Amara Holdings

[johnnydash]

Hi boon, good points and thanks for the flashing of the numbers.

I am aware that Amara has contribution from investment properties and so it is not a pure play. Also aware that there are fair value gain. I am not that much bothered by it because other hotel stocks have investment properties as well. I think pure plays hotel stock are very rare. Now presumably, one can make adjustments to all the hotel stocks to get the cleanest comparison but it will 1) take lots of effort 2) doing so will give rise to problems of its own. And does it matter that much? the fact is that the market assigns much higher multiples to other hotel stocks which have property/investment segments as well.

The fair value gain is interesting. The bulk of it if im not wrong comes from 100 Am. While it is a one off gain accounting wise, but it has in effect been occurring every year consistently. The question is is this fair value gain in reality a recurring one? And for it to be recurring two conditions have to be fulfilled. 1) asset is carried conservatively on the book 2) higher rentals/ sustained good market conditions such that valuation will increase organically. And if 1 exists to a large extent, then 2 may not be that important. A case in point will be Guthrie and Lee Kim Tah. Because of both 1 and 2, it has revalued its ownership of jurong point upwards for the past 5-6 years. Such fair value gains I dont think should be discounted completely because they form a tangible and substantive part of the value of the company. My own back of the envelope calculation suggests that 100 am is carried conservatively. But will be interesting if we can take it further on this point.

Completely agree with you on the operating/ cash flow perspective. In fact that's a very nuanced point. And so that's why i view this as a cigar butt, supercharged with growth in value in the near term. looking at pe/rnav, rather then buffet's wonderful companies that compound, looking at ocf,fcf.

I have done some conservative(i hope) calculations for the valuation for amara shanghai and bangkok. for hotel components i have used revpar for 4/5 star hotels in their respective cities, number of rooms, 35% profit margin and comparative cap rates. for office and retail components i have used rental * nla *50% profit margin and compartive cap rates. The conclusion was that significant chunks of value will be added to Amara. In terms of earnings and asset value. Will be interesting if other value buddies can comment on their own methodology and perhaps even calculations.

[Tiggerbee]

Once Guocoland's Tanjong Pagar retail mall is up and running, 100AM will be facing stiff competition.

[kayaroti]

I suspect the reit that management mentioned before will come soon after Bangkok and Shanghai Hotels are completed.

I have been scouring the SGX to look for undervalued companies with great certainty in its earnings for the years to come. I chanced upon this little known, under-covered company. And what sets this company apart from other companies is the fact that it earnings is sustainable, even as it will be cyclical.

The investing community recently seems to be especially enamored with small cap companies, especially those that trades at low earnings multiple. The number of such companies that are truly undervalued, is in my opinion much smaller than the number of companies that have been touted as "undervalued". Many people including analysts are projecting recent good results in a straight line far into the future, failing to consider factors like benign operating environment, industry tail wind and whether companies have lasting competitive advantage. As surely as night follows day, so too will competition drive down profits towards the cost of capital. Sadly, a large number of such small caps do not have lasting competitive advantage and in my view things will get tough sooner or later. But I digress.

Back to Amara. It is trading at about 8 X P.E. Very low multiple. Is this sustainable? Probably yes. Earnings may fluctuate due to cyclical demand but if you look at room rates in Singapore over the decade, room rates have trended up and rates now are not at astronomical levels.(both are good) Will earnings be driven down by competitors? Theoretically, competitors may set up hotels, lots of it and drive down revenue. But practically hotels are viewed in a large part as investment and returns are supported by Cap Rates. In any case new hotels take time to be constructed and you can look to see if supplies of rooms in Singapore will experience significant growth. The answer is no. So low multiples, sustainable earnings. It potentially is undervalued.

Lets do a final test, are the prospects of the industry diminishing, and hence market is assigning such a low ratio. To answer this, we simply look at the valuation of the hotel companies in Singapore. There are about a dozen of them. All trades at at least high teens PE ratio, some in the twenties. The next closest hotel stock trades at about 16 times PE. Clearly, the prospects seem to be in no way diminishing. You can try it out yourself on any stock screener with a list of hotel stocks from SGX. Indeed Amara has to be undervalued(quite severely)

The fact that we can use PE to judge that Amara is undervalued speaks volume of the extent to which the market is unfairly valuing Amara. Most of the times, hotel stocks are undervalued from the asset perspective. And because cap rates of hotels are low, especially in Singapore, and especially in the current era of low interest rates, a hotel stock has to trade at such a huge discount to its asset value such that it will have a low PE multiple. Its no surprise therefore for me to find that it carries its hotel at historical cost, and investment property conservatively. And if we use the conservative estimates of valuation provided by the company, the assets is already worth $1.35.

Earlier in this thread some have called out value trap. Well, if we look at the charts up to a few months ago. Amara hit a high of 60 + cents. Less than a year before that, it hit 60 + cents as well. So at current level there is a decent 20% return as long as interest rotates back into the hospitality industry/ the stock.

Now if you think this is the end of the story, thats not all. Amara is on the way to completing a hotel in Bangkok and a mixed development in Shanghai! Both are scheduled for completion for this year and will add huge chunks to the stock value, and even more earnings. Things will then start to get ridiculous. Imagine a hotel stock that trades at 5-6 X PE. And if you do DCF, you will know that a company's fortunes(change in earnings or asset value) in the near term (3-5 years) contributes significantly to its intrinsic value. It seems like Amara is at a very sweet spot of being undervalued to begin with, plus tremendous growth coming up. Its like a cigar butt on steroids, with a dash of hash thrown in. (forgive the flowery language, its 2.30 am in the morning and I have to amuse myself as I finish my other work)

Now I'll reserve my judgement on these two developments, especially for Amara Shanghai; management has indicated that they wanted to start work on it since the Beijing olympics(yup you heard me right). But even if I apply a substantial discount, Amara still offers a mouth watering margin of safety.

(will start to accumulate)

[MOV]

AXA Tower a stone's throw away was sold to Perennial group for slight more than $1700psf, so that will give you an indicative value of 100AM office component, both with slightly different lease balance.

Anyway I remember disco roller skating at Amara as a young student, it was a cool place.

Definitely camping here for the REIT, hopefully not for long.

[Boon]

Hi boon, good points and thanks for the flashing of the numbers.

I am aware that Amara has contribution from investment properties and so it is not a pure play. Also aware that there are fair value gain. I am not that much bothered by it because other hotel stocks have investment properties as well. I think pure plays hotel stock are very rare. Now presumably, one can make adjustments to all the hotel stocks to get the cleanest comparison but it will 1) take lots of effort 2) doing so will give rise to problems of its own. And does it matter that much? the fact is that the market assigns much higher multiples to other hotel stocks which have property/investment segments as well.

The fair value gain is interesting. The bulk of it if im not wrong comes from 100 Am. While it is a one off gain accounting wise, but it has in effect been occurring every year consistently. The question is is this fair value gain in reality a recurring one? And for it to be recurring two conditions have to be fulfilled. 1) asset is carried conservatively on the book 2) higher rentals/ sustained good market conditions such that valuation will increase organically. And if 1 exists to a large extent, then 2 may not be that important. A case in point will be Guthrie and Lee Kim Tah. Because of both 1 and 2, it has revalued its ownership of jurong point upwards for the past 5-6 years. Such fair value gains I dont think should be discounted completely because they form a tangible and substantive part of the value of the company. My own back of the envelope calculation suggests that 100 am is carried conservatively. But will be interesting if we can take it further on this point.

Completely agree with you on the operating/ cash flow perspective. In fact that's a very nuanced point. And so that's why i view this as a cigar butt, supercharged with growth in value in the near term. looking at pe/rnav, rather then buffet's wonderful companies that compound, looking at ocf,fcf.

I have done some conservative(i hope) calculations for the valuation for amara shanghai and bangkok. for hotel components i have used revpar for 4/5 star hotels in their respective cities, number of rooms, 35% profit margin and comparative cap rates. for office and retail components i have used rental * nla *50% profit margin and compartive cap rates. The conclusion was that significant chunks of value will be added to Amara. In terms of earnings and asset value. Will be interesting if other value buddies can comment on their own methodology and perhaps even calculations.

Hi johnnydash,

Each property type (hotel, retail, office, industrial, residential etc…) has a different set of drivers influencing its performance.

There are certainly differences between comparing
1) two basket of fruits with the same composition/mix, and
2) two basket of fruits with different composition/mix.

Difference could be small or big - depending on the composition/mix

Yes, on investment properties, the bulk of fair value gain comes from 100 AM.

The Investment properties are carried at fair value, hence fair value adjustments (gain or loss) needs to be carried out over the reporting period

The fair value adjustment is “recurring” but not necessarily the “gain”, which could be a “loss” – ha-ha !.

From page 85 of AR2013:
“In the consolidated statement of comprehensive income, rental income of $13,840,000 (2012: $4,134,000) was generated from investment properties, and direct operating expenses include $5,617,000 (2012: $3,393,000) relating to investment properties that generated rental income during the year.”

(Note: Investment properties in 2013 = AM 100 (Retail + Office) + 118 Killiney Road; in 2012 without 118 Killiney Road)

Have to wait for AR2014 for the 2014 Rental income and operating expenses figures, to make my own analysis on its fair value.

Going forward, what is the prospect of rental growth/fair value gain?

On existing business hotel in Singapore, profitability seems to be declining..............

No doubt, there would be new income streams coming from the new Bangkok/Shanghai projects, but these are the “income” side of the equation. How about the “cost side”?
- What are the budgets/costs of these two projects?
- How much cost have been incurred and paid for to date?
- How much more, including borrowings, are needed to complete the projects?
- There seems to be lack of disclosure on these – if most of the project costs have already been incurred – great ! Otherwise……..
- it seems to me that there have been time-overrun in both projects – which could equate to cost overrun (I am not saying there are)
- New countries/ new market/new projects……………it could take a while to stabilize the incomes of these new projects even after completion..............

IMO, without the above information, it would be difficult to assess if Amara is undervalued (if so, how much undervalued?).

(not vested)

[glico]

Actually, on the hotel earnings perspective only, Amara is not particularly attractive.
It remains to be an asset play.

[johnnydash]

Yes. Agreed on your first points. I guess what i think and mean is if i can take your analogy further, is that there are multiple fruit baskets in the market. Each have different mix. But why is this basket so much cheaper than the rest? Presumably amongst the baskets some will have similar mix with Amara. At the same time the difference in price is several orders of magnitude. Perhaps Amara has been wrongly placed in the section for fruits which are damaged and spoilt.

From the figures so far, declining profitability is probable but is marginal. Last year was not exactly a great year for hospitality. And going forward I think it will be marginal increase and decrease as well, tracking the supply and demand factors of overall hotel industry. Thats the way hotel business works. Unless you are telling me you think Amara Revpar may drop more than 30% from current levels in a sustained way, then I will sit up and take note.

On the cost of developments, the major cost, the cost of land is very low. Land were bought years ago. For instance for Shanghai, the land was acquired in 1997 or thereabouts. Now that was before China became the dragon it is so land has appreciated by several magnitudes, I think its safe to say that land cost is dirt cheap.

The other cost is construction cost, and that is pretty much commoditised across all developments in a particular city. I don't see how that can eat into the margins so much that the new developments will not be profitable; i.e. not result in revaluation surplus. If you look at the financial statements, Amara has been increasing PPE, what is less clear is the exact breakdown. But I am also not sure whether other hotel companies disclose all the things that you demand from Amara! Also, I don’t think market participants wait for the precise moment for hotels to be completed before they jump in to buy hotel stocks. There will be a degree of uncertainty but the market is completely discounting the completion of the two new substantial developments right now.

If you look at balance sheet, cash flow I think you will find that Amara has no problem putting up the necessary for the CAPEX.

As for cost overruns, Amara is a developer. They engage construction companies for the construction of the hotel. If there are cost overruns, the construction companies will have to pay Amara. This is afaik the norm in the industry.

Agree about taking time for hotels to ramp up. My observations, a handful of past experiences is that it takes 6-9 months for hotel to reach like the average industry levels. Will be interesting if more people can share on this area as well.

thanks for being the devil advocate and raising up points.

The RNAV of Amara is about 1.3-1.4 based on the figures the company gave last year. This year the RNAV would have gone up. So it trades at least about 60% discount to their asset values. What kind of discount to RNAV do other hotel stocks trade at? And the figures the company gave has not included the developments in Bangkok and Shanghai, that means the real productive buildings( only the cost of land or the land use rights was considered in Shanghai) How much will those add? This then gets to the gist of valuing Amara. In addition, the market is discounting completely the eminent completion of these two developments. And its definitely true that these two projects have been pushed back in the time line for a number of times in the past. Especially for Amara Shanghai, management has wanted to start work many years ago but no work seems to have been done. The market perception seems to be that development has not started even now. I’ll definitely try and find out the progress of these two developments. But even without those, the discount right now is simply too wide. I’ll expect capital appreciation to come in two stages, first narrowing of discount as market interest returns (Amara has gone up to 60 plus for periods of time in the past two years) and second as the market realises that the developments are for real this time round.

All these have not considered CItylife @ Tampines which will TOP by mid 2016, which should see profit of 20-40 million recognised over this 1 1/2 years. Needless to say thats a pretty nice boost to bottomline. There are other smaller development projects due as well.

[Boon]

Strictly speaking, Amara has 4 business segments:
A) Hotel investment and management
B) Property Investment (PI) – Build for rental income
C) Property Development (PD) – Build to sell
D) F&B

Let’s look at and analyse each of its business segment one at a time.

First the hotel business (A)

Revenue (SGD, million)
FY2009 = 39.874
FY2010 = 49.493
FY2011 = 54.171
FY2012 = 56.277
FY2013 = 53.001
FY2014 = 53.723

Gross Operating Profit ~ EBIT (SGD, million)
FY2009 = 4.017
FY2010 = 13.101
FY2011 = 14.910
FY2012 = 17.624
FY2013 = 14.794
FY2014 = 13.318

Depreciation (SGD, million)
FY2009 = 5.763
FY2010 = 6.056
FY2011 = 4.934
FY2012 = 4.261
FY2013 = 3.275
FY2014 = 3.939

EBITDA (SGD, million)
FY2009 = 9.780
FY2010 = 19.157
FY2011 = 19.844
FY2012 = 21.885
FY2013 = 18.069
FY2014 = 17.257

Addition to Hotel Segment PPE (SGD, million)/ PPE on BS (SGD, million) / Group Borrowing (SGD million)
FY2009 = 2.376 / 141.646 / 157.161
FY2010 = 6.968 / 140.638 / 133.738
FY2011 = 13.557 / 150.760 / 140.945
FY2012 = 24.180 / 147.406 / 222.029
FY2013 = 30.453 / 176.086 / 221.807
FY2014 = 41.483 / 215.450 / 258.832

Comments:
1) The hotel assets are carried at cost less depreciation - capital projects in progress are not subject to depreciation.
2) The above revenue contributions are from the two existing hotels in Singapore.
3) Revenue in the last 4 years seems pretty stable. But gross operating profit (~ EBIT) and EBITDA had been on the rise before 2012, peaked in 2012, and then declined.
4) Addition to the hotel segment PPE (Capex) has been on the rise since 2009. From 2010 to 2014, addition to hotel PPE amounts to about 116 million - while Group’s bank borrowing over the corresponding period increased by about 125 million. It seems that most of the capex have been funded by debt.
5) These additions to PPE include capital works for the new Bangkok/Shanghai projects + maintenance capex and upgrading works to existing operating hotels – unfortunately, no exact breakdown was given.
6) The BV of all hotel assets (existing old hotels + added capital works to new hotels) = about 215 million, as at 31-Dec-2014. Again, no exact breakdown was given.
7) If Y = capital costs spent on new hotels to end of 2014.
BV (old hotels) = (215 – Y)
Applying a cap rate of 5% to SGD 13.318 (2014 EBIT) would give a Market Value (MV) of 266 million to existing old hotel portfolio, against a BV of (215 – Y) million.
(MV – BV) for existing old hotels = 266 – (215 – Y) = (51 + Y) million.
 Bigger Y means more “undervalued” of existing old hotel portfolio.
8) Assume, Z= Remaining capital costs to complete the new hotels
At completion of new hotels: assumed
EBIT of (old + new) hotels = N x 13.318 million, 5% cap rate => MV= 266 x N million
BV (new hotels) = Y + Z
BV (old + new hotels) = 215 + Z
(MV – BV) of (old + new) hotels = (266 x N – 215 - Z) million
 Bigger N and smaller Z mean more undervalued of (old + new) hotel portfolio
9) if N=2 and Z=0, => undervalued = 317 million (or 55 cents per share)
If N=2 and Z = 100, => undervalued = 217 million (38 cents per share)
If N=1.5 and Z=100, => undervalued = 84 million (or 14.5 cents per share)
If N=1.5 and Z=150, => undervalued = 34 million (or 6 cents per share)
10) As always, an analysis is only as good as its underlying assumptions.

(not vested)

[johnnydash]

Yes.

But the industry standard is to use net operating income, which is analogous to ebitda. So earnings without considering tax, interest and depreciation. so based on that the figures will be 340 million.

But actually you don't have to go about in such a roundabout way.

You may want to refer to the annual report, the one in 2013, the hotel portfolio:- Amara hotel, Amara sanctuary and land use rights for Shanghai are carried on the books for a total 116 million. Amara hotel is carried at 20 million only. 47 million is capital project in progress, which basically is the capex on new projects. That was in 2013. This year the PPE is 215 million, I expect 90-95% of the increase to be capital project in progress as well.

So we know Amara hotel portfolio is carried at about 116 million. We value the the assets of Amara on our own, based on market price, and we get the revaluation surplus or the RNAV for the hotel assets.

Just based on the existing assets( discount new projects completely), we get (340 - 116) million, 220 million revaluation surplus. Amara right now has a market cap of 300. This revaluation surplus does not consider the increase in value of the land in shanghai(acquired before 2000), since we are only considering NOI of the hotels. The 340 million figure is a conservative one.

[Boon]

Hi johnnydash,

I understand what you are saying on the industry “norm”
NOI = EBITDA = EBIT + DA
NOI should be “net of maintenance capex”.
So it depends on if the EBIT derived at is “net of maintenance capex”, which could be accounted for under “addition to PPE”
Hotel industry is a very “maintenance capex intensive” business, which requires a major “refurbishment” once every few years, in addition to the routine repair and maintenance. Increasingly, more buyers are demanding that all these have been fully accounted for in arriving at the real net NOI.
Even if routine repair and maintenance have been accounted for, I think it would be reasonable to allow for additional amount, equivalent to average long term depreciation - which in Amara’s case is about 4 million.
 NOI = 13 million instead of 17 million.
 Hence RNAV of 340 million is not necessarily a conservative one. It could be even lower at 217 million if a higher cap rate of 6% is used.

I have a different understanding from you on the carrying value of Amara hotel.

INITIAL cost of Amara hotel = 20.7 million. – but it was revalued to 52.2 million in 1987 and has been carried at this value on the book.

In 2013, carrying value of Amara Hotel (52.2 million) + Amara Sanctuary + land use right of Shanghai/Bangkok = 116.3 million

 Carrying value of (Amara Sanctuary + land use right of Shanghai/Bangkok) = 64.1 million.

No further breakdown given but at least the range has been narrowed down.

There remain many points of contention to be discussed which I would leave it to later when I do a further drill down in my analysis ………… .

(not vested)