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Soilbuild Launches Preferential Offering to fund Bukit Batok Connection Acquisition

Soilbuild REIT Logo

Soilbuild Business REIT has announced the launch of preferential offering to partially fund the acquisition of Bukit Batok Connection.

The preferential offering will issue up to 94,353,672 new units in Soilbuild REIT to raise S$59.4 million dollars. New units will be issues on the basis of 1 new unit for every 10 existing units. The new units will be issued at a price of S$0.63 per unit.

What is Preferential Offering?

A preferential issue is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital.

Increase in Average Leverage

Before the preferential offering, the average leverage of Soilbuild REIT is 35.9% as mentioned in my previous post. If Soilbuild REIT manages to get the maximum proceeds of S$59.4 million, the average leverage will increase to 36%.

Dilution of Share Price

With the issuance of new units, we are all worried that the share price will be diluted.

As of 29th July 2016, a total of 943, 536, 726 units are issued, market closing price is S$0.67.

943,536,726 x $S0.67 = S$632,169,606

Assuming maximum proceeds,

94,353,672 x $0.63 = S$59,442,813.40

Estimated stock price after dilution

(S$632,169,606 + S$59,442,813.40) divide by (943,536,726 + 94,353,672)

Thus, the estimated stock price after dilution is $0.6664.

Can we conclude not much dilution after the new units are issued at preferential price?

Should you or I take up the Offer?

Based on the closing of S$0.68 on 18th August 2016. The issuance price of S$0.63 translate to a discount of 7.35%. With slight dilution in stock price and a decent discount of 7.35%, it is a pretty good offer. However, one should still consider the risks involved (Should You Buy Soilbuild REIT Now?) prior to making your own personal decision.

Should You Buy Soilbuild REIT Now?

Soilbuild REIT Logo

Recently, Moody’s Investors Service has changed the rating outlook for Soilbuild REIT to negative from stable. Soilbuild REIT overall portfolio occupancy also fell to 92%. Below I evaluate the risks versus the positives and whether you should enter into a position with Soilbuild REIT right now.

Near Term Risk

Seeking Replacement Tenant

The SGD11.8 million that Soilbuild REIT receives from the default of Technics Offshore Engineering Pte Ltd will be exhausted in Q3 2017. Soilbuild REIT will have to find a new tenant to replace the missing revenue.

More Debt

Recently, Soilbuild REIT announced the proposed acquisition of Bukit Batok Connection for a total of SGD100.49 million. This will be voted and concluded in the upcoming extraordinary annual general meeting. The acquisition will be funded by balanced mix of unsecured debt and equity. The aggregate leverage of 35.9% allows Soilbuild REIT to have a further debt headroom of S$84 million. Do note that REITs in Singapore has an upper gearing limit of 45%.

Solaris Lease Expiry

The lease for Solaris is expiring in FY2018.

Weak Industrial Space Demand

With the current headwinds in the industrial sector, industrial space demand continues to weaken and there is potential for a further decline in occupancy rate.

The Positives

Rental from Bukit Batok Connection

If the acquisition of Bukit Batok Connection goes through, the property will contribute S$8.0 million rental in the first year followed by an annual rental escalation of up to 2.0% annually.

Diversification

If the acquisition of Bukit Batok Connection goes through, Real Estate and Construction will take 8.5% of its portfolio. This diversifies some form of risk as compared previously whereby Soilbuild REIT is concentrated in the Marine Offshore sector.

Soilbuild REIT Trade Sector Diversification

Conclusion

Soilbuild REIT currently makes up 3% of my stock portfolio. If you are looking into entering a buy position with Soilbuild REIT, my advice is to wait for the clouds to clear before deciding given the current risks outweigh the positives right now.

Kingsmen Creatives Turnaround Soon?

Kingsmen Creative Logo

Kingsmen Creatives Ltd reported their revenue increases 10.8% to S$149.4 million for 1st half of 2016 (1H2016). Although revenue has increased, the gross profit still remains in the negative outlook as compared to 1H2015. Gross profit decreased 1.4% as compared to 1H2015.

I am quite keen to understand the performance of the 4 divisions in Kingsmen Creatives Ltd. As you can see below, all the three divisions (Exhibitions and Thematic, Retail and Corporate Interiors, Alternative Marketing) maintained their performance by reporting a revenue increase except for Research and Design which continues to report a revenue decrease. (Results for 1Q2016 here: Kingsmen Creatives Profit Fell for 1Q2016)

Division 1Q2016 vs 1Q2015 1H2016 vs 1H2015
Exhibitions and Thematic Revenue Increase Revenue Increase
Retail and Corporate Interiors Revenue Increase Revenue Increase
Research and Design Revenue Decrease Revenue Decrease
Alternative Marketing Revenue Increase Revenue Increase

What is Research and Design?

Being curious on the job functions in Research and Design, I did some search on the internet. This is what I found.

Kingsmen Design Pte Ltd is a subsidiary of Kingsmen Creatives Pte Ltd. As a part of the Group’s Research & Design division, Kingsmen Design Pte Ltd specialises in design consultancy, design implementation, design management, research & development, and shop drawing support.

The division’s client includes TAG Heuer, Procter & Gamble Co., Kate Spade and Michael Kors, and thematic projects in the region. As you can see these are big brands in luxury retail goods sector which is facing headwinds now. In the current headwinds, these big brands are bound to be investing less in design consultancy and thematic implementation.

From my point of view, there is no point for these big brands to invest in thematic promotions and design the shops when nobody is buying in the current economy right? Most likely, the big brands may be busy stacking their shelves with more products to increase sales instead. But of course, this is just my analysis. What do you think?

Sixty One Percent Invested, Thirty Nine Percent Cash

Sixty One Percent

The below quote was taken from Boustead’s chairman message in their annual report 2016. It got me into deep thoughts whether I am using my cash in the right way to invest.

“Investing for long periods in cash is not desirable. But in the short run cash is like an option over every asset class, with no expiration date and no strike price. Cash provides the option to sweep up a bargain when it becomes available and this must have some value above the fact it earns almost nothing. If the purpose of an investment portfolio is to grow as well as protect the wealth you’ve accumulated over the years, doesn’t it make sense, if you can afford it, to also hold an option?”

– Roger Montgomery

When analyzing companies, we sometimes look at the free cash flow. Hogging plenty of cash means the company is cash rich but may also means the management has no direction or strategy where to invest to grow the company.

Personally, I felt the free cash flow model can apply to individuals as well. If you have followed my blog since last year, you will have realize I have been making purchases every month. This has left me little cash on hand when opportunity arises.

After reading the quote from Boustead’s chairman message, I calculated my invested amount versus my cash on hand. I am 61% invested and have 39% cash on hand. Personally, I feel having 39% cash is too little when opportunity arises. Since the market is also expensive now, I hope to accumulate more cash for the next opportunity.

What do you think is the ideal ratio for investment versus cash on hand?