Monday, 14 August 2017

Will Frasers Centrepoint Trust Enjoy Another Year of DPU Rise?


Frasers Centrepoint Trust (SGX: J69U)(FCT) is one of two retail REITs on my watchlist.  The Trust owns a portfolio of suburban malls in Singapore, the largest being Causeway Point in Woodlands.  FCT has an unparalleled record of increasing distribution per unit (DPU) every year since its IPO in 2006.  Refer to Figure 1 below.

Figure 1. FCT’s annual distribution per unit. Source: FCT 3Q FY2017 results.

FY2016 marks its tenth year of DPU rise.  Currently, FCT has a major asset enhancement initiative (AEI) underway at Northpoint in Yishun.  However, it has not been without hiccups – there was later-than-expected relocation of large tenants within the mall, thereby lowering the occupancy in 3Q FY2017.

With two more months to go before the fiscal year ends, I wonder if FCT is still poised to score another year of DPU rise in FY2017.

I extracted FCT’s financial data to attempt a prediction.

Required 4Q FY2017 Net Income

Figure 2 below shows FCT’s DPU by quarter between FY2007 and FY2017.  In order to beat FY2016’s DPU of 11.764 cents per unit, the Trust must achieve a minimum 4Q FY2017 DPU of 2.834 cents per unit.

Figure 2. FCT’s distribution per unit by quarter.

Next, I did my homework to forecast the number of units in issuance at end FY2017.

(1) Base Management Fee

FCT’s Trust Deed stipulates that the Manager is entitled to receive 0.3% of the value of the Deposited Property as base management fee.  The Manager can opt to receive in cash or in units.  On 26 July 2017, FCT reported that 656,436 units were issued at a price of $2.1173 per unit to the Manager.  This is payment for 70% of the base fee for the period 3Q FY2017.  For 2Q FY2017, the payment was 665,121 units issued at a price of $2.0533 per unit.  For 1Q FY2017, the payment was 738,767 units issued at a price of $1.8956 per unit.

Short of a massive shift in property valuation, I do not expect the Deposited Property value to change significantly.  Assuming the Manager takes 70% of the base fee as payment in units and a flat unit price, I believe a conservative number of 660,000 units will be issued for the period 4Q FY2017.

(2) Performance Fee

The Trust Deed also stipulates that the Manager is entitled to receive 5% per annum of FCT’s Net Property Income as performance fee for the relevant financial year.  On 19 January 2017, FCT made a fourth amendment to the Trust Deed, which includes changing the payout of the Manager’s performance fee from a quarterly basis to an annual basis.

At end 3Q FY2017, FCT reported that 2,304,380 units are to be issued to the Manager.  Deducting the 656,436 units paid out on 26 July, 1,647,994 units remain in the ledger.  This is payment for 70% of the performance fee for the first nine months of FY2017.

While not scientific, I am just going to do a straight-line extrapolation and assume that the Manager will receive a hearty 2,200,000 units as performance fee for FY2017.

(3) Acquisition/Divestment Fee

The Manager is also entitled to receive a 1% acquisition fee and a 0.5% divestment fee.  The Manager can opt to receive in cash or in units.  However, I do not foresee any acquisition or divestment happening in 4Q FY2017, so I will not cater for such provision in the calculation.

The existing number of units in issuance at 26 July 2017 is reported to be 922,448,285.  With the two assumptions above, the number of units in issuance at end FY2017 is estimated to be 925,308,285.  Given our target DPU of 2.834 cents per unit and an estimated 925,308,285 units in issuance, this implies that FCT will need to earn at least $26.23 million for the period 4Q FY2017.

Is this a realistic and possible figure?

Lease Renewals in 4Q FY2017

FCT earned a net income of $21.89 million in 3Q FY2017.  This excludes the $3.4 million net tax adjustments, the $829,000 contribution from the Malaysia-listed Hektar REIT and the $116,000 income from FCT’s joint venture (Changi City Point car park operations with Ascendas Frasers Pte Ltd).

If we make another bold assumption that these 3Q FY2017 figures will be similar for the next quarter, my back-of-the-envelope calculation indicates that FCT will be able to hit the target DPU nicely.

Of course, there is the concern of negative rental reversions for the quarter.

Figure 3 below shows FCT’s portfolio average rental reversion since FY2007.

Figure 3. FCT’s average annual rental reversion. Source: FCT 3Q FY2017 results.

For the first nine months of FY2017, FCT experienced the lowest positive rental reversion (4.3%) throughout the entire period.  This hints that, as a landlord, FCT is running short of pricing power this fiscal year.

In the 3Q FY2017 results, FCT reported 47 leases are up for renewal in the last quarter of FY2017.  This represents 6.5% of the portfolio’s net lettable area and 7.3% of the portfolio’s gross rent.  Of these 47 leases, a majority of 19 leases are at Causeway Point – the stronghold in FCT’s portfolio.  This represents more than one tenth of the gross rent at the mall.  For the first three quarters of FY2017, Causeway Point saw net rental reversions of +10.6%, +6.3% and +5.8% respectively.  Given the trend, I do not expect to see a dramatic decline in rental reversion for the period 4Q FY2017.

3 leases are up for renewal at Changi City Point.  Similarly, 2 leases are up for renewal at Bedok Point.  Currently, these two malls have the most pessimistic situation.  (The occupancy rate is 84.0% and 81.7% respectively.  I do not count Northpoint which is undergoing AEI, hence the lower occupancy is to be expected.)

The bearish sentiment is most pronounced at Bedok Point, which experienced a whopping 30.2% negative rental reversion in 3Q FY2017.  However, Bedok Point only makes up less than 3% of the portfolio’s net property income.  It is unlikely to tilt the needle into the red.

On the other hand, Changi City Point makes up a chunky 11.4% of the portfolio’s net property income.  Looking on the bright side, the mall had experienced positive rental reversions for the first three quarters of FY2017.  What the Manager could not fill in terms of space, it made up for it in terms of higher gross rent.

Taking these factors into consideration, I would still expect FCT to eke out a positive, albeit small rental reversion in FY2017.


While not entirely fool-proof, the above mental exercise gives some assurance that FCT should be able to maintain another year of DPU rise.  The Northpoint AEI scheduled to complete in September 2017 will also lead to a 9% rise in average gross rent, if the management’s forecast is to come true.

Another matter on my mind is whether the Sponsor, Frasers Centrepoint Limited will be injecting its one-third share of their latest mall Waterway Point at Punggol into FCT’s portfolio anytime soon.

But that is an investigation for another time.

The Eleutherian Odyssey

*Disclaimer: I am currently vested with shares in Frasers Centrepoint Trust.

Quick Facts

Thursday, 10 August 2017

Can You Buy a Car From a Bank? Why Not, Says DBS

Can you buy a car from a bank?

Why not, says DBS (SGX: D05)

Singapore's largest bank by assets has teamed up with local online used car marketplaces sgCarMart and Carro to launch a new digital platform called DBS Car Marketplace.  (You can read the press release here.)

The new portal attempts to match car sellers and buyers directly.  Advantages touted for the car sellers include full control and transparency over every step of the sale process.

DBS Head of Consumer Banking (Singapore), Jeremy Soo elaborates,

“DBS Car Marketplace exemplifies how we are reimagining banking, using digital technology and innovation to extend our reach. Our insights indicate that consumers increasingly value transparency and simplicity, particularly in large purchases such as cars. We’ve therefore designed the marketplace so buyers and sellers are seamlessly guided throughout their purchase or sales journey – from start till completion – and provided relevant financial and product information."

DBS is trying to extend its digital reach via a legal amendment announced by the Monetary Authority of Singapore (MAS) in June this year.  The banking regulator has decided to provide more leeway for banks to conduct "permissible non-financial businesses".  (You can read the MAS announcement here.)

The rationale is explained as follows,

"MAS’ proposed refinement will allow banks to broaden their ability to provide a fuller suite of services to their retail customers.  Beyond digital platforms, banks will need to seek case-by-case approval, as they should not be engaging in the sale of consumer goods or services as a business in its own right."

That said, MAS is not offering the banks carte blanche.  They will be restricted from operating certain businesses such as property development.

My Thoughts:

DBS is trying to reposition itself from your friendly neighbourhood bank to a lifestyle enabler.  However, I wonder if this consumer-focused strategy might be setting up young adults for failure.

Picture this: (in a young man's head, surfing DBS website)

"Hmm... DBS offers really good fixed deposit rates.  But wait!  Oooh...  Isn't that blue Honda Vezel a beauty?  And it's only going for $70,000!  What's more, DBS is offering a car loan on the side, at a competitive rate of only 1.99%!  Should I just buy it, instead of parking my money earning lousy interest?"

Whatever the case, it is unlikely that DBS will gain any significant profit from this venture.  And I do not rule out the possibility that the lender may branch into the housing resale market too.  It will be a boon for shareholders if DBS can get its customers to linger more on its website, admiring  and arranging test drives for  the used cars.  There is always the sliver of a chance to sell him or her the additional car loan, at a competitive rate.

The Eleutherian Odyssey

Quick Facts

Sunday, 6 August 2017

Why is Sheng Siong Cutting Dividend Despite Better Results?


I am fascinated by the science that goes into the design of a supermarket.  Fresh produce and baked goods are placed at the entrance to attract shoppers to walk in.  Dairy and other essentials are placed at the back, so that shoppers have to pass through aisles of other merchandise first.  The list of psychological gimmicks goes on and on.

Supermarkets are a low-margin, high-volume business.  Survival depends on how well the owner can push higher-margin items and keep a tight lid on costs.  In this aspect, local supermarket chain Sheng Siong Group (SGX: OV8)(SSG) has done well.  The company released their 2Q 2017 results last Friday, and it was a crowd pleaser.

Figure 1. Sheng Siong Group’s logo.

Overall numbers had improved from a year earlier.  Revenue increased 6.8% year-on-year (y-o-y) to $201.5 million.  Gross profit improved 8.4% y-o-y to $53.5 million.  Gross profit margin rose to 26.6%, which was attributed to efficiency gains derived from the central distribution centre and a higher level of suppliers’ rebates; and a better sales mix of higher gross margin fresh versus non-fresh produce.

Net profit also improved 6.1% y-o-y to $16.1 million, despite an increase in expenses and a significantly lower interest income received.  The management provided a breakdown of the expenses, which include higher staff costs as the company took on additional headcount to operate new stores; a higher provision for staff bonus; higher maintenance costs and depreciation for its fleet of delivery trucks et cetera.

Operating cash flow was bumped up 13.8% y-o-y to $30.1 million, aided by a higher profit, improved trade receivables and lower taxes paid.  Investing cash flow also improved y-o-y primarily due to the absence of one-off expenditures.  (History: SSG acquired Bedok Town Centre1 at a cost of $55.2 million in April 2016.)  As SSG does not hold any debt, there was no financing expense, other than a comparable dividend amount paid out in May this year.

Speaking of dividends, this is where I hit upon an enigma – the management had declared an interim dividend of 1.55 cents per share for 1H 2017.  This is considerably lower than the 1.90 cents per share declared in 1H 2016.  At today's stock price, this implies an annualized dividend yield of 3.24%, lower than the annualized dividend yield of 3.84% around this time last year.

Why did the board declare a lower dividend despite better results?  I pulled out the financial data to deduce the reason.

Dividend Yield

Firstly, I wanted to find out whether the higher dividend declared in 1H 2016 was an anomaly, perhaps a one-off incentive for shareholders.  Figure 1 shows the trailing twelve months dividend per share and dividend yield for the past ten fiscal quarters.

Figure 2. Sheng Siong Group’s trailing 12 months DPS and dividend yield.

SSG’s dividend yield hovered around the 4 per cent mark for most of the period, except for the most recent quarter (3.43%) and 3Q 2016 (3.44%).  The reason for the lower yield in 3Q 2016 is easily explained by the higher stock price then.  If we use this trend as a basis, the 1.90 cents dividend per share declared in 1H 2016 was not an anomaly.  Rather, the 1.55 cents dividend per share declared in 1H 2017 seems to be smaller than expected.

Dividend Payout Ratio

Next, I worked out SSG’s dividend payout ratio for the same period.  This is calculated by taking the trailing twelve months dividend per share, divided by the trailing twelve months earnings per share.  The dividend payout ratio tells us the percentage of earnings distributed to shareholders instead of being retained by the company.

Figure 3. Sheng Siong Group’s trailing 12 months EPS, DPS and dividend payout ratio.

SSG seems to have a high payout ratio of 90 per cent, which means the bulk of its earnings go into the pockets of shareholders.  The only exception is for the most recent quarter.  Even though the earnings per share had improved, the dividend payout ratio had declined to about 80 per cent.  What could be the purpose for retaining an additional 10% of profits, or approximately $5.26 million?

Management’s Outlook

Has there been a deliberate change in the dividend policy?  Is the board of directors planning to keep a larger cash hoard for more aggressive business expansion?  These were the questions floating in my mind as I pored over the data.  Unfortunately, SSG does not conduct its earnings calls publicly.  (If there is one, I am unaware of it.)  It will be good to hear directly what the management has to say.

Perhaps we can derive a hint from the management’s outlook summary.  In the most recent 2Q 2017 results, SSG’s management wrote,

“The Group is still looking for suitable retail spaces in areas where it does not have a presence. However, competition for retail spaces has not abated and looking for suitable retail outlets or successfully bidding for new HDB shops may be challenging.”

The company expressed its continued desire to expand the business.  However, this was practically the same rhetoric written over the past few quarters.  Could the company possibly be looking at another one-off property acquisition, similar to the deal for Bedok Town Centre?

In the same outlook summary, SSG’s management also wrote (something new),

“Construction of the new extension to the distribution centre has commenced and is estimated to be completed by 3Q 2018, adding approximately another 50,000 square feet of storage space.”

This refers the extension work being carried out on SSG’s warehousing and distribution centre at Mandai Link.  In SSG’s FY2016 Annual Report, the management wrote that the Mandai central warehouse is “running out of space”.  As such, the company had leased an adjacent piece of land from JTC Corporation to build an extra 45,000 square feet of warehousing space linked to the main building.  Could the money retained in 1H 2017 be used to offset this construction cost?

Again, without detailed publicly available information, your guess is as good as mine.

Brokers’ Take

Finally, I found my answer in two broker research reports.  Firstly, in RHB Research’s most recent report released on 28 July 2017, analyst Juliana Cai wrote,

“We are disappointed with the lower payout ratio, which brings dividend yields down to 3.3%.  Management said the board preferred to hold more cash, which may be used for future investments.”  (emphasis mine)

RHB had also gotten the management’s perspective on online competitor, whom had launched its Prime Now delivery in Singapore recently on 27 July 2017:

“As online grocery is still at its infancy stage in Singapore, Sheng Siong seems to be adopting a “wait-and-see” attitude.  CFO Mr. Wong Soong Kit has said the company was not going to be aggressive in the e-commerce space at the moment.”

The “wait-and-see” attitude may be a double-edged sword, should the digitally savvy millennial generation choose to do their grocery shopping online.  Fortunately (or unfortunately for Amazon), the Prime Now delivery seems to have hit a snag2.

In the second report released by Philip Securities on 28 July 2017, analyst Soh Lin Sin provided more insight on where the management’s focus will be:

“With Amazon Prime Now joining the party, there could be a potential price war triggered by the two major online groceries retailers, i.e. Redmart and Amazon Prime Now.  Nonetheless, the Group will not pursue on an aggressive expansion in its eCommerce operation.  Instead, it will continue to focus on strengthening its fresh product offerings, where its competitive moat remains.”  (emphasis mine)

Philip Securities also noted there are 12 new supermarket sites pending completion over the next six months, per the data on HDB’s Place2Lease website (you can check out the locations here).  However, the management is concerned that the proximity of these locations may cannibalize its existing stores.

In short, SSG’s management wants to keep more cash in its coffers to make timely acquisitions as they appear.  This looks to be the gameplay going forward.


Since its IPO in August 2011, Sheng Siong Group’s stock price has climbed steadily.  Taking dividends into account, a buy-and-hold investor would have gained an average of 23.5 per cent return each year.  This is an impressive record for a brick-and-mortar business.

If the market sees SSG as a growth stock, the share will likely continue its upward trajectory, given the strong results showing.  However, if the market sees SSG as a stable dividend play, based on a historical average 4 per cent yield, SSG’s stock price could retreat to about $0.78 to justify its reduced dividend.

SSG competes with supermarket titans NTUC Fairprice and Giant, as well as mum and pop stores for shoppers’ footfall and purse strings.  Despite the cut-throat competition, by maintaining an effective cost control, sensible expansion of new stores, and a gradual shift towards higher-margin products, SSG should be able to power ahead comfortably.

The Eleutherian Odyssey

Quick Facts

1. Business Times
2. Channel NewsAsia

Monday, 31 July 2017

Did SATS Get Wounded in the 2016 Price War?


“To avoid jet lag, skip food in flight.”

This was the advice I got from an article recently.  Sadly, I am a fan of the culinary delights served onboard Singapore Airlines.  The food is exquisite and the choice is varied. I do not mind looking frazzled just to enjoy these gastronomic pleasures at 12,000 feet in the sky.  Do you?

Now, consider the tantalizing fact that the flight catering industry in Singapore is cornered by just two companies, and you can own one of them.  With 3,500 flights departing from Changi Airport1 every week, surely this is a generous slice of the pie to have.

Singapore Airport Terminal Services (SGX: S58)(SATS) has been serving airlines since the 1940s.  The company is one of two entities licensed by the Civil Aviation Authority of Singapore (CAAS) to supply flight catering.  (The other entity is dnata Singapore.  A third bidder withdrew their application in 2004, and CAAS subsequently never awarded the license2.)

In July 2016, SATS and dnata were reported to be engaged in a price war to secure more customers3.  A price war is a race to the bottom and is never sustainable.  One year on, I wonder about the impact it had resulted to SATS’ bottom line.

I decided to review SATS’ financial performance to check it out.

SATS’ Overall Revenue and Operating Profit

Firstly, I would like to know whether there is a notable difference in revenue and profit before and after the price war in July 2016.  Figure 1 shows SATS’ revenue, operating profit and operating profit margin (OPM) for the past ten quarters.  Note that the data does not include the results from SATS’ overseas associates and joint ventures.

Figure 1. SATS’ quarterly revenue, operating profit and OPM.

Looking at the figures, there does not seem to be any visible increase or decrease in revenue after the price war was reported.  Although the revenue for the most recent quarter was at the lower range, I am not convinced that the price war had affected SATS’ topline.

Conversely, SATS was still able to maintain a healthy double-digit OPM throughout the period.  The margin ranged between a low of 10.5% to a high of 15.1%.  There was no affirmative drop in profitability from servicing airlines.

SATS’ Revenue by Business Segment

SATS categorizes its business under two broad segments – Food Solutions (“Food”) and Gateway Services (“Gateway”).  As the name implies, Food Solutions consists of in-flight catering as well as sales & distribution of food products to non-aviation industry in Singapore.  Gateway Services comprises airport apron services like baggage and cargo handling, aircraft maintenance, security and flight operations.  Figure 2 shows the breakdown in revenue between the two segments for the past ten quarters.

Figure 2.SATS’ revenue by business segment.

There seems to be a small decline in Food revenue from $252.7 million in 2Q 2016/17 to $233.1 million in 1Q 2017/18.  On the other hand, Gateway did not experience a similar drop over the same period.  Again, the numbers do not tell a coherent story.

SATS’ Management

When in doubt, listening in to the quarterly Earnings Call may help.  During the Q&A session between broker analysts and the management, one can gain immense insight into what is keeping the management awake at night, and where they plan to steer the business.

I took time to view SATS’ most recent Earnings Call webcast.  You can access it here.  I gained a treasure trove of information, which helped to clear the picture.

Firstly, SATS’ Chief Executive Officer Mr. Alex Hungate explained the drop in Food revenue was attributed to lower volume sales to non-aviation industry in Singapore, and also due to lower revenue from TFK Corporation4 (TFK).  (History: TFK is an airline caterer in Japan, with presence in both Narita and Haneda Airports.  SATS had acquired the 50.7% stake from Japan Airlines in November 2010.)

The CEO also elaborated on the current overcapacity situation in Japan, which saw Delta Airlines and Japan Airlines cutting back on flights, hence the lower Food revenue.  On a brighter note, Mr. Hungate said that TFK is working to win a pipeline of new customers in Japan.

During the Q&A session, the CEO highlighted wins in the Gateway business, such as the new partnership with Jetstar Asia5 (“Jetstar”).  SATS will provide Jetstar with ground handling services, as well as in-flight meals and duty-free shopping.

The CEO also explained how SATS negotiates with SIA (“Singapore Airlines”) on its flight catering needs:

“The way it works is that as menu changes occur, we will constantly be providing pricing for the new menus et cetera. So on the flight catering side, this is a continuous process, there is no particular cliff where everything stops, although of course there are periodic refreshing of the overall master framework agreement. The actual pricing part of the flight catering happens from week to week as new menus are agreed together.”

Interestingly, Philip Securities analyst Richard Leow inquired on the drop in SATS’ Food revenue to non-aviation industry in Singapore.  He wanted to know whether it was due to a structural issue from the contract to certain new army camp, or some kind of one-off (reduction) from MICE – Meetings, Incentives, Conventions and Exhibitions – type of catering contracts.  (History: SATS acquired Singapore Food Industries6 (SFI) back in December 2008.  SFI is a well-known caterer to military camps in Singapore.)

To which, Mr. Hungate answered that it was a temporary reduction in one of SATS’ major contracts, and the company hopes to build up the volume again over time.

So where does the management see potential opportunities?  The answer is right within their niche area.  As elaborated by the CEO:

“The flip side of the airline industry suffering from yield pressure is that sometimes the airlines start to think more radically about how they could restructure, and when they restructure, sometimes that involves spinning off non-airline assets that could be ground handling, could be catering et cetera.  So we have quite a good pipeline currently of those kinds of opportunities.”


For some years now, SATS’ management has reminded investors that its fortune is closely tied to airlines making money, and airline “yields” have been low all this while.  There is no expected upturn in the near future.  Low airline yields exert pricing pressure on SATS.  A zealous desire to win new contracts against its competitor was probably the reason for the reported price war in July 2016.

The company had scored big wins in Singapore.  However, there was revenue lost in Japan due to the overcapacity situation.  Nonetheless, having an exclusive duopoly, well-positioned associates/JVs in growth markets, really low leverage and a healthy profit margin should ensure that SATS continues to perform well going forward.

The Eleutherian Odyssey

Quick Facts

1. Changi Airport Group
2. Ministry of Transport
5. Jetstar Asia

Thursday, 27 July 2017

Is Trouble Brewing for CapitaLand Mall Trust in Jurong East?


Last Sunday morning, I had some free time to review the 2Q 2017 results of CapitaLand Mall Trust (SGX: C38U)(CMT).  This is one of two retail REITs on my watchlist (three if you count Mapletree Commercial Trust).  I was going through the Powerpoint deck when something caught my eye on the “Valuation and Valuation Cap Rates” slide.

For readers who do not know what a cap rate (“capitalization rate”) is about, it is a measure of how efficient a property manager is utilizing the real estate to generate income.  The higher the cap rate, the better the manager is at the task.  It can be calculated by taking the net property income, divided by the property value, which in this case, is the appraised value by professional valuers.

When a property’s value is higher, the cap rate should fall, all else equal.  This was expected for most of the assets in CMT’s portfolio, which saw higher values than the previous valuation exercise in December 2016.  The only exception is Westgate.  Instead of a gain, there was a valuation loss of $29.7 million – more on this later – and the valuation cap rate declined from 5.20% in 2H 2016 to 4.75% in 1H 2017.

Why did both the valuation and the cap rate fall for Westgate?  As they say, the devil is in the details.  I decided to take a closer look at the data.

Westgate’s Retail Rental

When the valuation falls and the cap rate declines too, logic tells us the actual or forecasted property income must have dropped significantly.  On the “Rental Reversions” slide, it was reported that Westgate had experienced an average negative 10% rental reversion for the first six months of 2017.  This is for 15.3 per cent of the total net lettable area in the mall.  In other words, whoever rented the premise recently had gotten it 10% cheaper than the lease signed three years ago.

If you consider someone who adds footnotes on a Powerpoint slide as trueful, then CMT’s management is as honest as the day is long.  In Footnote #6 on the “Valuation and Valuation Cap Rates” slide, CMT’s management provided a short explanation:
“The decrease in the valuation of Westgate is largely due to lower rental reversions as well (as) a lower market rental forecast in view of the increased competition in the western region of Singapore.”

So Savills (the professional valuer) had decided to award a lower valuation, because they think the retail rental market is going to suffer around the Jurong Gateway district.  This certainly does not bode well for CMT, since it has not one but three golden eggs – JCube, IMM and Westgate – in the same neighbourhood.

One fact I like about CMT’s management is that they provide plenty of data, not just in their annual reports, but in their quarterly results too.  I studied the rental situation at Westgate since the mall first set up shop in December 2013.  Figure 1 shows the occupancy rate at Westgate as reported by CMT’s management.

Figure 1. Quarterly retail occupancy rate at Westgate.

I was hoping to see whether there is any directional trend in the occupancy.  Unfortunately, I could not say for sure.  However, if Westgate’s occupancy continues to hover around the 96% mark, then I would conclude that either (1) it must be tough for CMT’s management to find tenants, or (2) it is unable to do so without offering a steep discount to the current rental rate.

I would love to get hold of occupancy data in Westgate’s next door neighbor, JEM.  I wonder if the situation is unique to Westgate, or impacting all the malls in the vicinity.  Unfortunately, property manager Lendlease does not disclose such information in their filings, so I am not able to find out.

The next best comparison would be IMM Building.  On Figure 2 below, I transposed IMM retail occupancy against Westgate’s occupancy.

Figure 2. Comparison of retail occupancy rate between Westgate and IMM.

IMM’s retail occupancy rate has held fairly steadily around 98% for the last eighteen months.  Despite IMM being some distance away from the Jurong East MRT Interchange, there is still relatively strong interest from tenants.

Could the market have been overly optimistic about Westgate’s potential, when the mall first opened its doors three years ago?  Looking at the rental reversions may give us a hint.

Figure 3 shows the quarterly retail rental reversions of Westgate and IMM respectively.  Note that as CMT’s management only provides year-to-date data for each fiscal period, I had adjusted the numbers to approximate each quarter’s reversion rate.

Figure 3. Adjusted quarterly retail rental reversion rate at Westgate and IMM.

Clearly, we see that Westgate has been experiencing negative rental reversions ever since 1Q 2016.  However, the situation at IMM Building is different.  It has been experiencing positive rental reversions for the same period.  The asymmetric data gives some indication that the bearish retail rental outlook does not seem to be impacting all the malls in the area.  Alternatively, it may also mean that CMT’s management has priced Westgate out of the market’s realistic expectations.

Valuer Bias

I had considered the possibility that Savills is a more conservative valuer than the other two (CBRE and Knight Frank) whom CMT’s management had engaged previously.  Figure 4 shows the semi-annual valuations and valuation cap rates of Westgate since 2H 2013, as reported by CMT’s management.  The different colours represent the different valuers (Green – CBRE, Red – Knight Frank, Yellow – Savills).

Figure 4. Westgate’s valuation and valuation cap rate since 2H 2013.

The valuation cap rate for Westgate has declined from 5.35% in 2H 2013 to 4.75% today.  The valuation had remained largely constant until this year when it dropped significantly by $99 million (CMT owns 30% of Westgate, which works out to a valuation decrease of $29.7 million.)

Savills was the most recent valuer engaged by CMT’s management to appraise the value for Westgate.  For the past two years, it was Knight Frank.  Prior to that, it was CBRE.  There may be a grain of truth that the lower valuation and cap rate is due to a difference in opinion about the retail rental market, as we can see that the cap rate changes whenever the valuer is swapped.

In Savills Research’s Q1 2017 Singapore Retail Briefing1, it was written:
“Although there does not appear to be a pause in sight for the storm that is whipping through the retail industry, current retail rents have probably reached a level such that, at least for the next couple of quarters, landlords can be expected to put up strong resistance to further cuts.”

Sadly, Savills – the valuation unit – does not think the above applies to Westgate.

Westgate’s Potential – Management’s Perspective

In the most recent 2Q 2017 Earnings Call, newly appointed CMT’s Chief Executive Officer Tony Tan still expressed optimism for retail in the Jurong Gateway district.  He called the place Singapore’s “second CBD”, and mentioned the area has a “long-term fundamental attraction” for many real estate players.  CMT is good to have a presence early.   Nonetheless, it will take a while for the resident population to build up.  In the meantime, the management wants to ensure that CMT remains competitive (in terms of retail rental rates), especially since the current demand-supply dynamics is tilted towards more on the supply side.

My thoughts:  Negative rental revisions for Westgate will likely continue for a while more until CMT’s management hits the sweet spot between demand and supply in the area.


Savills is bold (or foolish if you think otherwise) in predicting that trouble is brewing for the retail rental market in the western region of Singapore.  But if the slide in rents indeed materializes, then Savills will be seen as having foresight to call the bears.

Why is it important for us retail investors?  This is because the Net Asset Value (NAV) of a REIT is wholly dependent on the valuation of the properties in its portfolio.  If the assets get lowered valuations, then the NAV will decrease.  CMT (the stock) will consequently be perceived as overvalued and selling pressure may result.

I hope Westgate is just an aberration and not representative of a new bearish trend.  Nonetheless, it may be good to keep an eye on the development.

The Eleutherian Odyssey

Quick Facts

1. Savills

Monday, 24 July 2017

Is the Nightmare Finally Over for Singapore Post? [Part 2]


In my previous post, I provided a quick update on the preliminary review conducted by WongPartnership (“WongP”) on Singpost’s acquisition of TradeGlobal (TG). You can read it here.

In this post, I review contemporary research on the prospects of the various business segments that SingPost operates in, namely Postal, Logistics, eCommerce and Property.


The Info-communications Media Development Authority recently renewed Singpost’s postal license for another 20 years.  However, as alluded by SingPost’s management in their FY2016/17 results commentary, letter mail volumes continue to decline, with businesses adopting e-statements.  International mail transhipment market remains highly competitive and margins are relatively low.

SingPost’s management is also reviewing changes in the international terminal dues system.  This relates to the new remuneration system for postal service operators starting in 2018, when bulky letters and small packets will be compensated differently from other letter-post formats.1

Decline in letter mail volumes is a universal trend.  Post offices worldwide are testing different solutions to stay relevant and add value for customers.  Swiss Post2 has a service where customers can carry out the most common postal transactions on weekdays directly with the postman.  Customers simply fasten a sign to their private letter box to post letters or parcels, make payments or buy stamps.  On the next delivery round, the postman rings at the door to conduct the postal transaction.

The United States Postal Service3 recently rolled out a service called “Informed Delivery”.  It scans the outside of your mail and sends you the images each morning before the mail is actually delivered.  That way, you would know whether an important letter is being delivered today or not.

SingPost is not sitting idle too.  The company launched the Centre of Innovation in November 2016, which experimented with drone postal deliveries4 and a new locker service “Rent-a-POP”5, where customers can collect or return parcels at various POPStations islandwide.  SingPost is also testing out new eco scooters with research platform TUMCREATE6.  The scooter features detachable, rollable storage boxes which provide up to 23% more storage space than existing postal scooters.  This can reduce daily delivery routine by up to 40 minutes.

Figure 1. SingPost’s eco scooter on trial. Photo Credit: SingPost

Accenture Consulting7, in their September 2015 paper, wrote that the global Courier-Express-Parcel market size is estimated to be worth US$343.1 billion by 2020.  The Asia Pacific market is expected to see a 15% Compound Annual Growth Rate (CAGR) from 2013 to 2020.  Digitally savvy consumers are seeking lower prices, greater convenience and a seamless experience with regard to eCommerce parcel delivery.  Many delivery service providers are seeking inorganic growth via mergers and acquisitions to build scale and new capabilities so as to widen the scope of their business.  (Viewed in this context, the acquisition spree by ex-SingPost CEO Wolfgang Baier does not seem overly aggressive or unwarranted.)

My Thoughts – Postal

Sadly, SingPost had missed out on an important trend – food delivery service.  New asset-lite start-ups such as Deliveroo and FoodPanda have blossomed to fill the gap between restauranteurs and consumers.  By leveraging on technology and contract riders, these companies provide a smooth order-to-delivery experience for hungry customers.  According to McKinsey & Company8, delivery time is the most important factor in satisfying these customers, and food orders tend to spike on Fridays, Saturdays and Sundays.  SingPost, being platform-agnostic, can collaborate with these start-ups to provide the fulfilment service via its existing postal transportation fleet.  (Since SingPost does not do postal delivery on weekends, this may help to increase asset utilization and bump up revenue in the process.)

The “last-mile delivery” market in Singapore, which SingPost used to be the de facto leader, is becoming increasingly fragmented, as start-ups backed by technology join the fray to give seasoned players a run for their money.  Case in point: Home-grown courier service Ninja Van9 makes use of computer algorithms and crowdsourcing to fulfil next-day door-to-door deliveries.  The company also allows customers to track their parcels in real-time via an online portal.

I am thinking out of the box here – Since SingPost has to make mail runs daily, the company can follow Swiss Post’s example to facilitate transactions at the customer’s doorsteps.  Via a mobile app, customers can request for the postman to provide services that include cash remittances (for domestic helpers working at home), currency exchange, bill payments and even medicine delivery for bedridden patients.


In the logistics business, SingPost has several entities, namely Quantium Solutions, Couriers Please, SP Parcels, Famous Holdings and others.  In their FY2016/17 results commentary, SingPost management wrote that they will seek to grow their customer base, develop collaborations and alliances with strategic partners to increase volumes.

Quantium Solutions International, the joint venture between SingPost and Alibaba Group Holdings, is likely the poster child for such partnerships. It was highlighted as the platform to develop eCommerce logistical capabilities in Southeast Asia and Oceania.

One industry poised to benefit from growing eCommerce is warehousing service providers.  SingPost took the plunge and opened the 553,000 sq ft Regional eCommerce Logistics Hub in Tampines Logistics Park in November 2016.  It managed to sign up local online retailer Lazada as a client in May 2017.  Automated parcel sorting as well as eCommerce platform integration are prominent features of the tech embedded facility.

Figure 4. SingPost’s Regional eCommerce Logistics Hub. Photo Credit: SingPost

 The logistics industry is traditionally known to be asset heavy, with fixed overheads for warehouses and transport fleets.  Consultancy firm Frost & Sullivan10 believes the future will be radically different.  Mobile app-based brokers will match freight customers to trucking vendors.  By being asset-lite and having minimal cost, these e-brokers will be able to offer more competitive freight rates, a model otherwise known as the “uberization of trucking”.

Thought leader PwC11 believes the future of logistics lies in collaboration, not competition.  The emergence of shared networks and the “Physical Internet” will lead to standardization of shipment sizes and greater modal connectivity.  Sharing of resources will help logistics players to increase efficiency and reduce carbon footprint.

The Singapore government unveiled the Smart Logistics Initiative12 in June 2015, which aims to harness new technologies to allow logistics service providers gain greater visibility into their supply chains, and share resources to create more efficient logistics networks. It is projected to result in around $76 million of annual savings for Singapore’s logistics industry and a productivity gain of 4 000 man-years.  In November 2016, the government launched the Logistics Industry Transformation Map13 which is expected to achieve a value-add of $8.3 billion and introduce 2,000 new PMET jobs by 2020.  SingPost could be a beneficiary of both initiatives.

Confidence in Singapore’s logistics future is also evident in the huge investments made by two private sector operators last year.  LF Logistics14, the logistics arm of Hong Kong trading giant Li & Fung, opened a $170 million, 1 million sq ft logistics hub in Jurong West in April 2016.  Separately, DHL Express15 opened its new $127 million South Asia hub in Singapore as part of its efforts to take advantage of the region’s growing cross-border trade.

My Thoughts – Logistics

The first question on my mind was why does SingPost have so many subsidiaries in the same sector?  I wonder whether there are economies of scale and efficiency to be gained if consolidation occurs.  On a deeper look, the subsidiaries seem to differ in their role within the supply chain and geographical reach.  (For example, Couriers Please operates in Australia.)  It may not be easy or plausible to consolidate these subsidiaries.

As a warehousing service provider, SingPost is competing with industrial behemoths such as Ascendas REIT (who owns nearly 9 million sq ft of warehousing space) as well as private operators.  As a last-mile delivery service provider, SingPost is facing unprecedented competition from new entrants aided by technology.  SingPost does not have the luxury to set its own pricing.  In this winner-takes-all market, profit margins are expected to be crimped further16.  It is going to be a long, bloody endurance match before the weaker companies get weeded out.


SingPost’s investment in eCommerce includes SP eCommerce in Asia Pacific, as well as TradeGlobal (TG) and Jagged Peak, a US-based eCommerce logistics provider acquired in October 2015.  In their FY2016/17 results commentary, SingPost’s management wrote that eCommerce revenue remains robust and will continue to contribute significantly to the Group revenue.  However, they cautioned that TG is not expected to be profitable for the financial year ending 31 March 2018.

In the preliminary review, WongP described more woes for the struggling subsidiary:

“TradeGlobal faced and continues to face headwinds posed by the sustained cost pressures arising from labour shortage in the Cincinnati area and the disruption in the US fashion retail industry which adversely affects key customers. TradeGlobal faced further setbacks in, amongst others, the loss of two large customers which accounted for a significant portion of its revenue.”

TG’s plight contrasts sharply against the bright future of eCommerce, especially in the United States. The US National Retail Federation17 expects that online retail will grow 8% to 12% in 2017, up to three times higher than the growth rate of the wider retail industry.

At this point, it must be noted that TG is NOT an eCommerce retailer.  It does not compete head to head with the likes of Amazon and Wal-Mart per se.  What TG does is to develop B2C eCommerce solutions for retailers keen to set up a web presence and grow their business via the internet.  TG has two main products: TG Commerce and TG Enterprise.  TG Commerce is a SaaS (Software as a Service) model that helps clients to manage their end-to-end supply chain and international order fulfilment.  TG Enterprise is a cloud-based solution that helps customers to sell their wares via an omni-channel approach.

Jagged Peak18 has a similar business model to TG, which in a statement, is to help customers have “complete control of their online brand and B2C and B2B sales channels.”

SP eCommerce is yet another player in the same market, but focusing on the Asia Pacific region.

On current eCommerce development, consultant DemoUp19 wrote that,

“Product visualization will become a crucial eCommerce trend as more and more complicated products are sold online… eCommerce players in those new categories need to come up with solutions that replace the offline retail experience where you can talk to the shop owner and ask for explanation or touch and try out products.”

Figure 5. DemoUp cited online retailer Zappos as an example of how companies can improve their product visualization to attract customers. Photo Credit: DemoUp

 eCommerce news platform Ecommerceguide.com20 concurs, saying:

“Greater personalization and a better customer experience will be the holy grail for eCommerce businesses in the future, as it becomes increasingly difficult to secure customers against a backdrop of ever increasing competition. Customers will eventually flock to those offerings as close to the in-store experience as possible, and major eCommerce retailers are already striving to make things more personal and more tangible on the web.”

The expertise offered by TG, Jagged Peak and SP eCommerce will be in demand, as retailers seek to build their brand and manage their online sales effectively.  The market is sizable, according to research firm Gartner21.  Worldwide spending on eCommerce platform software reached US$4.7 billion in 2015, a 15% year-on-year increase.  Gartner also estimates that the eCommerce platform market will grow at a CAGR of over 15% from 2015 through 2020, including revenue from SaaS, licenses, and maintenance.

However, the barrier of entry is low and these companies will likely face plenty of competitors in their respective landscape.  Another concern is the short lifespan of eCommerce software.  Unlike postal services, TG, Jagged Peak and SP eCommerce will need to continually innovate and refresh their offerings to stay ahead of the curve.  Machine-learning solutions, enhanced chat bots, predictive shopping and automated conversion funnel enhancers are just some of the technological advancements expected in the future22.

My Thoughts – eCommerce

The crucial differentiator between a successful online retail platform and a failure is the end user experience.  Gone are the days when a website simply dumps all the deals in the landing page for the online shopper.  (Think Qoo10.)  Customers will want personalisation – the “Internet of Me”23 as it is called – and a smooth interactive experience.  (Think Amazon.)  eCommerce platform providers who can help retailers fulfill this need will likely see brisk sales.

If SingPost is to succeed in the eCommerce segment, significant R&D investment will be required by its subsidiaries.  Or they can do it the ‘Baier’ way – find another acquisition to plug the technological gap.


The redeveloped Singapore Post Centre (SPC) is slated to open in the second half of 2017.  CapitaLand has been appointed to manage the mall.  SPC will be the first Singaporean mall to combine brick-and-mortar shops and online shopping under one roof24.  What this means is that shoppers can browse in-store, purchase the product and arrange for delivery directly to their home.  Retailers do not need to carry spare inventory in store as fulfillment is executed at the backend of the warehouse.

Figure 6. Artist's impression of the new retail mall at Singapore Post Centre. Photo Credit: SingPost

SingPost will progressively start to recognise rental income in FY2017/18, as occupancy occurs in SPC.

Physical malls are facing stiff competition from online retailers.  Statistics from the Urban Redevelopment Authority25 show that retail vacancy rate has been on a steady uptrend since Q2 2012, hitting a high of 7.3% for the Outer Central Area region in Q1 2017.

Property research firm CBRE26 reported that Q2 2017 suburban retail rents have fallen 2.2% year-on-year, and “in the absence of clear demand drivers, rental outlook for the rest of the year and into 2018 is muted.”

On the other hand, Savills Singapore27 painted a silver lining in their Q1 2017 report, saying:

“On the whole, retailers face strong frontal and flanking assaults from online competitors, shopping destinations within a four-hour flight time from Singapore and lower consumer confidence; yet landlords, despite already having had to lower rents, are still able to retain confidence. Well-located and well-managed malls are still sporting close to full occupancy with a waiting list of potential tenants wishing to take up space, reflecting the scarcity of well-located malls.”

The way we shop today is going to change.  Forecasted trends28 include physical (& virtual) showrooms for online retailers (“e-tailers”), contactless payments, robot-assisted shopping and pop-up stores (dubbed the “Airbnb” for retail).

To attract foot traffic, research firm TRPC29 suggests the following,

“Mall operators can start allocating the extra space saved from smaller storefronts and reduction in inventory needs to improving in-person experiences. Experiences that cannot be recreated online, such as rock climbing or drinking, will continue to thrive as congregation points and drive consumers back to malls. Seasonality of offerings can drive more foot traffic. Offering Christmas markets or pop up concerts and shows will let customers have unique experiences that they couldn’t have online.”

Consultancy firm McKinsey & Company30 agrees:

“Innovative malls are strategically rethinking the types of stores that consumers will respond to. Anchor tenants that drive traffic are still key, but we also see a new emphasis on a curated mix of smaller stores that add a sense of novelty to the mall offering. Additionally, some malls are making greater use of temporary, flexible spaces that can accommodate different stores over time. Pop up stores, showroom spaces and kiosks provide customers with a sense of the unexpected and give them a reason to treasure hunt.”

Ironically, the malls of the future are going to be strong on experiences and less on merchandise.

My Thoughts – Property

SPC competes with Paya Lebar Square and Paya Lebar Quarter (expected TOP: second half of 2018) for footfall around the Paya Lebar MRT Interchange.  With 269,000 sq ft of retail space, SPC pales in comparison to Parkway Parade (561,000 sq ft) as a one-stop shopping destination in the Tanjong Katong area.  The spectrum of retail offerings will likely be limited.  Perhaps with a variety of eateries though, SPC can hope to attract office workers in the Paya Lebar Commercial Hub during the lunchtime peak hour.  Some mall owners have chosen to specialize, so as to draw in a specific crowd. Examples include Velocity @ Novena Square (sports and active lifestyle) and JCube (young shoppers).  It remains to be seen whether the novel concept of physical and online shopping combined will attract digitally savvy Singaporeans to spend their time (and money) at SPC.


SingPost has shifted its focus from snail mail to eCommerce.  It made a string of acquisitions to grow its business over the past few years.  Unfortunately, one of them has not turned out well.  SingPost faces either declining revenue or intense competition in the various business segments the company operates in. The short term outlook is not optimistic.

In their June report, OCBC Investment Research analyst Low Pei Han listed four things to watch out for: 1) level of improvement in volumes from the collaboration with Alibaba, 2) results from the review of the TradeGlobal acquisition, 3) utilization levels at the new eCommerce logistics hub, and 4) any escalation of losses from the eCommerce division.

Will SingPost emerge as a beautiful butterfly, or a dull moth from the cocoon of transformation?  The key lies in the effective execution of its corporate strategy by the management.  Significant expenditure may be required, if SingPost wants to carve, or maintain, a dominant market share.  At the same time, the company needs to conserve cash to tide over tough times.  The change in dividend policy from a fixed amount to a flexible 60-80% of net profit is thus, a sensible board decision.

To answer my own question, the nightmare lingers on for SingPost and its shareholders.  But it will be interesting to see how the company delivers results while going through the storm (pun intended).  I will be keeping tab.

The Eleutherian Odyssey

Quick Facts

1. Universal Postal Union
2. Swiss Post
3. United States Postal Service
4. SingPost
5. SingPost
6. SingPost
7. Accenture Consulting
8. McKinsey & Company
9. Channel NewsAsia
10. Forbes
11. PwC
12. Future Ready Singapore
13. Ministry of Trade and Industry
14. LF Logistics
15. DHL Express
16. Business Times
17.Business Insider
18. Jagged Peak
19. DemoUp
21. Forbes
22. HuffPost
23. Wired
24. SingPost
25. Urban Redevelopment Authority
26. CBRE
27. Savills Singapore
28. Straits Times
29. TRPC
30. McKinsey & Company

Thursday, 20 July 2017

Is the Nightmare Finally Over for Singapore Post? [Part 1]


Readers may well be aware of the TradeGlobal (TG) saga at Singapore Post Limited (SGX: S08) (“SingPost”).  The company took a massive impairment charge of $185.0 million for the eCommerce subsidiary in the final quarter of FY2016/17.  SingPost had previously paid $236 million to acquire the 96.3% stake from private equity firm Bregal Sagemount in October 2015.  This impairment wiped off nearly 80% of the deal value.

Figure 1. TradeGlobal logo.

Earlier this year, SingPost had appointed WongPartnership (“WongP”) as legal counsel to review the TG Acquisition, and also appointed FTI Consulting to assess the adequacy of the financial and commercial due diligence performed in relation to the transaction.  On 17 July 2017, SingPost submitted a preliminary report of the review to the Singapore Exchange.  You can download the report here.  Straits Times had published a summary of the report.  You can read it here.

TradeGlobal Acquisition

The report proved pretty damning.  It revealed that SingPost (or to be precise, SingPost’s board of directors) failed to cover pertinent issues before going ahead with the acquisition in 2015.  There were red flags that should have been raised during the due diligence process, but were not.

One red flag is that SingPost’s intended purchase price for TG was much higher than what previous owner Bregal Sagemount had paid.  SingPost’s board came to know this information a week before the signing of the purchase agreement, but no further due diligence was carried out.

Another red flag is that TG’s main subsidiary had significantly underperformed its forecasts in the two fiscal years before SingPost’s acquisition.  In the preliminary report, WongP wrote,

“The significant underperformance in the years immediately prior to the TG Acquisition, in view of the Aggressive Forecast Risk, warranted greater scepticism as to the achievability of the forecasts, and a more conservative valuation of TG may have been arrived at following an examination in greater detail of previous and current forecasts.”

 WongP added further that,

“Where forecasts of a target company’s performance are potentially aggressive, it would have been best practice to explicitly consider the implication of historical multiples on the valuation of TG.  Despite the Aggressive Forecast Risk, the valuations presented to the Board were based only on forecasts, and no valuations based on historical multiples were presented.”

In short, SingPost did not fully consider all angles before proceeding with the acquisition.  But to be fair to SingPost’s board of directors, it is mind boggling, or nearly impossible – “nearly impossible” because in hindsight, everything looks possible – to take every speck of data into consideration before arriving at a business decision.  (Imagine if you have to carefully weigh your choice of food between the calories and reviewers’ ratings on HungryGoWhere, would you still be able to have any lunch at all?)

The Road Ahead

My apologies to SingPost shareholders (my wife included) if my analogy isn’t appropriate.  SingPost’s board of directors should have taken a more conservative stance, since we are talking about multi-million dollar acquisitions, not ten dollar lunches here.  Investors have reacted bearishly since the FY2016/17 results release.  The stock had plunged 11 per cent before recovering to a loss of 2.9 per cent till date.

Figure 2. SingPost’s price movement since FY2016/17 results release.

At this point, the damage is done.  The impairment charge has been taken, and SingPost’s management is now executing a turnaround plan for TG.  What lies ahead for SingPost from here?

In my next post, I review contemporary research on the prospects of various business segments that SingPost operates in.

Watch this space.

The Eleutherian Odyssey

Quick Facts