2nd Chance Properties

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(16-02-2014, 07:52 PM)CityFarmer Wrote:
(16-02-2014, 01:26 AM)zquan Wrote: Reading through the AR, i think the company is in 4 lines of business (Apparel, Gold , Properties and Securities), not sure why most of the postings in VBs did not take mention about the securities business ?Huh

Among the 4 lines of business, only Apparel and Properties are the key businesses. The Gold business is good, but it is unscalable i.e. no prospect for growth. The Securities business is mainly bond investments, which primary function is for capital preservation of cash reserve.

(not vested)

They own a fairly large amount of REIT investments too. Based on the 2013 Annual Report, 54% of their financial assets are in REITs, 31% in bonds and 15% in listed equities. It is fairly substantial. I won't be surprised if they deployed the proceeds into REITs to make up for the shortfall in rental income.

(Not Vested)
Disclaimer: Please feel free to correct any error in my post. I am not liable for anything. Do your own research and analysis. I do NOT give buy or sell calls and stock tips. Buy and sell at your risk. I am not a qualified financial adviser so I do not give any advice. The postings reflects my own personal thoughts which may or may not be accurate.
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(13-02-2014, 01:55 AM)ashparagon Wrote:
(10-02-2014, 10:58 AM)opmi Wrote:
(10-02-2014, 10:33 AM)valuebuddies Wrote: I wonder why the price is so resilient knowing that future yield will be bad. Is the company paying any special dividend or capital reduction from the proceeds?

market not efficient one coz 99% dont read annual reports or corp anncs.
(fund mgrs included)

Pardon my ignorance as I am new to this, but why should the price fall even if everyone else knows about the news?

Looking at it,

1. Prior to this, there were concerns about the property market cooling off and the properties will not appreciate further. Thus finding opportunity to sell the properties when the time and price is right seems like a sensible move.

2. The disposal is valued at S$175,376,412, while the book value is only S$134,773,500. That's 30% above valuation. That seems like a really good price. If the sale does go through, doesn't this actually increases the NAV of the company?

3. Since the company has great business sense and is making good decisions shouldn't we buy more instead of selling?

4. Another point to note is that this is an option agreement, the proposed disposal will only go through if CM exercise the call option or 2nd chance exercise the put option, by 29 Aug 2014. So nothing is finalised yet.

Am I missing something here?

Agreed with all the 4 points.
Except that I wouldnt be buying at this point as all this news has been factored into the share price. At current prices, there isnt a substantial MOS.

But yes, my personal opinion is that the property sale, if it goes through, is a good thing.
How the sales is being utilised is another matter, but it is the right move to sell out now.
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(16-02-2014, 08:36 PM)Nick Wrote:
(16-02-2014, 07:52 PM)CityFarmer Wrote:
(16-02-2014, 01:26 AM)zquan Wrote: Reading through the AR, i think the company is in 4 lines of business (Apparel, Gold , Properties and Securities), not sure why most of the postings in VBs did not take mention about the securities business ?Huh

Among the 4 lines of business, only Apparel and Properties are the key businesses. The Gold business is good, but it is unscalable i.e. no prospect for growth. The Securities business is mainly bond investments, which primary function is for capital preservation of cash reserve.

(not vested)

They own a fairly large amount of REIT investments too. Based on the 2013 Annual Report, 54% of their financial assets are in REITs, 31% in bonds and 15% in listed equities. It is fairly substantial. I won't be surprised if they deployed the proceeds into REITs to make up for the shortfall in rental income.

(Not Vested)

I think the company is more likely to put the sale proceeds mainly into bonds, and commit to REITs only when there is a substantial discount and they are particularly cheap.
This is one of the qns from the 2013 AR

Q. Why is the Company investing in bonds?
A. It is good that you have raised this question as probably many of our shareholders are also wondering the same.
Bond investment or trading in bonds is not part of our core business.
Due to our very low gearing and in order to compensate the loss of rental income from the sale of several properties, we have reinvested $20 million of the sale proceeds into a diversified bond portfolio that provide us an average yield of 5.60% per annum.
At the appropriate time especially when opportunities to invest in real estate arise and our gearing increases we will dispose off the bonds that are in the money while holding on to others until maturity.
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Looking at it more carefully, I don't think this is a good company to invest, due to the warrants issuance and ultimately dilution to all shareholders.

The warrants can be exercised at $0.40 from july 2016 to july 2017 (expiry date). Let’s dig deeper to investigate what is the consequence.

Warrants issued: 577,024,950

Let’s assume that during the period july 2016 to july 2017, 2nd chance properties share price ranges sustainably above $0.40 (e.g. price fluctuate from $0.45 onwards), a large majority of the warrant holders will exercise their warrants. Let’s put an estimate that conservatively 80% of the warrants are exercised.

Warrants exercised: 461,619,960

Assuming that total shares outstanding in 2016 is same as 2013 (meaning no shares dilution or shares buyback from now till 2016/2017),

Shares outstanding prior to warrants conversion: 637,607,158

Shares outstanding after warrants conversion: 1,099,227,118

This will result in dilution of 72% of the shares outstanding, and this is very very dilutive. What this means is that the EPS (as well as ROE and ROA) will decrease significantly. For e.g. 2013 earnings of 63.7 million will give you 0.10 EPS, but after this dilution the same earnings only give you 0.058 EPS!

Short term wise, this is bad news. Shareholders value decrease a lot, as you can see. One may argue that with this increase in capital, if 2nd chance properties can maintain the same ROE, we as shareholders benefit the same way in the long term. I shall further explain to you why this is not the case.

Let’s use the same ROE of 21.9% in 2013. Now let’s calculate the total equities.

Total Equities prior to warrants conversion: $260,842,000

Total Equities after warrants conversion: $184,648,000 + $260,842,000 = $445,490,000

Thus, net income = 0.219 x $445,490,000 = $97,562,310

EPS = 97,562,310/1,099,227,118 = 0.089

As you compared the EPS of 0.10 (in 2013) to 0.089 now, that’s 11% decrease in value for shareholders, even AFTER we assume that the company is efficient in allocating the additional share capital and give us higher earnings.

Looking at it this way, even though the earlier shareholders who were issued the warrants get to benefit from converting the warrants, in the long run they also suffer from this dilution as well.

This company also has a track record of diluting shareholders value previously, with warrants conversion in 2012/2013 at $0.32 exercise price, and the scrip dividends issuance ever since earlier periods till 2011.

The question to ask is why is the company doing this and why the 2016/2017 warrants exercise price are chosen at a low $0.40, given that the company expects growth and by 2016, should therefore expect a much higher share price?

The way I look at it, the company seems to really want most of the warrants to get converted; they want this huge inflow of capital, even at the expense of selling them cheaply. My guess is that with creative financing, they can sustain the high and ever-increasing dividends payout. Let’s analyse further.

Capital raised through warrant conversion (assuming 80% exercised): $184,647,984 (461,619,960 x $0.40)

Dividends payout for 2013 was at $36,190,879. So in essence, 5 years of dividends payout are returned back to 2nd chance properties when the warrants get exercised! (Issued warrants were exercised in 2012/2013, and then in 2016/2017, so will there be more warrants coming in 2020/2021?)

In other words, to entice shareholders to invest in 2nd chance properties with high dividends payout, the company resort to diluting shareholders value to fund the dividends. This doesn't seem right at all.

Another thing to take note is that in 2012/2013 when the warrants exercised price was at $0.32, the company were buying back shares at $0.395. What this means is that they were essentially buying back at a higher price than what they sold to the old existing shareholders for. You can say that such a practice benefit the old shareholders at the expense of new shareholders (those without warrants).

So with the warrants exercise price of $0.40 in 2016/2017, personally I will not buy this share anything above $0.40, and I will also sell it before it gets diluted from July 2016 onwards. Imagine if you bought it at $0.46 (current price now), price stay stagnant (or rise) in 2016, then the company keeps buying back shares at $0.46 (or higher) to ensure price don’t drop so that majority of the warrants get exercised. History repeats itself, the new shareholders suffer.

To put it short in summary, new shareholders suffer because of
1. Company buying back shares above warrant exercise price,
2. Heavy dilution of shares.

Personally I do not like where this company is headed, even though I have to say that Mr Salleh is a smart and shrew businessman.

(Side note: The only way that the dilution doesn't materialise is that the share price stays at/falls below $0.40 in 2016/17. But if that happens then it doesn’t make sense for you to buy this share at current price.)
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(22-02-2014, 05:19 AM)ashparagon Wrote: Looking at it more carefully, I don't think this is a good company to invest, due to the warrants issuance and ultimately dilution to all shareholders.

The warrants can be exercised at $0.40 from july 2016 to july 2017 (expiry date). Let’s dig deeper to investigate what is the consequence.

Warrants issued: 577,024,950

Let’s assume that during the period july 2016 to july 2017, 2nd chance properties share price ranges sustainably above $0.40 (e.g. price fluctuate from $0.45 onwards), a large majority of the warrant holders will exercise their warrants. Let’s put an estimate that conservatively 80% of the warrants are exercised.

Warrants exercised: 461,619,960

Assuming that total shares outstanding in 2016 is same as 2013 (meaning no shares dilution or shares buyback from now till 2016/2017),

Shares outstanding prior to warrants conversion: 637,607,158

Shares outstanding after warrants conversion: 1,099,227,118

This will result in dilution of 72% of the shares outstanding, and this is very very dilutive. What this means is that the EPS (as well as ROE and ROA) will decrease significantly. For e.g. 2013 earnings of 63.7 million will give you 0.10 EPS, but after this dilution the same earnings only give you 0.058 EPS!

Short term wise, this is bad news. Shareholders value decrease a lot, as you can see. One may argue that with this increase in capital, if 2nd chance properties can maintain the same ROE, we as shareholders benefit the same way in the long term. I shall further explain to you why this is not the case.

Let’s use the same ROE of 21.9% in 2013. Now let’s calculate the total equities.

Total Equities prior to warrants conversion: $260,842,000

Total Equities after warrants conversion: $184,648,000 + $260,842,000 = $445,490,000

Thus, net income = 0.219 x $445,490,000 = $97,562,310

EPS = 97,562,310/1,099,227,118 = 0.089

As you compared the EPS of 0.10 (in 2013) to 0.089 now, that’s 11% decrease in value for shareholders, even AFTER we assume that the company is efficient in allocating the additional share capital and give us higher earnings.

Looking at it this way, even though the earlier shareholders who were issued the warrants get to benefit from converting the warrants, in the long run they also suffer from this dilution as well.

This company also has a track record of diluting shareholders value previously, with warrants conversion in 2012/2013 at $0.32 exercise price, and the scrip dividends issuance ever since earlier periods till 2011.

The question to ask is why is the company doing this and why the 2016/2017 warrants exercise price are chosen at a low $0.40, given that the company expects growth and by 2016, should therefore expect a much higher share price?

The way I look at it, the company seems to really want most of the warrants to get converted; they want this huge inflow of capital, even at the expense of selling them cheaply. My guess is that with creative financing, they can sustain the high and ever-increasing dividends payout. Let’s analyse further.

Capital raised through warrant conversion (assuming 80% exercised): $184,647,984 (461,619,960 x $0.40)

Dividends payout for 2013 was at $36,190,879. So in essence, 5 years of dividends payout are returned back to 2nd chance properties when the warrants get exercised! (Issued warrants were exercised in 2012/2013, and then in 2016/2017, so will there be more warrants coming in 2020/2021?)

In other words, to entice shareholders to invest in 2nd chance properties with high dividends payout, the company resort to diluting shareholders value to fund the dividends. This doesn't seem right at all.

Another thing to take note is that in 2012/2013 when the warrants exercised price was at $0.32, the company were buying back shares at $0.395. What this means is that they were essentially buying back at a higher price than what they sold to the old existing shareholders for. You can say that such a practice benefit the old shareholders at the expense of new shareholders (those without warrants).

So with the warrants exercise price of $0.40 in 2016/2017, personally I will not buy this share anything above $0.40, and I will also sell it before it gets diluted from July 2016 onwards. Imagine if you bought it at $0.46 (current price now), price stay stagnant (or rise) in 2016, then the company keeps buying back shares at $0.46 (or higher) to ensure price don’t drop so that majority of the warrants get exercised. History repeats itself, the new shareholders suffer.

To put it short in summary, new shareholders suffer because of
1. Company buying back shares above warrant exercise price,
2. Heavy dilution of shares.

Personally I do not like where this company is headed, even though I have to say that Mr Salleh is a smart and shrew businessman.

(Side note: The only way that the dilution doesn't materialise is that the share price stays at/falls below $0.40 in 2016/17. But if that happens then it doesn’t make sense for you to buy this share at current price.)

People might not exercise their warrants juz becoz its above water. Especially if it takes significant capital to convert the warrants. For me, I would juz sell the warrants.
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(22-02-2014, 05:19 AM)ashparagon Wrote: Looking at it more carefully, I don't think this is a good company to invest, due to the warrants issuance and ultimately dilution to all shareholders.

The warrants can be exercised at $0.40 from july 2016 to july 2017 (expiry date). Let’s dig deeper to investigate what is the consequence.

Warrants issued: 577,024,950

Let’s assume that during the period july 2016 to july 2017, 2nd chance properties share price ranges sustainably above $0.40 (e.g. price fluctuate from $0.45 onwards), a large majority of the warrant holders will exercise their warrants. Let’s put an estimate that conservatively 80% of the warrants are exercised.

Warrants exercised: 461,619,960

Assuming that total shares outstanding in 2016 is same as 2013 (meaning no shares dilution or shares buyback from now till 2016/2017),

Shares outstanding prior to warrants conversion: 637,607,158

Shares outstanding after warrants conversion: 1,099,227,118

This will result in dilution of 72% of the shares outstanding, and this is very very dilutive. What this means is that the EPS (as well as ROE and ROA) will decrease significantly. For e.g. 2013 earnings of 63.7 million will give you 0.10 EPS, but after this dilution the same earnings only give you 0.058 EPS!

Short term wise, this is bad news. Shareholders value decrease a lot, as you can see. One may argue that with this increase in capital, if 2nd chance properties can maintain the same ROE, we as shareholders benefit the same way in the long term. I shall further explain to you why this is not the case.

Let’s use the same ROE of 21.9% in 2013. Now let’s calculate the total equities.

Total Equities prior to warrants conversion: $260,842,000

Total Equities after warrants conversion: $184,648,000 + $260,842,000 = $445,490,000

Thus, net income = 0.219 x $445,490,000 = $97,562,310

EPS = 97,562,310/1,099,227,118 = 0.089

As you compared the EPS of 0.10 (in 2013) to 0.089 now, that’s 11% decrease in value for shareholders, even AFTER we assume that the company is efficient in allocating the additional share capital and give us higher earnings.

Looking at it this way, even though the earlier shareholders who were issued the warrants get to benefit from converting the warrants, in the long run they also suffer from this dilution as well.

This company also has a track record of diluting shareholders value previously, with warrants conversion in 2012/2013 at $0.32 exercise price, and the scrip dividends issuance ever since earlier periods till 2011.

The question to ask is why is the company doing this and why the 2016/2017 warrants exercise price are chosen at a low $0.40, given that the company expects growth and by 2016, should therefore expect a much higher share price?

The way I look at it, the company seems to really want most of the warrants to get converted; they want this huge inflow of capital, even at the expense of selling them cheaply. My guess is that with creative financing, they can sustain the high and ever-increasing dividends payout. Let’s analyse further.

Capital raised through warrant conversion (assuming 80% exercised): $184,647,984 (461,619,960 x $0.40)

Dividends payout for 2013 was at $36,190,879. So in essence, 5 years of dividends payout are returned back to 2nd chance properties when the warrants get exercised! (Issued warrants were exercised in 2012/2013, and then in 2016/2017, so will there be more warrants coming in 2020/2021?)

In other words, to entice shareholders to invest in 2nd chance properties with high dividends payout, the company resort to diluting shareholders value to fund the dividends. This doesn't seem right at all.

Another thing to take note is that in 2012/2013 when the warrants exercised price was at $0.32, the company were buying back shares at $0.395. What this means is that they were essentially buying back at a higher price than what they sold to the old existing shareholders for. You can say that such a practice benefit the old shareholders at the expense of new shareholders (those without warrants).

So with the warrants exercise price of $0.40 in 2016/2017, personally I will not buy this share anything above $0.40, and I will also sell it before it gets diluted from July 2016 onwards. Imagine if you bought it at $0.46 (current price now), price stay stagnant (or rise) in 2016, then the company keeps buying back shares at $0.46 (or higher) to ensure price don’t drop so that majority of the warrants get exercised. History repeats itself, the new shareholders suffer.

To put it short in summary, new shareholders suffer because of
1. Company buying back shares above warrant exercise price,
2. Heavy dilution of shares.

Personally I do not like where this company is headed, even though I have to say that Mr Salleh is a smart and shrew businessman.

(Side note: The only way that the dilution doesn't materialise is that the share price stays at/falls below $0.40 in 2016/17. But if that happens then it doesn’t make sense for you to buy this share at current price.)

One important point was excluded from the analysis. The warrants were awarded to shareholders on pro rata basis. That means, if the shareholders kept the warrants and exercised it, then no issue of dilution for them. The bonus warrants were a generous way for existing shareholder to participate on the company growth.

For new shareholder, may be an issue. The dilution should be part of the DD before the investment.

(not vested)
“夏则资皮,冬则资纱,旱则资船,水则资车” - 范蠡
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@ smallcaps:
Even if u dont exercise and sell the warrants, the eventual buyer/holder of the warrants would exercise them
So what u r saying doesn't apply to his analysis
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(22-02-2014, 05:24 PM)GFG Wrote: @ smallcaps:
Even if u dont exercise and sell the warrants, the eventual buyer/holder of the warrants would exercise them
So what u r saying doesn't apply to his analysis

Wouldn't that need another assumption that the last holder of the warrants actually have the capital/knowledge to exercise the warrants?
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(22-02-2014, 06:26 PM)smallcaps Wrote: [quote='GFG' pid='75147' dateline='1393061071']
@ smallcaps:
Even if u dont exercise and sell the warrants, the eventual buyer/holder of the warrants would exercise them
So what u r saying doesn't apply to his analysis

Wouldn't that need another assumption that the last holder of the warrants actually

He already said he factored in 80% conversion.
Which is conservative if u calculating dilution. Previous conversion was higher.

In any case, just saying whether you will convert or not is not really relevant to an analysis. You gotta consider a percentage for the big picture
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(22-02-2014, 10:43 PM)GFG Wrote:
(22-02-2014, 06:26 PM)smallcaps Wrote: [quote='GFG' pid='75147' dateline='1393061071']
@ smallcaps:
Even if u dont exercise and sell the warrants, the eventual buyer/holder of the warrants would exercise them
So what u r saying doesn't apply to his analysis

Wouldn't that need another assumption that the last holder of the warrants actually

He already said he factored in 80% conversion.
Which is conservative if u calculating dilution. Previous conversion was higher.

In any case, just saying whether you will convert or not is not really relevant to an analysis. You gotta consider a percentage for the big picture

Guess its pretty subjective. Personally prefer to consider warrants as 100% dilution since it seems the most conservative and which does not need to assume some future price scenario that is in turn assumed to affect conversions in a certain manner. I am actually doubtful if there is any correlations between price fluctations at certain % above strike to that of conversion %.
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