Capitaland - Sprouting more branches with CapitaMalls Malaysia Trust

CapitaMalls Asia, which is 65.5% owned by Capitaland, announced on Friday that it has received approval from the Securities Commission of Malaysia to list a Trust (CapitaMalls Malaysia Trust) on Bursa Malaysia. The trust will consist of 1,350,000,000 units upon IPO, whereby 786,522,000 units will be offered for IPO, leaving CapitaMalls Asia with a 41.74% stake. This could fall to as low as 33% if an over-allotment option is exercised.

The trust will hold CapitaMalls Asia’s Malaysia shopping malls, and three Malaysian shopping mall assets will be injected into the trust upon IPO. These are the Gurney Plaza in Penang, an interest in Sungei Wang Plaza in Kuala Lumpur, and The Mines in Selangor, resulting in a total net lettable area of approximately 1.88 million sq ft for the portfolio. AmTrustee Berhad has been appointed as the trustee for CapitaMalls Malaysia Trust, and has valued the portfolio at approximately RM2,130.0 million (this is substantially different from the RM1,482.48 based on the indicative price of RM1.10 which cornerstone investors EPF Malaysia and Great Eastern Life Assurance have agreed upon, suggesting that some debt may also be injected into the initial portfolio).

This latest proposed listing augments our investment thesis for Capitaland - the company continues its excellent job of asset recycling, which frees up capital much more quickly for further growth. Along the years, Capitaland has created enormous amounts of shareholder value via REIT securitisation of its assets. Still maintaining a stake in each, the company could offload new developments quickly, and utilise the proceeds for further expansion, instead of waiting for years to recoup the development costs. The company also earns recurring income from the management of the trust assets, most of which are being paid for by new shareholders brought in under the REIT structure.

The listing of CapitaMalls Asia allowed Capitaland to monetise part of an important subsidiary for over $2.8 billion, but still retain its majority interest in the subsidiary (65.5%), and this proposed listing of CapitaMalls Malaysia Trust is further indication that the "Macquarie-style" model of asset recycling is very much alive under the Capitaland group.  

WBL continues to streamline operations, sells Applied Engineering

WBL Corp today announced that it has reached a conditional agreement to sell its wholly-owned Applied Engineering Pte Ltd to Advanced Holdings for a cash consideration of $18 million. Applied Engineering specialises in the design and fabrication of process equipment such as pressure vessels, shell & tube heat exchangers and other equipment, and supports the petrochemical, oil and gas industries both in Singapore and the region.

The sale for $18 million looks like a good deal (on WBL's part), given that the book value of Applied Engineering Pte Ltd on WBL's books is only $8.5 million. The sale price is twice of the carrying value, and the proceeds will be in cash, which may be deployed to other parts of the business, or returned to shareholders in the form of a special dividend. $18 million is no paltry sum, especially when there are only about 280 million shares outstanding (assuming full conversion of convertibles and including dilution for ESOS). Currently, there are about 250 million outstanding shares, which means the latest sale represents cash of about $0.072 per share. The company still has a substantial cash horde of $435 million (as of end March 2010), which increases the possibility of a special dividend.

We are hardly worried about the lowered profit contribution from WBL's "Engineering and Distribution" business following the sale, as the segment only contributed earnings of $2.9 million in 1H 2010. Other businesses in the "Engineering and Distribution" segment include Far East Motor (automobile servicing and repair), SPC Wearnes (bottled LPG), Pacific Silica Pty Ltd (silica mining), O’Connor’s (engineering systems), Polytek Engineering (laundry, boiler and washroom equipment and accessories), Wealco Equipment (water jet propulsion) and Welmate (architectural ceiling and partition systems).

While the remaining businesses may not see such generous buyers, it is likely that they may be sold off in the near future as WBL continues to streamline its operations to concentrate on property development and technology.

Sold SGX, a quarter of the portfolio in cash

Singapore Exchange Limited (“SGX”) wishes to announce an investment of $250 million in technology, comprising $70 million for a new securities trading engine and $180 million for infrastructure outsourcing services and data centres, collectively known as the Reach initiative. The investment of $70 million was previously announced by SGX on 4 March 2010.

The investment in the Reach initiative is to create the fastest access to Asia by implementing a new high-performance trading engine, a state-of-the-art data centre, as well as introducing co-location services to its customers. The Reach initiative also includes establishing presence at key data centres in Chicago, London, New York and Tokyo. The infrastructure outsourcing services will enable SGX to benefit from improved access to technical capabilities, implementation of enhanced processes and comprehensive infrastructure management tools. (3 June 2010)

We sold SGX (finally!) at $7.28 today, bringing the portfolio's cash level to almost 25%. We actually bought SGX at around the $4+ level in mid-March 2009, in the belief that the company (and its stock price) were sure beneficiaries of a market recovery. The stock's returns have been decent since, but we see little upside from current levels, despite the hype over the new $250 million trading system which promises to boost revenues. The exchange expects additional annual recurring expenses of $12 million due to this new system, which is paltry compared to the $200+ million operating expenses SGX racks up every year, but we are sceptical that the new trading system will actually provide a substantial boost to revenue.

The problem we have with SGX is that growth for the exchange is difficult to create. The new CEO, Magnus Bocker, is pulling out all the stops to try to increase revenue, and the latest $250 million investment represents a foray into algorithmic trading, which Mr Bocker hopes will drive trading velocity in cash equities trading. In our opinion, it will be difficult to induce algorithmic traders into providing liquidity for a large number of stocks listed on the exchange - either due to a low free float or a distinct lack of buying interest. The small market capitalisation of many counters also compounds the problem. More likely, algorithmic trading will be focused on the usual suspects (the market darlings which adorn the daily top volume list) and some of the larger capitalisation companies. Traders need other buyers and sellers in order to make money, so why focus on low investor interest companies where they have to make a market to induce buyers? As has been the case in the past, higher velocity and investor interest in a select group of stocks will likely drive investors away from others, more like a zero-sum game.

Moreover, Singapore's positioning as a financial hub (and "Asia's exchange") remains in question, given that Hong Kong already enjoys tremendous levels of trading volume. Much of this stems from Hong Kong's proximity to China, whose citizens possess tremendous household wealth. Hong Kong is already facing stiff competition from the Shanghai exchange, and going forward we expect to see Shanghai obtain a more-than-fair share of new large-cap listings. What does this leave SGX? Zilch (except for numerous poor quality third-tier S-Chips).

SGX's monopoly status looks safe at present, with its infrastructure setup preventing other players from quickly stealing market share in the local market. However, with the limited growth from local retail investors, SGX is looking overseas for growth. While this could be a way to boost revenue, SGX already charges one of the highest clearing fees in the world, and there could be downward pressures on pricing, reducing margins. The ASX has recently announced lowered fees as a result of the entrant of new competitors, which could be something that SGX may face further down the road.

Noble buys stake in USEC Inc

Noble Group today reported that it had purchased 5,848,940 shares of USEC Inc, a 5.13% stake in the company. The purchase cost was US$30,194,176.53, which works out to US$5.16 a share, an 8.2% premium to USEC's close of US$4.77 on Monday. USEC Inc is in the nuclear energy business, and supplies low enriched uranium (LEU) to commercial nuclear power plants in the United States and internationally.

Sold Jardine Strategic, market technicals unfavourable

We sold our shares in Jardine Strategic today (500 shares at US$21.22), despite the much anticipated sell-off in the stock market following huge losses on Wall St last Friday. Nonfarm payrolls were poorer that expected, renewing fears that the recovery in the US isn't going to plan. Also, a curious statement from Hungary's ruling party indicating that Hungary would go the way of Greece in terms of its debt problems further fuelled investor worries.

As we have described in a previous post, European debt problems are unlikely to simply disappear, and the likely result would be a sovereign default by one or more European economies. We have yet to see a selling climax, despite the sharp YTD falls in some markets.

While we reiterate that valuations are attractive for the stock market in general, we have to acknowledge the unfavourable market technicals - the Dow Jones and S&P 500 have both fallen below their 200 day moving averages, and the moving average now appears to be a resistance for both indices. With such bearish market technicals coupled with the fact that we have yet to see the market capitulate (or a failure/near-failure of one or two European banks), we have little choice but to err on the side of caution. With our sale of Jardine Strategic Holdings, we have raised the cash level of the portfolio to about 19%. We will also be looking to dispose of SGX to increase cash to about a quarter of the portfolio.

There is a good chance that we may be wrong in our reading of the market, which is why we will remain largely invested, but our larger cash holding will help us to buffer risks to the downside, and will be a useful source of ammunition should distressed opportunities appear.

Liew Mun Leong eats his own cooking

Capitaland CEO Liew Mun Leong has purchased a unit at the Interlace for $3,737,500, while his son has also purchased a $2,467,000 unit in the same development. A discount was not announced for both transactions.

Best World to issue bonus warrants

Best World International yesterday proposed the issuance of bonus warrants (exercise price $0.30) on the basis of 1 warrant for every 5 existing shares, which can be exercised 6 months from their listing and have a "shelf life" of 3 years. The rationale behind the proposed warrant issue was to reward existing shareholders as part of their 20th anniversary celebrations, allowing shareholders to participate in the growth of the company.

A bonus issue at this point of time is a curious step, given that the company has a large cash horde and we would have been happier if the company paid out some of that cash as a bonus dividend. However, a warrant issue is interesting and provides a new dimension to our investment in Best World Intl. We are no experts at valuing options or warrants, but if market conditions continue to be poor, we will not be surprised if the warrant is grossly underpriced by the market (due in part to the poor liquidity expected). We look forward to the listing and will be very happy to scoop up more warrants for leveraged exposure to the stock if the price "warrants" it.