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This is the most talked about IPO issuance for the year since Malaysia is running out of mega IPOs in recent years.  Seems to be that many retailers are hot about it, rushing to withdraw fixed deposits to buy the stock.  Let’s look closer at it if it’s really worth a buy:

IPO Structure

2.25 bil shares (27.17%) will be offered by its major shareholder, Maxis Communications Berhad (”MCB”) comprising 2.04 bil shares to institutional investors including placees approved by MITI, and 212 mil (2.83%) to the public retailers.

The price for the institutional shareholders will be bookbuild while for the retailers will be at lower of RM5.20 per share or 90% of the institutional price to be determined.

862.5 mil shares (11.50%) under institutional offering will be offered to Bumiputera placees approved by MITI while 626.1 mil shares (8.35%) will be subscribed by cornerstone investors including EPF, PNB and Kumpulan Wang Persaraan.

There is a lock-up arrangement that prevents MCB, Maxis Berhad and the cornerstone investors from disposing their block within 6 months from the listing date.  This will prevent any unwanted downward price pressure from the selling of the shares by MCB or the cornerstone investors.

Having said that, there may still be downward pressure upon listing as 11.50% is awarded to Bumiputera placees and 2.83% is given to retailers with a discount of about 10% at least.  This is the group that will most likely cash out at the first opportunity.

Valuation

Based on annualised 1H09 results of Maxis, the RM5.20 pricing will translate to a PER, EV/EBITDA and dividend yield of 16.6x, 10.2x and 4.5% respectively.  This is certainly more pricey than it’s local counterpart of Axiata of 14.5x, 6.3x and 0% respectively.  It’s counterpart in Singapore, SingTel, trades at about PER, EV/EBITDA and dividend yield of 14.5x, 13.0x and 4.0%.

I’d say that it’ll be a neutral call on this stock instead of a buy.  Upside will be limited by high valuations but downside is limited by efforts to ensure the largest IPO in Malaysia for 2009 does not go underwater.  Giving it a benefit of 13x EV/EVITDA based on SingTel’s valuation, it is estimated that the price will run up to RM6.80 at most, a potential 30% upside.  Let’s hope the sky is cleared by ‘relevant parties’ to ensure it flies!

Over the last weekend, I was at Mid Valley Exhibition Centre for a Property Fair.  None of the property showcase caught my eyes except for one booth.  It was the Profitable Group.  You see posters showing “12.5% return in 6 months!” I think they expect passer-bys to look like this…

I didn’t look like this of course.  Decided to stop by to hear out the sales pitch. The guy was in the midst of explaining to a housewife whom I think was lost and confused by his pitch.  Cutting short of the whole conversation, his sales pitch centred around:

1.  12.5% in 6 months

2.  Minimum placement is 6 months

3.  Look at my orders, so many people bought it through me

4.  I’m a retiree and a regional manager before and my son is a pilot, we both place our money in here

5.  Have you seen ESPN? We have our advertisements there. You don’t believe? Go back to view the channel.

6. This offer is ending soon, we’ll only provide 12.5% p.a. next week onwards

I expect he thought that I was like an idiot???

I’m not sure if he was thought to sell this way or is this his own selling technique but dude, I’d say that it makes him look like this…

He was selling this Strategic Energy Investment in Boron-CLS-Bond, a product that allows you to have a stake in the contract for supplying Boron to the UK government for 8 years and has 7 years remaining life now.  He says that the UK government’s payment terms are 90 days and hence, they will take our money to roll twice within the 6 months period.  What is this Boron? Apparently it’s a new and patented biodegradable, high performance, lubrication technology that was developed by the US.  What it does is that it creates a bond with metal and the resultant layer virtually eliminates metal to metal contact.  Hence, resulting in lesser friction, improving operating efficiency, extend economic life, increase fuel efficiency and lower exhaust emissions.

Further probe into this investment revealed the following concerns:

1.  No clarity in the operations team who sees through the execution of the contract

2.  No satisfactory explanation to address situation when investment holders decide to make a cash run and withdraw all their investments siumultaneously (He only managed to defend by stating that the returns are too good for people to withdraw them)

3.  No justification on how they managed to secure this exclusive contract (He only explained that they are some ‘kwai lo’ (white men) who has experience

4.  Failure to name the trustee for the investment (He tried to avoid answering the question but repeating his sales pitch of (1) to (6) above.

5.  No assurance on promise to remit our investment upon issuing withdrawal instructions.

Profitable Group also offers strategic investments in land, paintings and cigar.  My take on these products is that there’s no clarity on the underlying operations.  Maybe they share it after you’ve invested or maybe not.  Certainly I wouldn’t put my money in it from my experience with their sales person.  There’s no such thing as high return low risk in this world.

One question that I came across from a house buyer was “Why doesn’t older condominiums / apartments appreciate in price like the newer ones?”  I was also curious when I came across condos within the same area to be priced differently given the age of the properties.  By age, I mean a gap of around 10 years thereabouts.

Some of the reasons that I could think of generally are:

1.  Condos nowadays are sold as a lifestyle living unlike the older ones where it was just another place to live.  More features are built into it and hence a higher cost is imputed into the price.  Nonetheless, it will still attract more buyers.

2. Preference for new units due to availability of supply abundance

3. Revelation of weakness in building structures and poorer management of condominiums

4. Rising cost in materials versus lower locked-in cost for older units

Dear readers, unfortunately work and sports have caught up my free time and left out this blog.  Given some positive response from you, I’ll attempt to do a more frequent updating of the blog so that you could have a timely insight on new developments and/or share my analysis or insights into these matters.  30 June has just passed and this means some REITs will be declaring their distributions soon.  It’s time to add some units to your portfolio to improve your annualised returns!

Last week, the local daily The Star featured Axis REIT’s loss of Nestle as the tenant for its Nestle House. I’m not sure if this was the reason for the drop in Axis REIT’s price late last week as the Malaysian Bourse generally was weaker due to profit taking activities and concerns over the valuations given the recent run-ups of stock prices.

Axis REIT fell to RM1.37 on the back of this news and currently on an annualized distribution based on its 1QFY2009 results, it’d translate to a yield of 11.6% per annum. Taking out the contribution of Nestle House, the annualized distribution yield would fall to approximately 15.6 sen per unit, 11.35% p.a. versus 11.88%with Nestle House’s contribution.

I see this as an opportunity to buy / accumulate holdings in this REIT as it’d only be a temporary set back given the longer term benefit from the remaking of it into an iconic building in the heart of PJ. It looks like Axis REIT is beginning to play the actual REIT game in converting older properties into modern ones with a potential for higher yields instead of a passive management like other Malaysian REITs.

Conventional wisdom says that owning a property is a good investment to hedge against inflation.  There are various investments around town ranging from residential to industrial, providing various returns.

Various factors are to be considered in owning a physical property.  Basic questions to be answered are such as:

a.      What’s the attraction of the location?

b.      Who are your target tenants?

c.       What kind of capital appreciation has there been?

d.      What is the development potential of the surrounding neighbourhood?

e.       What are the facilities and infrastructure supporting the neighbourhood?

f.        What is the depth of the neighbourhood’s secondary market?

Of equal importance are financial numbers to be modeled to assess if such physical investment provides the required returns.  These include:

a.      Potential rental range

b.      Maintenance fees related to the property

c.       Comparison of property price against recent transactions

d.      Property agent’s fees

e.       Transaction costs including legal and stamp duty

f.        Potential rent free period

g.      Margin of finance

h.      Outlay required for renovation

I’ve recently attempted such analysis and realized that the returns from such investment comes to approximately less than 1% per annum on the property price on a conservative basis.  Essentially, this means that despite bad times, you have sufficient rental to cover all costs without any or with minimal outflow.  Your gain from such investment will only be realized upon disposing of the property at the end of your investment horizon.

In a residential property context, unless you’re very well connected in the industry, it’s hard to come by a prime piece of property that gives you a high return of at least over 9%.  Your headache is then compounded by concerns over duration of the rent free period and the requirement for your physical presence to monitor any renovation works required as well as regular checks on property condition.

Sounds like a fair deal for a small sum of cash flow? Not to some and not to me. I’ve worked out the sums, and it looks like an investment into REITs that generate sustainable returns looks more attractive than direct physical investment, leaving the search for value and value enhancement in the hands of professional while staying sidelines as a ‘real passive investor’.

Part II to continue next…

One key thing to look out for REITs is the distribution yields, especially during current turbulent markets where investors look for stability in recurring income. Many times, one will pull up a report and look at the distribution yield computed by houses and screen through for the highest yields.  Getting more than 10% yields is unbelievable!  Put in your money now and let the good times roll!

Hang on, think about it again. Are you the first to discover this? Unlikely not, and if so, many others would have bought it resulting in demand exceeding supply translating to price appreciation to an equilibrium level.   Overnight rates are nearing zero, and deposits and treasuries giving low single digit returns.  Surely, REITs can’t trade way above these benchmarks without much risks attached to it.

And so it important to study what can go wrong with such returns from REIT investments.  Several factors to consider where yields may be affected are such:

1. Loss of rentals / lower rental renewals
2. Renewal of borrowings at higher rates
3. Inability to renew borrowings
4. Reduction in distribution payout

Cut the story short, some REITs have given the market assurance that they’re able to renew borrowings especially during the recent credit crunch and they will sail through this crisis. Yet, the yields that they’re offering is still double digits and far from what they used to be.  In Singapore, high digit yields were almost unseen of during the good times.  Given double digit yields, what it will mean for the REIT managers is that they will need to acquire properties that gives leveraged double digit returns.  Logically one should not expect a REIT to acquire prime properties in the future for such returns as vendors will not be in such desperate situation unless it’s a real fire sale.

This leads to one real possibility that the REIT manager will decide to issue new equity in order to raise new money to acquire new properties. This also means that distributions to you will be diluted until such new money is deployed for new properties.  Rights issue to pare down borrowings is one such method that will eat your double digit yields away.  Unless new equity issuance is carried out in conjunction with a new acquisition, you’ll likely see the indicated double digits yield evaporate to good old single digit returns, just like when you dream of a pretty girl.

How this blog came about? Over the past few weeks, I’ve been toying the idea for investing in the property sector, either direct physical investments or via REITs.  I have been analysing some REITs based on broad numbers and realised some potentially good returns are up for grab and possibly only during this window of opportunity when many houses are making and underweight call on property stocks and REITs.  I also found that many aren’t well versed on the REITs investment game and see them as underperforming stocks.

Hence, the birth of this blog.  What I would like to do is to express my personal view based on my observations and analysis on REITs.  From time to time, I’d also post my thoughts on real estate and other related financial matters.  One should not take my views as recommendation and your actions should always be cross checked with your respective professional advisers.  My postings are independent of any REIT, research house or investor group.  There is also no compensation from any party for the posting of any of my view related to the REITs mentioned.  The information provided here is based on public sources and any other source that is believed to be reliable and there is no representation made that the information and analysis provided is true, accurate, complete and up to date.

Happy investing!