Amara Holdings

[BlueKelah]

this counter is obviously very undervalued with regards to the RNAV.

Business wise it will just rumble along. Obviously tourism sector will not be booming with the state of global economy.

Since we cannot predict the upcoming catalayst, as we won't know if they gonna REIT anything or sell off asset for profit or start new big mega project.

In the end, can only depend on things like RNAV or dividend yield. Div yield has been poor throughout. so left with RNAV

which means Amara will not pay you to wait, you can probably buy as they say an "asset play" , wait for some fund to come push or for an unexpected catalyst to happen.

The stock did run up to 60c last year but since then not much action or trading volume.

Maybe the ever popular St****** is a much better option to park your money in a hotel company.

[Tiggerbee]

Dorsett, a hospitality group listed in HK, is currently valued at 0.64x book value. Hotel assets are valued at cost. Stock price was last traded at $1.27 HKD. It's RNAV is at least $7 HKD. Estimated annual dividend payout is about 4c, which translates to about 3.1% yield. Most of its hotels are located in HK, with the rest in China, Malaysia, UK and Singapore.

So it's trading below 0.2x RNAV. In general, most of the hotels listed in HK are trading way below book value. Amara is still not as cheap in terms of valuation. Having said that, the stock prices of hospitality companies in HK has been on a down trend for the past few years and has yet to bottom out. It might take years for investors' interest to return to this sector.

Another sector that has been on a downward spiral since 2011 is the departmental store sector in China. Earnings peaked in 2013 and stock prices of this sector had been sold down to below book value, and about 49-50% below RNAV. Even our dear GIC is suffering heavy losses. It was vested in Intime at $9.90 and has recently cut losses at $4.3+. The PE of a Intime and it's peers are trading at about 7x PE (TTM) with 5-8% dividend yield.

In conclusion, we can't value stocks based on book value of its property assets alone. Investors sentiments and perception of the sector/industry can remain pessimistic for years before interests return to the sector. In return, what one might be compensated for is hopefully the high dividend yield while waiting for the value to be realized. So in my view, Amara do not meet the dividend yield criteria. It's valuation is not that cheap either.

[Boon]

Now, let’s look at the Property Investment (PI) business segment of Amara:

Investment Properties Portfolio:
FY2010 = 100 AM (Office+ Retail)
FY2011 = 100 AM (Office+ Retail)
FY2012 = 100 AM (Office+ Retail)
FY2013 = 100 AM (Office + Retail) + 118 Killiney Road
FY2014 = 100 AM (Office + Retail) + 118 Killiney Road

SGD (million)

Fair Value Gain or Loss / Carrying Value (CV)
FY2010 = +5.000 / 190
FY2011 = + 25.361 / 214
FY2012 = + 11.321 / 261
FY2013 = + 11.524 / 279
FY2014 = + 18.997 / 299

Gross Rental Income / direct operating expenses / difference = NOI / Carrying Value (CV) / Yield = Implied Cap-Rate
FY2010 = 8.590 / 2.904 / 5.686 / 190 / 3.0%
FY2011 = 4.754 / 2.792 / 1.962 / 214 / 0.9%
FY2012 = 4.134 / 3.393 / 0.741 / 261 / 0.3%
FY2013 = 13.840 / 5.617 / 8.223 / 279 / 2.9%
FY2014 = ????? / ????? / ???? / 299 / ?????

Comments:
1) Investment properties are properties held for long-term rental yield and are measured initially at cost and subsequently carried at fair value determined annually by independent professional valuers - gains or losses arising from changes in the fair values of investment properties are included in profit or loss in the year in which they arise.
2) From 4Q2014 results, segment revenue from the Property Investment and Development amounts to SGD 19.979 million – breakdown would only be available in AR2014 which is not out yet – this division revenue contains rental income from investment properties + revenue from sales of development properties.
3) Assuming the entire 19.979 million to be gross rental income from investment properties
Assume direct operating expenses in 2014 to be same as in 2013
 NOI (2014) = 19.979 – 5.617 =14.362
 Yield or implied cap rate (2014) = 14.362 / 299 = 4.8% (maximum possible highest rate, unless expenses in 2014 is lower than 2013.
4) If the market cap rate is 6%, current CV is overvalued – unless prospects of future rental growth remain bright
5) If rental income in 2014 has stabilized – valuation and “fair value gain” in 2014 seem to be stretched and running ahead of rental growth………………………………….

(not vested)

[Boon]

Bangkok: Hotel
•International visitor arrivals continue to decline
•New supply concentrated in midscale segment
•RevPAR declines due to decrease in occupancy levels

http://www.joneslanglasallesites.com/app...ls/bangkok

[Boon]

http://www.skyscrapercity.com/showthread...507&page=3

http://www.synteccon.com/2005/EN/project...asp?id=218

https://www.facebook.com/AmaraBangkokRecruitment

From the above links, it looks like the opening of Amara Bangkok is not too far away…….

“johnnydash” has a point – it seems like the market has yet to price in this piece of good news – or has it?

(not vested)

[Boon]

Amara Bangkok

Cost Estimate:
http://newpattaya.com/construction/amara-bangkok/
http://www.sweettgroup.com/en/project/am...l-bangkok/
http://www.synteccon.com/2005/EN/project...ar2012.pdf

From page 37 of Syntec AR2012 – see above,
Project value of Amara Bangkok = THB 820 million (or about SGD 35 million)

Cost = SGD 35 million + Land Cost + (consultant fees/utilities fees/development permitting fees/others) + FF&E
=> Cost estimate = roughly SGD 50 million ~ SGD 75 million

EBIT Estimate (on stabilized basis)　
Number of rooms = 250
Assume occupancy rate = 80%
EBIT margin = 25%
If ADR = SGD 250, => EBIT = 250 x 365 x 250 x 0.8 x 0.25 = SGD 4.56 million (= SGD 0.8 cent a share)
If ADR = SGD 200, => EBIT = SGD 3.65 million (= SGD 0.6 cent a share)
If ADR = SGD 150, => EBIT = SGD 2.74 million (= SGD 0.5 cent a share)

=>EBIT estimate = roughly SGD 0.5 ~ 1.0 cent per share

Capital Value Estimate (on stabilized basis)
Further assume NOI = EBIT, and Cap rate = 6.0%,
If ADR = SGD 250, => Implied Capital Value = 4.56 / 0.06 = SGD 76 million
If ADR = SGD 200, => Implied Capital Value = 3.65 / 0.06 = SGD 61 million
If ADR = SGD 150, => Implied Capital Value = 2.74 / 0.06 = SGD 46 million

=>Capital Value estimate = roughly SGD 50 million ~ 100 million

=>Revaluation surplus estimate = roughly of SGD 0 ~ 50 million ( about zero to SGD 8.0 cent a share)

An analysis is only as good as its underlying assumptions, as always.

(not vested)

[johnnydash]

In reply to Boon:

I have to disagree with you respectfully. NOI does not include maintenance capex, when used together with the cap rate.

NOI used in conjunction with cap rate is one way of checking for valuation of property, of course it is extremely useful for broad view, but more importantly, it allows for comparisons. So right now cap rates of hotel in singapore is about 5, and that cap rate came about because market participants use NOI that does not include maintenance capex. So if the norm was otherwise, then the cap rates will adjust downwards accordingly. Cap rates are not just used before transactions, but they are often(perhaps more often) used by analysts post transactions. It is a tool at the end of the day, and the context and how its used is important. As a very clear illustration of one way cap rate is used, you may refer to IPO of the hotel fund listing in recent years, the one that acquired a number of properties in Australia(the name has slipped my mind). Actually other such IPOs prospectus should be able to perform the same role.

You are right that some buyers will consider refurbishment required in the future, and you may think that going forward there will be significantly higher proportion of such buyers(i dont see any reason for this), but its wrong to calculate what the buyers will be willing to pay by simply using the method you have discussed, for the reasons mentioned above. Perhaps you can say that more buyers are demanding replacement value, and so valuation of hotels will drop. But analysts has and will still continue to use NOI and cap rates the way it has been used in the past. If you want to use NOI considering maintenance capex, then you have to account for the adjustment in the cap rate as well but im not sure how one can do that in way to reflect market conditions.

As a guide, you may refer to desktop valuation done by property consultants on the assets. The surplus on
Amara hotel is 307 million,
on Shanghai 92 million,
Amara sanctuary 71 million
Amara market cap is 300 million

Of course to me those are slightly too aggressive. Similarly, yours may be somewhat off too(but the main gripe is more with the basis and not really the final figures)

Im liking this exchange it reinforces the basics very much. so thanks

I understand your approach in valuing 100 A.M. Personally i would not use those cap rates, im presuming you are using the national average across the different sectors. Amara's assets lie in CBD.Office wise, transactions in the past few years according to CBRE has been at the cap rate of 2.6-3.5. Retail wise is more tricky, hard to find comparable transaction within the CBD, but we cant just use country average because presumably the land in CBD is much more valuable. When i valued, i also considered, built in positive rental reversion "to account for inflation" because retail malls have the bargaining power and it seems like for ages this is how retail malls have operated, even when market softens. And then I also looked at demand and supply factors but this was more as a check to whether there is anything astronomical that will come our way. IE; i didnt in built a positive trend as is the long run trend of retail in singapore.

If I may say so, the differences from our approach arise on a somewhat philosophical basis. I prefer to estimate as close to market value as I can, erring on the side of conservatism, especially in areas where there is huge uncertainity, and then after I get the market value of Amara on the whole, I will demand a margin of safety off the final number before I buy Amara. You seem to have in built your margin of safety into your valuation, to arrive at something like a target value and ultimately a target price. Not a few analysts do this as well. Personally I prefer my approach because it allows me to wrap my head around thinking about intrinsic value and purchase point. Also the second approach creates obstacles when we compare within industry( the same margin of safety built into the parameters have to be used for other hotel stocks so comparison is fair. Eg: a similarly large cap rate) and across industries ( how to inbuilt the similar extent of margin of safety in parameters of different nature since know we are evaluating different companies)

And again thanks for the exchange it really got me relooking at my own sums and also understanding of concepts.


In reply to Bluekelah:

I have some St****** too. Very similar to Amara. But i prefer Amara and may end up with a bigger accumulation because of the following differences, which i think will cause the discount to RNAV to close very soon.

1) Discount to RNAV in Amara is considerably larger.
2) Earnings will be too good for market to ignore in the coming years. Recognition of citylife 20-40 milion by mid next year. Projects in SH and bangkok will give alot of earning boost.
3) Growth story. Developments in SH and bangkok will add significant chunks of value.

But you may well be right if some corporate event happens with St******, its just that it is much less visible to me.

In reply to TiggerBee:

It may well be that that Dorsett is undervalued as well. I do not know anything at all about HK stocks, I have been doing ok in the SG markets, have no wish to venture out for now. But one difference, as you have said so yourself, hotel stocks in HK have been on a downward trend. That is not the case for hotel stocks in Singapore. Amara is a laggard when other singapore hotel stocks have rerated and narrowed the gap between their rnav.

The comparison might not be that relavant. But in general China stocks trade at much lower multiple perhaps because of market skepticism(rightly or wrongly) about their books.

Agree cant look at assets alone. But Amara has a growth story and a earnings story as well, when the developments pan out. In any case, the fact is Amara has run up to 60 plus cents twice in the last two years. So its not as if interests were flat all the way.

Disagree that Amara is not as undervalued. Perhaps you can provide more details on what you think is its value.

[johnnydash]

Some of the posters seemed to have taken an extremely conservative, to the point of pessimistic stance in valuing Amara. And because I follow this forum quite actively, I cant help but notice that there is inconsistency between the pessimistic stance they have taken when they value Amara and when they look at the prospects of other stocks. Please dont take this in bad faith but it may be good to look within and see whether there are inherent biasedness.

At the same time, maybe this highlights the importance of valuing to determine market value(still on the side of conservatism) but taking a margin of safety after that. Its hard to consistently incorporate the same degree of margin of safety inside valuation itself across stocks of different business types.

[Boon]

In reply to Boon:

I have to disagree with you respectfully. NOI does not include maintenance capex, when used together with the cap rate.

NOI used in conjunction with cap rate is one way of checking for valuation of property, of course it is extremely useful for broad view, but more importantly, it allows for comparisons. So right now cap rates of hotel in singapore is about 5, and that cap rate came about because market participants use NOI that does not include maintenance capex. So if the norm was otherwise, then the cap rates will adjust downwards accordingly. Cap rates are not just used before transactions, but they are often(perhaps more often) used by analysts post transactions. It is a tool at the end of the day, and the context and how its used is important. As a very clear illustration of one way cap rate is used, you may refer to IPO of the hotel fund listing in recent years, the one that acquired a number of properties in Australia(the name has slipped my mind). Actually other such IPOs prospectus should be able to perform the same role.

You are right that some buyers will consider refurbishment required in the future, and you may think that going forward there will be significantly higher proportion of such buyers(i dont see any reason for this), but its wrong to calculate what the buyers will be willing to pay by simply using the method you have discussed, for the reasons mentioned above. Perhaps you can say that more buyers are demanding replacement value, and so valuation of hotels will drop. But analysts has and will still continue to use NOI and cap rates the way it has been used in the past. If you want to use NOI considering maintenance capex, then you have to account for the adjustment in the cap rate as well but im not sure how one can do that in way to reflect market conditions.

Hi johnnydash,

Please refer to the below article, parts of which are pasted below

Leasing Expenses: Above the Line or Below the Line Expenses and Does It Matter - Part 1

http://www.commercialappraiser.com/more/...er-part-1/

There is no universally accepted practice for the treatment of replacement reserves and leasing expenses (tenant improvements (TIs) and commissions) in the income statement developed by commercial property appraisers as a basis for estimating value using direct capitalization. While it is often the case that these are capital items, falling below the NOI (net operating income) line, which is capitalized into a value estimate, such costs may still have a sizeable effect on value and should not be ignored. Additionally, it is not always the case that these are capital expenses and so would be properly included as an operating expense in the commercial appraiser's reconstructed operating statement .

The Dictionary of Real Estate Appraisal defines net operating income (NOI) as the actual or anticipated net income that remains after all operating expenses are deducted from effective gross income but before mortgage debt service and book depreciation are deducted.[1] It equates to the definition to EBITDA (earnings before interest, taxes, depreciation, and amortization) used in corporate finance and business valuation. EBITDA does not include capital expenses, which are monies meant to acquire or improve an asset, e.g., land, buildings, building additions, site improvements, machinery, equipment; as distinguished from cash outflows for expense items that are normally considered part of the current period's operations. Such costs depreciated over the asset's useful life.

Repairs, even significant ones, that do not extend the asset's life, however, are treated as routine operating expenses and so are reflected in NOI. This is where things begin to get fuzzy from an appraisal perspective. How are items such as reserves for replacement, tenant improvements and leasing commissions properly handled? Do such expenditures extend the life of the asset making it a "below the line" capital expenditure or do they merely return the asset back to its previous condition making it an "above the line" expense? Does it matter?.......................................

…………………………………………. Depending on which level of income is capitalized, this transaction produces at least three different capitalization rates. There is a common misconception that each property or property type has a single unique cap rate, but this is incorrect. In fact any number of cap rates can be extracted from a single sale depending given the host variations possible for the computation of income: e.g. whether it is projected income or trailing income that is capitalized; whether or not the income is stabilized; whether it is contract rent or market rent that is capitalized; whether or not adjustments for vacancy and collection losses are considered; or what level of income is capitalized. Cap rates vary by geography, with property age, based on the strength of tenants, length and terms of leases, with market conditions and interest rates.

Applying a capitalization rate suitable to one method of computing income to the wrong income stream produces a spurious result. In the example above applying the cap rate extracted from the this sale using Method 3 (cash flow after reserves and leasing expenses) to a subject’s NOI before reserves and leasing expenses would result in an over valuation by more than 18%— $2,490,000 (roundly) vs. $2,100,000.

So which method is right? Since 80% of investors use Method 2, capitalizing NOI before reserves, TIs, and leasing commissions, shouldn’t that be the method commercial property appraisers use?

No, not necessarily. This isn’t the type of situation where “majority rules.” There are good reasons for applying any one of the three methods. For example, appraisers almost routinely consider replacement reserves in their reconstructed income statements, which equates to Method 1. This is because the direct capitalization method is premised on the assumption that the single year’s stabilized income reflects its potential earnings, now and in perpetuity. Therefore, an allowance for replacements is charged against NOI on the premise that periodic replacements have to be made of short-lived items such as water heaters, heating units, roofs, paving, parking lots, landscaping, exterior finishes, etc., to maintain the optimum rental status of the property and to reduce the escalation of maintenance and other operating expenses that may result from the deferral of necessary capital expenditures.

……………………………………………The author concludes, “Each of the methods for developing NOI can be the most appropriate, depending on the appraisal assignment.”[14]

So far we’ve pointed out that data from a single property transaction can produce multiple cap rates (i.e. that one size does not fit all) and secondly, that applying a cap rate derived form a comparable sale or survey using income calculated in one manner to the income for an appraisal subject that is calculated using another method produces erroneous results. A third item to note is that as one moves down the income ladder in the hypothetical example above, the capitalization rate gets smaller. Obviously, as more expenses are taken out, income declines and so does the cap rate. Also true, is that a cap rate is a measure of risk, or uncertainty. Assuming the accuracy of the data, as the specificity of the income model increases, uncertainty is diminished and the cap rate falls. So there may be a real advantage in explicitly considering the impact of such below the line expenses as leasing expenses. After all, the risk profile of property where half of the tenants have leases that expire within the next 12 months is much different than one having leases expiring two or three years out. Just because leasing expenses fall below the line from an accountancy perspective, these potential costs cannot be ignored in an appraisal. The buyer of such a property would certainly be well of aware of these forthcoming expenses in his purchasing decision and will plan accordingly.

The argument for commercial appraisers for capitalizing income before reserves generally follows from accounting definitions that these are capital costs and not operating expenses. In point of fact however, as Francis observes, the majority of investors amortize short-lived building components, including leasing expenses (TIs and leasing commissions) over the lives of the underlying leases and do not depreciate them over the life of the building. As much as anything else, the practice of capitalizing income before reserves is a marketing stratagem to make the property appear more attractive because both the NOI and cap rate are higher; nevertheless, as Francis also points out in his article, sophisticated investors are well aware of these costs.

Even in corporate finance and business valuation, practitioners warn against exclusive reliance on EDITDA as a performance measure and value indicator. Warren Buffet is famously reported to have asked, “Does management think the tooth fairy pays for capital expenditures?”

(not vested)

[Boon]

As a guide, you may refer to desktop valuation done by property consultants on the assets. The surplus on
Amara hotel is 307 million,
on Shanghai 92 million,
Amara sanctuary 71 million
Amara market cap is 300 million

Of course to me those are slightly too aggressive. Similarly, yours may be somewhat off too(but the main gripe is more with the basis and not really the final figures)

1) Are these the “surplus” figures or the “desktop valuation” figures?
2) Do you know what does “desktop valuation” mean in real estate parlance? Try “googling”….
3) Wondering why Amara gives “desktop valuation” instead of a “proper” valuation?
4) The “desktop valuations” were done on the basis of “highest and best use”
http://en.wikipedia.org/wiki/Highest_and_best_use
But it did not mention if “current use” is at “highest and best use” – valuation gap could be huge and significant if they are not.....
5) Wondering why Amara gives “desktop valuation” based on “highest and best use” instead of “current use”