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Wednesday, 27 September 2017

APAC Realty Limited - Balloting Results

I rarely see such balloting announcement results where there was no accompanying 📢press release and APAC Realty Limited announced its placement and public tranche subscription rates separately🤔:
  • 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! 😎 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

Saturday, 23 September 2017

APAC Realty Limited

APAC Realty Limited ("APAC" or the "Company") is offering 48,914,200 shares at $0.66 each, of which 44,503,200 shares is distributed via placement and 4,411,00 shares via Public Offering. The offer will be subject to over-allotment option where up to 9.75m shares (or 19.9% of the offering shares) can be sold. The IPO will close on 26 Sep 2017 at 12pm and starts trading on 28 Sep 2017. The prospectus is here. The market cap based on the enlarged shares is around $205.3m


For investors who don't know the Company, this was previously known as Hersing Corporation and Northstar led the management buyout from the previous owner Harry Chua (who owns the Tim Ho Wan franchise in Singapore) around Aug 2013. Jack Chua, unrelated to Harry Chua, became the CEO after helping to grow ERA Singapore into the largest real estate agency in Singapore. The news article is here. The Company is now being re-listed as APAC Realty Limited.

Business Model

The Company has an easy to understand model and the prospectus made it even easier with a succinct graphical view on its business model. Basically the revenue is the commission that is generated from the property transactions

Financial Performance

The Company ended FY 2016 with a revenue of $284m and a net profit of $15.9m. Q1 2017 continues to see improved revenue and profitability where net profit increased by 109% from $1.926m to $4.031m. Based on the adjusted EPS of 4.47 for FY2016, the Company is listing at the historical PER of 14.7x. Q1 is usually a slower period but the Company seemed to have pulled off one of the highest growth quarter on quarter of 109%. 

Assuming i am less aggressive in my projection of using 35% growth for FY2017 and a further 20% growth for FY2018, the EPS will grow to 5.58 Singapore cents in FY2017 and 6.7 Singapore cents in FY2018. This translate into a PER of 11.8x and 9.8x for FY 2017 and FY 2018 respectively.  

The Company is listing at the right time where its revenue and net profit is seeing an uptick due to the turnaround in the Singapore market. See article here.

Use of Proceeds

The Company intends to use the proceeds to strengthen and expand its presence in Singapore, expand its range of services and geographical presence in the Asia Pacific and enhance its technological capabilities

What I like about the Company
  • One of the largest agent networks in Singapore. In this business, you will need scale and we have seen several consolidation in the market place in the last 12 months where Propnex acquire Dennis Wee and Orange Tee merged with Edmund Tie & Company. APAC commands about 21% of the agency share in Singapore in 2016. Its market share in 2012 was 15.1%.
  • The Company has been resilient and profitable for the last 10 years - The Company was profitable even during the global financial crisis and for the last 3-4 years where the Singapore property market is languishing. This bodes well with the perceived upturn in the Singapore property cycle in the coming years

  • The Company intends to distribute 50% of its net profit after tax from the Listing Date to 31 Dec 2017 and for FY 2018 as dividends. Assuming an EPS of 6.7 Singapore Cents, the DPS will be around 3.35 Singapore cents for FY2018. This translates into a yield of 5.08%, which is decent since i have been conservative (i hope) in estimating the EPS growth. My gut feel is that the dividend policy will continue given that its major owner is a PE fund and they will want regular distributions back to their investors as well.
  • Stable and highly cash generative business - The real estate business is highly cashflow generative and generated $22.6m in FY2016. By deducting commissions from sale proceeds at the close of transaction probably mean that bad debts are pretty low. Other than the intangible assets of $101m, the Company doesn't have a lot of leverage on its books remaining. In addition, buying and selling properties seemed to be Singaporean's favorite past time and this is unlikely to change
  • The Singapore Residential Market seemed to be turning around - While the cooling measures are still in place, the market seemed to have turned around. If the Company is able to maintain its market share of the transaction value, the profitability of the Company will be maintained as well
  • Presence of cornerstone investors  - The presence of FIL Investment Management (Fidelity) 15.2m shares, Qilin Asset Management (Family Office of Soilbuild Group) 12.12m shares, Asdew Acquisitions (Alan Wang) 6m shares and Azure Capital 6m (Fund managed by Terence Wong) bodes well for the issuance. While they collectively owns 11.1% of the float, they individually own less than 5% of the issuance, meaning they are not subject to any reporting should they sell the shares. My personal view is that they are likely to be longer term investors (i.e. hold for at least 6 to 12 months). The low free float of 16.5% means that the shares will be tightly controlled, which may be good for the issuance.

Some of my concerns
  • Heavily dependent and limited size of Singapore market  - while Singapore has been the crown jewel of ERA, the market size is limited unless it can continue to gain market share from its rivals. The consolidation in the market place is good for APAC as it will help make the market more professional and stabilise the commission by weeding out fly by night agents
  • Disruption by fintech companies - There are many fintech companies sitting at the sidelines waiting to disrupt the marketplace by providing better services,leveraging on technology, and lowering commissions. However, in my view, property business is at the end of the day, still a "people business". You will still need agents to facilitate the closing of a property transaction and companies such as propertyguru is probably one of the tools which agents leveraged on. 
  •  Government intervention - This is one area which is subject to heavy regulations by the government. Any new property measures to curb speculation will hurt the local market. The reverse is true though, whereby if the Government relaxes or removes any existing property measures, it will be a huge a boost to the Company
  • Future selling by Northstar - Northstar is a private equity firm with Indonesian roots that has since expanded to Singapore. It's recent activities included the de-listing of Innovalues from SGX. APAC is held by one of the Northstar Funds and the aim of PE fund is to eventually sell the Company for a profit. Northstar Fund will own 72% of the Company (assuming over-allotment is exercised) post IPO. They will continue to sell down the shares once the moratorium is over but I trust that they will continue to divest in a responsible manner. My own estimate is that based on current share price, they will be sitting at >1.6x money multiple on their original investment
  • Ease of competition - While the industry has undergone some consolidation, you can be assured that competitors will re-emerge when the market is hot again due to the ease of entry into the industry. My gut feel though is that the market will continue to be dominated by a few key players
  • High Per Share Issuance Price - The issuance price of 66 cents sometimes mean that retail participation may not be as vibrant. I would have preferred to see it priced at below 30c for the launch as you need some massive retail participation to see good price movements
My Fair Value

There are no listed peers on SGX, hence it is difficult to put a valuation benchmark. If the Company wants to maintain good market cap, they should lean towards being a dividend play and investors will learn to appreciate the Company better. A 50% payout ratio seemed reasonable and i wished they would keep it permanent. Investors will love this stock when that happens.

Assuming a valuation benchmark of 11-13x for FY2018 and based on my EPS of 6.7 Singapore cents, the fair value range will be from 74 cents to 87 cents.

My Chilli Ratings

I like the fact that the Company has a public tranche for retail investors, is paying out 50% of its net profit as dividend and that the property cycle seemed to be turning better in the next 1-2 years.The presence of cornerstone investors also bode well for the Company. I will give it a 2 chilli ratings for this IPO.

Happy IPOing

Please note that Mr. IPO is vested through the placement tranche.

Strawpoll - Vote now!

Saturday, 16 September 2017

Cromwell Europe REIT

Cromwell European Real Estate Investment Trust ("Cromwell" or CEREIT") is offering up to 1,583,955,000 Units at €0.55 to €0.57 per Unit. 79.198m Units will be available for public offering in Singapore, 267.857m for a public offering in Japan (without being listed there) and the balance units will be via the Placement Tranche. The REIT is currently in book-building phase with the pricing to be determined around 21 Sep 2017. The market cap will be €1,814.8 million based on the maximum IPO price. The IPO is expected to close on 26 Sep and be listed on 28 Sep 2017. The draft prospectus is here.

CEREIT is the first Singapore REIT with Pan-European portfolio as show in the diagram below. 

The portfolio is being acquired at 1.7% discount to the Appraised Value. The Portfolio is spread across office, light industrial or logistics and retail. The summary of the IPO portfolio by asset class and geographies are set out below.

What I like about Cromwell Europe REIT
  • Decent yield - The yield of 7.5% to 7.7% is decent
  • Well diversified portfolio across asset classes and geography - The 81 properties are diversified across asset classes in 6 countries, Denmark, France, Germany, Poland and the Netherlands. The offices are located in major cities in Netherlands and Italy, the light industrial and logistics are spread across the 4 countries while the retail assets are mainly in Poland.
  • Freehold assets - The assets are predominantly freehold 
  • Long portfolio lease with Weighted Average Lease Expiry ("WALE") of 5.1 years - implying stability in predicting income

  • Potential upside if the Manager is able to execute as occupancy is currently at 89.3%
  • Experienced sponsor and manager - The Sponsor is listed on ASX since 2006 and has global of A$10.1b, meaning it is not a "fly-by-night" manager
  • Presence of cornerstone investors - The presence of Cerberus Singapore and Hillsboro Capital helped provide some institutional pricing to the issuance. The track record of the two cornerstone investors are not available
  • Decent board composition and management  - The board comprise of independent directors who are experienced
  • Exposure to Eurozone - This again depends on your view whether Europe has turned the corner. If your view is yes, then this is a positive factor, otherwise, you can move this to the "concerns" column 😋
  • Not overly levered  - The leveraged ratio ranged from 34.3% to 36.6% and this provides some headroom to levered up to 40%

Some of my concerns
  • Low alignment of interest - the Sponsor will hold only 12.7% as at listing date (and even lower at 8.7% if the over-allotment option is exercised). There is no alignment of interest. The Sponsor is cashing out on its portfolio and their timing is good with Euros at a high. In addition, they will have one of the lowest Sponsor's stake for REITs listed on SGX 🙄
  • High fees - Seems like the Sponsor is not well-liked as it charges above market fees. There is an article that warns that CEREIT's overall management fees are on the high side and more than double the peer average 🤔
  • Performance fee - I don't like the performance fee of 25% of the difference in DPU. This sound a tad too high and not in line with market. No reasons why i should pay performance fee if Manager managed to increase the occupancy from 89.3% to 100% right or use financial engineering to boost DPU? Plus the rental demand and rates is frankly market driven, why should the manager be rewarded for this? 🤕
  • No economies of scale - The portfolio seemed to be so well-diversified that while it doesn't depend on any single property, the well spread out locations also mean that there is less opportunities for reaping scale in its operations. I have to caveat that i am not familiar with the properties and its location
  • Sponsor cashing out at close to book value - The issue is priced to the max at around its book value of €0.54 per unit. There is no "upside" from this valuation and the Sponsor is cashing out cleanly
  • Large free float - The huge free float of at least 87% probably mean that all the demand should be satisfied
  • Euro Exposure - It depends on your views of Euro against SGD (see 5 year chart below). The distributions will be made in EUR and converted to SGD at each distribution date. Investors who don't mind Euro exposure would welcome the issuance but for the majority of retail investors here, be prepared for a "wild" ride as the exposure cuts both ways. The good thing is you can actually receive the distributions in Euro if you opt for it. Perhaps can buy some Units so that you can go Europe to spend it for holidays every year (natural hedge)? 😂

Listed Comparison IREIT (sourced from unless otherwise stated)

The only listed peer is probably IREIT even though it owns only office buildings in Germany. My previous write up on IREIT was here

IREIT didn't really debut well and the share price dropped post listing. The current yield seemed to be around 5.78 cents (annualised DPS) / 76 cents (last traded) = 7.6%. It is currently trading at a price to book of around 1.12x but the gearing is at 41.3%) Source: here.

My Chilli Ratings

This is a one-chilli rating for me. Buy if you are bullish on Eurozone or goes to Europe for holidays🏖 as it offers pure exposure to that region. The yield of 7.5-7.7% is respectable and is 'better valued' when compared to IREIT as it has a lower leverage and not trading at a premium to its book value. My key concerns are the manager's fees and the perceived lack of aligned interest given the low sponsor's stake.

Given the huge float, this is not a "hit and run" or "stag" game. Buy it only if it is part of your retirement plan for passive income. You can probably get it from the ATM or from the open-market post listing.

Voting time

Will you be subscribing to the IPO? Cast your vote here or click on the picture below!

 Click to vote

Subsequently, the Sponsor cancelled its IPO plans on 22 Sep 2017. The news is here.

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