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16-08-2011, 03:32 PM
Some thoughts on GIL's assets:
1. Their loan portfolio and securitization assets (LPSA) consists mainly of "fixed income" securities with floating rate coupons. There is very little interest rate risk. The most important risk is credit risk since they are mostly mezzanine loans (except for the US RMBS notes). With a Bloomberg machine, it can be quite easy to see the track record of payments in these notes. What is harder to tell is what the payment pattern would be like going forward, since you cannot possibly check the credit ratings of the individual obligors of each note.
2. A large part of its assets receive cash flows denominated in USD. With the outlook of the USD dim, how badly would this impact cash flows in SGD? Another large exposure is to AUD, which seems to be more stable, at least as long as their commodity-based economy thrives. In my DCF calculations for the cash flows from the USD assets, I would factor in a 1.5% - 2% depreciation in the USD per annum on average.
3. If valuing the company by book value, investors should remember to apply a discount to the DCF-calculated book value of the LPSA to arrive at the value attributable to unitholders. This is to factor in management fees and operating expenses. If 1H2011's net margins are indicative of net margins going forward, a discount of about 30% seems appropriate. The margin will likely narrow once share price hits above $0.36 since incentive fees will need to be paid.
4. As mentioned in (3), incentive fees will only be paid if share prices are above $0.36. Management has their work cut out for them. Base fees, at 1% of average market cap, are currently not very high and the rate is in place as long as market cap remains below $1.5bn. At current market cap of about $82mn, they have a long way to go.
Day-to-day expenses are fixed at $0.65mn per annum, excluding third party fees. Low acquisition fees of 1%. 3% divestment fees, with no divestment fees paid if company doesn't make a profit on the divestment. All in all, the fee structure looks good for unitholders. I think the fund has one of the lowest fees for listed funds in SG, and is certainly lower than most REIT's fees.
Perhaps the best way for the manager to increase its returns is to generate yield from its assets, and hope that this would push up the share price. This can be done by paying out as much as they can in distributions, hope the market pushes down the yield by increasing the share price, then raise fresh equity to try and increase AUM, NAV and market cap. As long as equity raised is larger than distributions (and consequently, the amortization of its LPSA), it will be able to attain incentive fees in time. It may be a good thing for potential shareholders who believe in this growth story to set aside some cash for future rights issues.
A relevant question would be if the managers have set the bar too high for themselves. This might perversely result in disincentives to work hard for unitholders.
5. The manager STAM is 100% Temasek-owned. Chairman Boon Swan Foo has so far acquired an 8.4% stake in the fund for $7.7mn, at the average price of $0.168. Even if he didn't foresee the $10mn impairment taken in FY2010, the counter should still be worth at least $0.148 according to him.
Just my 2 cents.
1. Their loan portfolio and securitization assets (LPSA) consists mainly of "fixed income" securities with floating rate coupons. There is very little interest rate risk. The most important risk is credit risk since they are mostly mezzanine loans (except for the US RMBS notes). With a Bloomberg machine, it can be quite easy to see the track record of payments in these notes. What is harder to tell is what the payment pattern would be like going forward, since you cannot possibly check the credit ratings of the individual obligors of each note.
2. A large part of its assets receive cash flows denominated in USD. With the outlook of the USD dim, how badly would this impact cash flows in SGD? Another large exposure is to AUD, which seems to be more stable, at least as long as their commodity-based economy thrives. In my DCF calculations for the cash flows from the USD assets, I would factor in a 1.5% - 2% depreciation in the USD per annum on average.
3. If valuing the company by book value, investors should remember to apply a discount to the DCF-calculated book value of the LPSA to arrive at the value attributable to unitholders. This is to factor in management fees and operating expenses. If 1H2011's net margins are indicative of net margins going forward, a discount of about 30% seems appropriate. The margin will likely narrow once share price hits above $0.36 since incentive fees will need to be paid.
4. As mentioned in (3), incentive fees will only be paid if share prices are above $0.36. Management has their work cut out for them. Base fees, at 1% of average market cap, are currently not very high and the rate is in place as long as market cap remains below $1.5bn. At current market cap of about $82mn, they have a long way to go.
Day-to-day expenses are fixed at $0.65mn per annum, excluding third party fees. Low acquisition fees of 1%. 3% divestment fees, with no divestment fees paid if company doesn't make a profit on the divestment. All in all, the fee structure looks good for unitholders. I think the fund has one of the lowest fees for listed funds in SG, and is certainly lower than most REIT's fees.
Perhaps the best way for the manager to increase its returns is to generate yield from its assets, and hope that this would push up the share price. This can be done by paying out as much as they can in distributions, hope the market pushes down the yield by increasing the share price, then raise fresh equity to try and increase AUM, NAV and market cap. As long as equity raised is larger than distributions (and consequently, the amortization of its LPSA), it will be able to attain incentive fees in time. It may be a good thing for potential shareholders who believe in this growth story to set aside some cash for future rights issues.
A relevant question would be if the managers have set the bar too high for themselves. This might perversely result in disincentives to work hard for unitholders.
5. The manager STAM is 100% Temasek-owned. Chairman Boon Swan Foo has so far acquired an 8.4% stake in the fund for $7.7mn, at the average price of $0.168. Even if he didn't foresee the $10mn impairment taken in FY2010, the counter should still be worth at least $0.148 according to him.
Just my 2 cents.