a leap of faith? 

I will give it a one chilli rating for the IPO launch given the high valuation but a 2 chilli for the longer term. I am willing to take a bet on its longer term prospects given the quality of the cornerstone investors.

Given the small float, the IPO should stay above water if the placement is done well. I will subscribe for some shares and hold it for the longer term. 

Will you subscribe for the IPO?

Please take the poll here.


Saturday, 18 November 2017

RE&S Holdings Limited


RE&S Holdings Limited ("RE&S" or the "Company") is offering 38m shares at $0.22 each, of which 35m shares will be through placement and the balance 3m shares through the public offering. The market cap based on the IPO price is around $78m.

The IPO application will close on 20 Nov 2017 at 12pm and commence trading on 22 Nov 2017. You can apply for the shares using the ATM or internet banking websites of DBS/POSB, OCBC and UOB. In addition, you can use the mobile banking app of DBS. 

Principal Business

RE&S was established in 1988 and is a concept owner and operator of F&B outlets in Singapore and Malaysia focusing on authentic Japanese cuisine and dining experience. 

It operates 34 restaurants in Singapore and another 5 in Malaysia. It also operates 38 quick service restaurants, food kiosks, Japanese bakery and food retail outlets locally.


Financial Highlights


The performance of the Company hasn't been consistent with profit fluctuating from $5.8m in FY2015 to $2.9m and back to $5.7m in FY 2017. It is hard to see how the Company can scale up significantly in the coming years unless they do some meaningul add-on acquisitions. 



Based on the post diluted EPS of 1.6 cents, the implied PE is 22/1.6 = 13.75x. My gut feel is that the profitability will continue to fluctuate in a range.

Dividend Policy

The Company intends to pay out at least 35% of its net profit attributable to shareholders for FY2018 and FY2019.

Assuming EPS remained the same as FY 2017 and on a fully diluted basis of 1.6 cents per share, the implied yield will be 35% x 1.6 cents divide by 22 cents x 100 = 2.54%. Not exactly attractive to me unless the Company can scale up its profits in FY2018.

Shareholders


Post the IPO, the founders Hiroshi Tatara and John will continue to own 83% of the Company with Heliconia holding 4.5% and the rest in public hands. The counter will continue to be tightly controlled. 

Use of Proceeds

The Company intends to use the proceeds for business expansion, refurbishment of existing outlets and general working capital

What I like about the Company

  • Long operating track record - The Company started since 1988 and the management has survived the down cycles such as the dot com bust, SARS, Global Financial Crisis and even the Tsunami (radiation) crisis  
  • Ability to develop different concepts - While it is solely focused on Japanese cuisine, it is able to develop 20 different concepts and brands to cater to differing demands and needs (example, requirements for high end and mass market needs are highly differentiated)
  • In-house chefs and central kitchen - allows the firm to market test concepts and dining menu while ensuring economies of scale and consistency across the outlets through the central kitchen
  • Rising income and regional expansion - There is a possibility for the Company to expand its expertise to neighboring countries and the rise of middle class in these countries will help boost the demand for better dining experience and RE&S will be well positioned to tap on this demand
  • Reputable cornerstone investor - The cornerstone investor, Heliconia, also backed Jumbo and Kimly in their IPOs. While this bodes well for the IPO since they are investing at the same price as retail investor and provides added comfort that there is some institutional due diligence, don't bet on it that it will be there for the long term though and make sure you run before they exit.
Some of my concerns
  • Single country risk  - While the restaurants are located in Singapore and Malaysia, any "perceived" food scare in Japan even if the materials may not "sourced" there, will result in the company being severely hit as it is heavily reliant on consumers who would like to enjoy the Japanese food and experience
  • Our local consumers are fickle - The local consumers are fickle and demanding. Hence it is not easy to create a dining experience that will encourage customers to keep returning, especially with regards to the quality and price points 
  • Competitive sector - This is a highly competitive sector as restaurants fight for a share of your pocket. Not all restaurants are doing well - such as Soup Restaurant, Sakae and Tung Lock. The high rental costs and lack of manpower mean that restaurants have to mange their operations well to have a survive the cut-throat competition
  • Owners cashed out of company - Instead of paying off the debts, the owners cashed out out $12m in FY2017 prior to the listing and this is terrible concerning it is highly geared! See cash flow table below ๐Ÿค•. Without the dividend payout, the Company would have a $5.2m positive cashflow though
  • High leverage  - The Company is carrying on its books debt and indebtedness to the tune of $16.2m. This is about 45% of its shareholders' equity! 
  • Auditor and Board composition - The auditor is a non big 4 and the board, with due respect, has an average age of 65.8 years old! The independent directors are all male, above 61 and don't have F&B experience. I would prefer to see some diversity and relevant experience or connections in leading the firm forward
  • Small float and liquidity - Post listing, the trading will likely come down after the initial weeks. Investors will have to be wary of the small cap status and liquidity
Peer Valuation


My own view is that the food and beverage sector is "overvalued" with average PE trading at 30-32x. This is unsustainable.  While the PE of 13.7x for RE&S is a discount to its peers, it is not giving me any comfort. 

The closest peer is my view will be Japan Food Holdings that operates the Ajisan and other concept restaurants with a focus on Japanese food as well. It has the same market cap but RE&S has more superior EBITDA and PE multiple, howbeit lower yield.

Assuming it trades up to the value PE of Japan Food at 15 to 18x, the "fair value" of RE&S should be between Singapore 24 to 29 cents. 

My Ratings

I like two things - Heliconia and its relatively better valuation against its peers. I dislike the overall sector valuation, less than stellar board and the intense competition of this sector for the longer term and the fact that the company is highly geared with founders cashing out prior to the IPO. I will give it a 2 chilli for the initial debut but 1 chilli for the long term. It is a hit and run for me and make sure you run ahead of Heliconia. Heliconia is not subject to any moratorium and they don't have to report their sale to SGX as their shareholding is below 5%.

Polling Time

You can vote here.

Thursday, 9 November 2017

Keppel KBS US REIT - Balloting Results

Keppel KBS US REIT announced that its IPO received strong response and the public tranche was 6.7x subscribed. 

The public balloting table is presented below:


Investors who applied for 50,000 shares will have a 46% chance of being allotted 15,000 shares. 

I did not apply for the public tranche as I was allotted 50,000 units from the placement tranche. 

"The positive demand from both institutional and retail investors is a reflection of their confidence in Keppel-KBS US REIT's high quality portfolio and unique investment proposition that is backed by strong visible growth opportunities, both organically and through future acquisitions." - Manager

My personal view is that the relatively small issuance size and 6.7x subscription rate will imply a decent debut for the IPO. It will start trading at 2pm on 9 Nov. 

Good luck to those who applied and managed to get some shares! ๐Ÿ˜Š

Sunday, 29 October 2017

Keppel KBS US REIT



Keppel-KBS US REIT ("Keppel US REIT") is offering 262,773,400 units at US$0.88 per unit (with over-allotment option). The REIT is established to invest in a diversified portfolio of income-producing commercial and real estate related assets in United States. While the IPO is not registered yet (should be in the coming days), the public offer will close on Nov 7 at 12pm.

(Side comments: It is quite difficult to locate the lodged prospectus on MAS website and I can never understand why SGX don't have it in the Catalogue either... you can find the link here. Having said that, i have to commend that this is a relatively easy to read prospectus with detailed information ๐Ÿ‘)

Key Objectives

The key objectives are to provide unit holders with regular and stable distributions while maintaining appropriate capital structure and sustainable growth in DPU and NAV.

IPO Portfolio

The initial portfolio comprises 11 office properties in the United States as follows:


West Coast (3) - The Plaza Buildings in CBD of Seattle, Bellevue Technology Center close to Microsoft Global HQ in Seattle and Iron Point located in Folsom Sacremento.

Central Region (5) - Westmoor Center in Northwest Denver, Great Hills Plaza in Northwest Austin in Texas, Westech 360 in Northwest Austin Texas, 1800 West Loop South, West Loop I & II  in Houston.

East Coast (3) - Powers Ferry Landing East and Northridge Center I & II  in Atlanta and Maitland Promenade II  in Orlando, Florida. 

Distribution policy

The first distribution will be from Listing Date to 30 June 2018 and be paid to unitholders on or before 30 Sep 2018 (quite a long wait). The distributions will be declared in USD and can be paid in either USD or SGD, depending on the arrangement with the custodians. Subsequent distributions will be semi-annually thereafter.

What I like about the REIT
  • Direct play on the United States - similar to Manulife US REIT, this offers the "second" pure play access to the US Real Estate market. If you are bullish about the US economy growth trajectory and the office real estate outlook, then this is a REIT which will provide that exposure. According to Cushman, the projected GDP growth will continue to be stable at around 2% but those in the IPO portfolio are above the national average (see chart below)
  • Quality portfolio in key growth markets - Frankly i am not an expert in the US real estate market but based on the description, it seemed like the properties are well located and diversified in the cities of Seattle, Austin Texas and Atlanta. According to the prospectus, major US markets in which the IPO portfolio is located have experienced higher job growth in 2016 than previously estimated and these bode well for the US office real estate market and those properties in the IPO portfolio have growth rates that are above the national average (see chart below). Many of the cities serve as national or regional headquarters of Fortune 500 companies
  • Attractive distributions with visible organic growth  - The yields look decently attractive to me with built in rental revisions that will help ensure improvement in DPU. In addition to the built in escalations, the prospectus provided a nice "uptrending asking rental chart" based on national average. 

Keppel US REIT is projecting the yield to increase from 6.8% in FY2018 to 7.2% in FY2019 as shown below.

This is underpinned by the below average lease rental which will be up for "renewal" in 2018 and 2019. Investors who want the projections can refer to page 64 of the prospectus.  

  • Well diversified portfolio by asset and tenants mix and geographically. It also has a stable lease expiry profile - The income is highly diversified as demonstrated by the charts below with a stable lease expiry profile. No more than 20% of lease expire in a single year
  • Freehold properties with decent leverage - All the properties in the IPO portfolio are freehold (same as Croesus Retail Trust) and at 36%, there is still much headroom to take on debt and the debt is not up for refinancing until 2021 and 2022. I like freehold properties ๐Ÿ˜€
  • Strong institutional support


The issuance is well supported by cornerstone investors such as Affin Hwang, Credit Suisse, DBS and Hillsboro Capital. 
  • Reputable sponsors and experienced team - I like the Keppel branding behind the combined Keppel-KBS name. It is a name which local investors can identify with and you know they are here for the longer term. While Keppel Capital is based here, KBS is headquartered in California with more than 180 specialists (See geographical footprint of KBS below)

Some of my concerns

  • How long will the partnership last? The Manager is jointly owned by Keppel Capital ("KC") and KBS Pacific Advisors Pte. Ltd ("KPA"). The shareholders in KPA are 4 individuals from KBS Capital Advisors ("KBS"). KC is the asset management arm of Keppel Corporation. As in all corporate partnerships, they will not last forever and eventually they will split. 
  • Rights issues is unavoidable, investors have to be prepared for rights issue in future - As you can see from the article in Manulife US REIT, rights issues is unavoidable as the REIT starts to grow and acquire new properties. According to the prospectus, there is a strong pipeline of potential acquisition properties. As REIT has to distribute at least 90% of its income, investors in this REIT must be prepared to fork out cash when acquisition kicks in. 
  • Forex exposure - For investors in Singapore, you will be exposed to USD at both the asset level as well as the distributions. Personally, i don't mind but for some investors, you may lose out on forex based on the share price movement and whenever the distributions are converted into SGD
  • IPO at premium to NAV - The current NAV is US$0.84 (page 60 of the prospectus). Investors who subscribed at US$0.88 will be paying a slight premium to book of 1.047x. 
  • Long waiting period till next distribution  - Investors who buy into existing REITs will get their distributions in the next 6-9 months, whereas IPO subscribers in this REIT will only receive their first distribution in Q3 2018. This makes it less attractive for investors who finance their acquisition with debt.   
Fair Value

The closest listed peers is actually Manulife USD REIT where my original write up is here. According to REITDATA and Shareinvestor, it is currently trading at a yield of 7.06% and a price to book of 1.09x.

Let's see how was its performance since launch. The IPO price was $0.83 and it languished for an extended period of time before investors appreciate it better and the price finally moved above its IPO price about 9 months later.


Keppel KBS US REIT is fairly priced at its IPO price of US$0.88 which represents around 6.8%-7.2% yield and price to book of 1.04x. 

Based on the valuation metrics of Manulife USD REIT, it should trade at a fair value trading range of between 85 cents (assuming investors require a minimum yield of 7% yield) and 92 cents (assuming Keppel USD REIT trades up to 1.09x book value).

My Ratings

As I have mentioned a few times, REITs are not meant for flipping. You invest only if you like the yield. As such, i will give it a one chilli rating for the IPO.

Having said that, i actually prefers this IPO to the Manulife USD REIT. I felt that investors are able to appreciate the Keppel branding and the well-diversified nature of the US IPO portfolio. If investors want to consider diversifying their REIT exposure beyond Singapore to the United States, this should be a name that can be considered. I will subscribe some shares for my longer term hold.

Polling time


Saturday, 14 October 2017

Lion-Phillip S-REIT ETF

I received at least 10 private messages asking if i will be covering the ETF. Even though i don't really consider this an IPO, i will share my thoughts with you.

What is an Exchange Traded Fund ("ETF")?

A short while ago, ETF was not accessible to retail investors until MAS relaxes that in April 2015! If you ask me what an ETF is, it is basically a fund tracking a particular index which it is set up for. In this particular case, this ETF is set up to track the Morningstar Singapore REIT Yield Focus Index.

Key information

The minimum application amount is 50,000 units (or $50,000) and it will be listed on 30 October 2017. The Managers are Lion Global Investors Limited and Phillip Capital Management. The Manager intends to pay out dividends semi-annually and you can find more information about the ETF here. You can find the FAQs here.

Who is ETF suitable for?

Investors who want regular distribution and seeking an "index-based" approach towards investing in a diversified basket of Singapore REITs listed on SGX. According to the prospectus, the ETF will not be actively managed as the Manager do not intend to actively select the REITs to outperform the market or take defensive positions in declining markets.

What i like about the ETF
  • Low cost way for investors to start planning for their retirement. While the initial minimum subscription is $50,000, investors with less capital can subsequently buy and sell in smaller units once the ETF is listed
  • Diversification. Investors are able to gain exposure to a diversified basket of REITs despite the small outlay 
Index REITs


The ETF is supposedly going to track the above REITs based on the weightings. While there could be some tracking error as the Manager tries to replicate the index but investors can expect that their money to be invested in the above basket of stocks

Some of my concerns
  • Low liquidity - Looking at the current trading volume of ETFs on SGX, trading liquidity is likely to be limited. However, investors could ask participating dealer to create or redeem the units
  • Inefficient tax structure - It seems like there is a tax leakage as retail investors who invest in the REITs directly will be "better off" than investing through the ETF even though they will probably not "feel" it as it will not be so evident. See tax treatment for individuals by IRAS versus tax treatment for the ETF below.
Page 66 of the prospectus: "Taxable income distribution from Real Estate Investment Trusts ("REITs") listed in Singapore derived by the Fund will generally be subject to tax withheld at source at the prevailing income tax rate, currently 17%. Such taxable income distribution derived by the Fund is a non-Designated Income and will be subject to tax at the prevailing income tax rate, currently 17%, which could be offset by the tax withheld at source. The gains or profits derived by the Fund from the disposal of units in REITs listed in Singapore are Designated Income."
  • Lower returns. The targeted yield of 4 to 5% after tax is not high enough for me for this asset class
Fees involved
  • Transaction fee and Duties of $500 per $50,000 means investors who subscribe to the ETF incur a 1% creation charge. The rate is similar to placement fees in an IPO, except that this is not an IPO. Investors who didn't sell through the exchange but via redemption subsequently will incur a 1% redemption fee as well
  • Manager's Fee  of 0.5% per annum
I didn't comment on the fee levels as you don't expect this to be created for free isn't it? So you have to access for yourselves whether you are comfortable with the fees you are paying

Mr IPO's views

The ETF is great for retail investors who wants to start their retirement plans and wants to build up their portfolio in a disciplined way but do not know how to choose the REITs. It is a safe way to build up a diversified portfolio from day one. To me, the best way to invest in this ETF is to set aside a small amount of cash regularly and nibble at the ETF through SGX. 

For investors who are more savy and have more capital, my view is that you are better off creating their own "index" of REITs. There is no point paying for low liquidity and low returns and incurring the transaction and manager's fees. I will give it a miss personally. If you have $50,000 to invest, you can start creating your own portfolio and enjoy a better after tax returns. ๐Ÿ˜Ž  Maybe i can charge 0.5% as advisory fees next time? ๐Ÿ˜‹

Saturday, 7 October 2017

IPOing 101 - Share Application Rules

For the IPO newbies, i have previously written a few articles that may still be relevant and for your benefit, i am posting the links here.

  1. IPOing 101 - How to apply for IPO shares
  2. How to increasing probability of getting IPO shares from the public tranche
  3. How to lay your hands on placement shares
Even though these articles were written in 2007 (wow more than 10 years ago ๐Ÿ™‚), I took a quick glance and think that they are still applicable. Please let me know if you spot any mistakes. ๐Ÿ˜‚

Having said that, I am still learning new things everyday! Here are some questions for today and see if you have the answers. For the purpose of this article, i will not be using the printed forms anymore. At this time and age, i think they should eliminate the printed forms to save the ๐ŸŒฒ...

Let's take a look at Appendix F using the most recent APAC Realty IPO as an example and see if we can learn something new.

Question 1: Must you physically be in Singapore when you apply for the IPO shares?

Answer: UNLESS PERMISSIBLE IN SUCH OTHER JURISDICTION, YOU MUST BE IN SINGAPORE AT THE TIME OF THE MAKING OF THE APPLICATION FOR THE OFFERING SHARES.

The answer is yes, you have to be in Singapore! It was printed in BOLD and Capital Letters, indicating that this is an important point! In other words, it is illegal to apply for the shares through the internet banking if you are physically in United States at the point of application... feeling guilty now? ๐Ÿˆฒ

Question 2: What is the minimum number of shares you can subscribe for and in what multiples? Example, can you apply for 2,000 shares, or 2400 shares or 2,688 shares?

Answer: The minimum initial subscription is for 1,000 Offering Shares. You may subscribe for or
purchase a larger number of Offering Shares in integral multiples of 100. Your application for
any other number of Offering Shares will be rejected. 

In other words, the rules are: (1) you must first apply at least 1,000 shares and (2) it must be in multiple of 100. Based on the question above, if you apply for 2,688 shares, it will be rejected but if you apply for 2,000 or 2,400 shares, it will be accepted.

Question 3: Can you apply for the same IPO placement shares with different banks or brokers? Example - Applying for Netlink Trust placement tranche through DBS, Credit Suisse and UOB?

Answer: Multiple applications may be made in the case of applications by any person for the
Placement Shares only (by way of Application Forms for Placement Shares or such other form of application as the Sole Issue Manager, Bookrunner and Underwriter may in its absolute discretion deem appropriate)

In other words, you can apply for Netlink placement shares through different banks or brokers

Question 4: Can you apply for the same IPO under both placement and public tranche?

Answer: Multiple applications may be made in the case of applications by any person for the Placement Shares together with a single application for the Public Offer Shares whether by way of an Application Form for Public Offer Shares or an Electronic Application.

In other words, you can apply for the placement tranche multiple times but you can only the public tranche once

Question 5: Can you apply for the same IPO public tranche using ATMs from different banks? 

Answer:  Only one application (be it using physical form or electronically) may be made for the benefit of one person for the Public Offer Shares in his own name. Multiple applications for the Public Offer Shares will be rejected. Persons submitting multiple applications for the Public Offer Shares may be deemed to have committed an offence under the Penal Code, Chapter 224 of Singapore, and the SFA, and such applications may be referred to the relevant authorities for investigation. 

In other words, you can only make ONE application for the public tranche ๐Ÿง and it is a serious offence and you can be charged in court for this. ๐Ÿ‘ฎ


Question 6: Why can't i use the ATM network or Internet Banking platform of certain banks for some IPOs (the answer is not found in the Appendix F) ๐Ÿ˜‹

This is an additional question which i have added which i think some people may not know. 

ATMs

Usually the issuer will have to decide which banking network they would want to use to distribute the shares during the IPO application. The de facto bank will be DBS bank. DBS has the widest ATM network compared to the other 2 local banks. If the issuer decides that DBS is adequate, it may not extend the ATMs to UOB or OCBC, especially for smaller issuance.

in addition, some banks has internal restrictions. I understand UOB has certain restrictions internally on distributing perpetuals through its ATM network.

Internet Banking

DBS has the most advanced Internet banking and mobile app platform among the three banks. As such, DBS users can apply for IPO using both internet banking or mobile app platform. I have been using the DBS internet banking to apply for shares for the longest time. At the time of writing, the UOB and OCBC internet platform is still not ready for IPO applications. Do let me know if my understanding is wrong. 

Polling time: Link is here



Wednesday, 27 September 2017

APAC Realty Limited - Balloting Results



I rarely see such balloting announcement results where there was no accompanying ๐Ÿ“ขpress release and APAC Realty Limited announced its placement and public tranche subscription rates separately๐Ÿค”:
  • Placement tranche of 44,503,200 shares was 13.4x subscribed
  • Public Offering of 4,411,000 shares was 29x subscribed
In connection with the offering, DBS, the stabilization manager was also over-alloted 9.75m shares and will step in to stabilize the market if necessary

The placement tranche was placed out in the following manner:

and the public tranche balloting results is below. 

It is also interesting to note that investors who applied for any number of shares has an equal 42% chance of getting the shares! ๐Ÿ˜Ž The Issuer didn't favor the big applicants or the small ones. 


Strong group of Institutional Investors

I am actually surprised that the issuance received quite a bit of interest from both hedge fund managers and traditional fund managers. The list is of managers awarded the shares are below and it doesn't include the cornerstone investors:


How did Mr. IPO fare in the balloting?

It is also quite rare whereby my broker said that i can still apply at the ATM even though i was given 2,000 placement shares. 

Here is my application results - 

Overall, i think APAC managed to attract strong interest in its placement tranche where it eventually priced at the high end of the 60-66 cents range. Good luck to those who managed to get some shares!

Happy APACing
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