WARNING: LONG POST
Business Trust Screener
Dear forummers,
Please add/substract to the list and share your views.
The business trust asset class fared terribly in the previous downturn with only a handful walking away relatively unscathed. I compiled some questions to ask before investing in any biz trust. Hope you will it useful.
1) Has the distributable income been stable for the past 3 years ?
If distributable income is fluctuating violently, this may not be a safe and defensive business trust to invest in. Generally, most trust locked in their long term cash generating contract over a period of years. Hence the main risk is counter-party risk which will be prevalent in recession periods.
2) Did the Trust face financing difficulties over the past 3 years ?
Most business trusts are highly geared and unlike REITs, there is no gearing limit. A well-managed trust must not over-expand in good times and face loan payment problems in the bust era. Moreover, some Trust have loan covenants ie credit ratings or LTV ratios which may expose the Trust otherwise defensive business to a whole new volatile cycle , asset valuation and credit cycle. This is a huge contradiction , what is the point of making the Trust operations anti-cycle when at the same time, it embraces the mother of all volatile cycles (the asset valuation and credit cycle) ?
3) Is the Trust operating as a self-liquidating trust ?
A large number of assets in this world do not last forever hence we must pay attention to the type of assets held by a business trust and in turn their dividend payout policy. The 3 common business trust's assets are vehicles (cars, railway carts, vessels and aircrafts), properties and infrastructures. In the case of vehicles, such assets will depreciate with time and eventually its cash generating ability will diminish. Similarly, this applies to leasehold properties and infrastructure assets especially those operating as a BOT plant with a fixed concession periods. These assets will be returned without charge back to the State when the lease/concession contract is over. Lease extension is no guarantee and it will not come cheap. Hence if the Trust uses cash-flow from depreciation to pay dividends to shareholders, there is no way it can replenish its own assets and its NAV will trend towards 0 and the Trust ceases to exist. There is nothing good or bad about this , shareholders just need to realize whether the Trust is termed as such and hence can the yield truly compensates its risk.
4) Is there a plan to repay its loans (if any) ?
Most Trusts are highly geared and often turn to bank loans or bonds to finance their capex intensive acquisitions. A key question therefore is whether a plan exists to repay such loans. Are they diverting part of their annual cash-flow to loan payments or do they intend to keep rolling it over every 3 years ? If the Management is failing to plan, then they are planning to fail.
5) Is the Trust's DPU growing ?
Business trust are low growth asset class but in return, there are expected to pay a consistent dividend to their shareholders. A shrinking DPU is not a very healthy sign unless there is a good reason. A well-managed Trust would be able to add value by slowly increasing the DPU with time through asset enhancement schemes or acquisitions.
6) Is the Trust NAV growing ?
This is closely linked to point 3. It is a good test to see whether the Trust is self-liquidating or whether is it truly growing. The biggest risk is when the Trust capital structure is self-liquidating in nature but the Management and shareholders assume that it is fully sustainable and acts as such. Generally, the only way to grow is to retain a portion of the net profit.
This are some basic questions to ask before buying a business trust. The business trust class was pretty badly hit in the previous year and only a handful looked strong enough to survive. Off-hand, I can only think of Ascendas India and PST which walked away from it unscathed. The jury is still out on newly listed Treasury China Trust and KGT.
My Personal Application of the Guidelines
Ascendas India
1) NPI has increased consecutively for FY 2008, 2009 and 2010. However the lack of diversification of its tenant base does pose some risk.
2) The Trust maintains a low gearing of 20%. It did not face any financing risk in the credit crunch of 2009.
3) It operates as a going concern since all of its properties are on freehold land.
4) As a property developer, it can divest its properties for a profit to repay its loans. However, there is no concrete plan for loan payment at the moment.
5) DPU shrank this year due to unfavourable exchange rates between IDR and SGD.
6) NAV has been declining due to unfavourable exchange rates and fair value loss in their properties.
Cityspring
1) Cash earnings increased substantially initially due to the Basslink acquisition. However there was a small dip in cash earnings in FY 2010 as compared to FY 2009. It is in a highly defensive industry.
2) It has one of the largest gearing though the bulk of its loans are non-recourse. Basslink currently face a potential drop in credit ratings which will hamper its distribution policy. The trust raised new equity in 2009 to bolster its balance sheet.
3) They are not retaining cash-flow from depreciation. But I don't think its assets operate under a BOT scheme.
4) Some of its loans have an amortizing feature while others demand a lump sum payment. No plans to repay those loans at the moment. They will most likely refinance it or raise new equity.
5) DPU was reduced due to the rights issue.
6) NAV has been declining since the Trust is paying out more than it earns.
First Ship Lease
1) Income available for distribution dropped in 2010 due to the Groda default. Counter-party risk remains a key issue for ship leasing businesses due to the on-going shipping recession especially in the tanker segment.
2) FSLT gearing is large with debts maturing in 2012 and 2014. It breached its LTV covenants and had to restructure its loans by making quarterly loan payment of US$8 million. It raised new equity in 2009 to boost its NAV.
3) It was operating as a self-liquidating trust initially since it did not retain cash-flow from depreciation. However, it is now retaining US$ 8 million a quarter and if continues to do so indefinitely, it should be able to replenish its asset base eventually.
4) There are no loan payment plans. It will most likely restructure its loans into a long term amortizing one in 2012 or raise new equity.
5) DPU has decreased substantially due to compulsory loan payment as part of the LTV waiver and reduction in revenue from Groda default.
6) NAV has declined due to its depreciation policy.
IndiaBulls Trust
1) Net Property income has increased substantially this year as its development projects slowly come online. However, it faced substantial delay initially and hence was not able to meet their forecast.
2) Gearing was reduced due cash raised from rights issue
3) Most of the assets are not yet online so I cannot judge
4) Gearing is low. As a developer trust, it may divest assets to repay loans.
5) No DPU was ever declared
6) NAV declined due to unfavourable foreign exchange rates
KGT (newly listed)
1) Highly defensive industry. Cash earnings should remain stable
2) Debt-free
3) It is operating as a self-liquidating trust since they are not retaining income to replenish assets when the concession period ends.
4) Debt free
5) Cannot judge since it just listed
6) NAV will most likely decline with time.
Pacific Shipping Trust
1) Revenue and profit remained stable with all vessels fully chartered out to its sponsor and CSAV. It did face the possibility of cutting its rates with CSAV a year ago though it was not implemented since CSAV undertook its own equity fund raising program. This underscores how fragile counterparties are in a recession.
2) It faced no financing problem during the credit crunch. It has no LTV covenants.
3) It is operating as a going concern since cash-flow from depreciation is not paid out to shareholders.
4) It takes on long term amortizing debts whereby loans are paid down on a monthly basis in line with its depreciation. It has secured financing for its first 4 vessel acquisition of US$150 million from banks. It has yet to secure debt and equity financing for the 5 Glovis vessels.
5) DPU shrank in 3Q 2009 due to a change in dividend payout policy from 90% to 70% of its net income.
6) Since the Trust is retaining 30% of its earnings, NAV has been trending upwards from US$0.379 in 4Q 2008 to US$0.406 in 3Q 2010.
Rickmers Maritime Trust
1) Revenue and profit has been stable. RMT charterers are blue chip container vessel companies. There was a slight dip in revenue as the charter contract for one of its vessels leased to Maersk expired in early 2010.
2) It breached its LTV covenants and was not able to finance its US$0.9 billion acquisition resulting in a huge restructuring in 3Q 2010.
3) It is operating as a going concern at the moment since merely 30% of its net income (or 13% of cash-flow) is paid out to shareholders.
4) After the restructuring program was approved, RMT repays its loans on an annual basis. It has obtained 3 year LTV waiver. Its debts are now long term amortizing loans.
5) DPU shrank dramatically due a reduction in payout ratio. There is a DPU cap imposed by its lenders for the duration of the LTV waiver.
6) NAV shrunk due to the one off US$64 million loss from the cancellation of the newbuilding projects.
Treasury China Trust
1) It is a new Trust so it is difficult to judge. Its current properties have renewed leases at higher rental rates. Refinancing will reduce interest expense substantially next year. Management expects revenue to double in 2-3 years' time when its development projects are online.
2) No loan financing issue highlighted. Development projects have secured financing.
3) Properties are not freehold. But as a developer, it may seek to divest its assets for a profit and recycle capital.
4) No loan payment schedule. Gearing is below its self imposed 45% limit.
5) DPU forecast of 2.5 cents per quarter for FY 2010 and FY 2011. DPU is being funded primarily by retained earnings from a previous asset sale.
6) NAV has increased due to fair value gains in property valuation.
I did not touch on the 3 listed funds - Global Inv, MIIF and MPSF as they are terribly complicating !
Disclosure: Vested in PST. This represents my views only. I may be wrong. Not a call to buy or sell. Please point out any errors made.
Business Trust Screener
Dear forummers,
Please add/substract to the list and share your views.
The business trust asset class fared terribly in the previous downturn with only a handful walking away relatively unscathed. I compiled some questions to ask before investing in any biz trust. Hope you will it useful.
1) Has the distributable income been stable for the past 3 years ?
If distributable income is fluctuating violently, this may not be a safe and defensive business trust to invest in. Generally, most trust locked in their long term cash generating contract over a period of years. Hence the main risk is counter-party risk which will be prevalent in recession periods.
2) Did the Trust face financing difficulties over the past 3 years ?
Most business trusts are highly geared and unlike REITs, there is no gearing limit. A well-managed trust must not over-expand in good times and face loan payment problems in the bust era. Moreover, some Trust have loan covenants ie credit ratings or LTV ratios which may expose the Trust otherwise defensive business to a whole new volatile cycle , asset valuation and credit cycle. This is a huge contradiction , what is the point of making the Trust operations anti-cycle when at the same time, it embraces the mother of all volatile cycles (the asset valuation and credit cycle) ?
3) Is the Trust operating as a self-liquidating trust ?
A large number of assets in this world do not last forever hence we must pay attention to the type of assets held by a business trust and in turn their dividend payout policy. The 3 common business trust's assets are vehicles (cars, railway carts, vessels and aircrafts), properties and infrastructures. In the case of vehicles, such assets will depreciate with time and eventually its cash generating ability will diminish. Similarly, this applies to leasehold properties and infrastructure assets especially those operating as a BOT plant with a fixed concession periods. These assets will be returned without charge back to the State when the lease/concession contract is over. Lease extension is no guarantee and it will not come cheap. Hence if the Trust uses cash-flow from depreciation to pay dividends to shareholders, there is no way it can replenish its own assets and its NAV will trend towards 0 and the Trust ceases to exist. There is nothing good or bad about this , shareholders just need to realize whether the Trust is termed as such and hence can the yield truly compensates its risk.
4) Is there a plan to repay its loans (if any) ?
Most Trusts are highly geared and often turn to bank loans or bonds to finance their capex intensive acquisitions. A key question therefore is whether a plan exists to repay such loans. Are they diverting part of their annual cash-flow to loan payments or do they intend to keep rolling it over every 3 years ? If the Management is failing to plan, then they are planning to fail.
5) Is the Trust's DPU growing ?
Business trust are low growth asset class but in return, there are expected to pay a consistent dividend to their shareholders. A shrinking DPU is not a very healthy sign unless there is a good reason. A well-managed Trust would be able to add value by slowly increasing the DPU with time through asset enhancement schemes or acquisitions.
6) Is the Trust NAV growing ?
This is closely linked to point 3. It is a good test to see whether the Trust is self-liquidating or whether is it truly growing. The biggest risk is when the Trust capital structure is self-liquidating in nature but the Management and shareholders assume that it is fully sustainable and acts as such. Generally, the only way to grow is to retain a portion of the net profit.
This are some basic questions to ask before buying a business trust. The business trust class was pretty badly hit in the previous year and only a handful looked strong enough to survive. Off-hand, I can only think of Ascendas India and PST which walked away from it unscathed. The jury is still out on newly listed Treasury China Trust and KGT.
My Personal Application of the Guidelines
Ascendas India
1) NPI has increased consecutively for FY 2008, 2009 and 2010. However the lack of diversification of its tenant base does pose some risk.
2) The Trust maintains a low gearing of 20%. It did not face any financing risk in the credit crunch of 2009.
3) It operates as a going concern since all of its properties are on freehold land.
4) As a property developer, it can divest its properties for a profit to repay its loans. However, there is no concrete plan for loan payment at the moment.
5) DPU shrank this year due to unfavourable exchange rates between IDR and SGD.
6) NAV has been declining due to unfavourable exchange rates and fair value loss in their properties.
Cityspring
1) Cash earnings increased substantially initially due to the Basslink acquisition. However there was a small dip in cash earnings in FY 2010 as compared to FY 2009. It is in a highly defensive industry.
2) It has one of the largest gearing though the bulk of its loans are non-recourse. Basslink currently face a potential drop in credit ratings which will hamper its distribution policy. The trust raised new equity in 2009 to bolster its balance sheet.
3) They are not retaining cash-flow from depreciation. But I don't think its assets operate under a BOT scheme.
4) Some of its loans have an amortizing feature while others demand a lump sum payment. No plans to repay those loans at the moment. They will most likely refinance it or raise new equity.
5) DPU was reduced due to the rights issue.
6) NAV has been declining since the Trust is paying out more than it earns.
First Ship Lease
1) Income available for distribution dropped in 2010 due to the Groda default. Counter-party risk remains a key issue for ship leasing businesses due to the on-going shipping recession especially in the tanker segment.
2) FSLT gearing is large with debts maturing in 2012 and 2014. It breached its LTV covenants and had to restructure its loans by making quarterly loan payment of US$8 million. It raised new equity in 2009 to boost its NAV.
3) It was operating as a self-liquidating trust initially since it did not retain cash-flow from depreciation. However, it is now retaining US$ 8 million a quarter and if continues to do so indefinitely, it should be able to replenish its asset base eventually.
4) There are no loan payment plans. It will most likely restructure its loans into a long term amortizing one in 2012 or raise new equity.
5) DPU has decreased substantially due to compulsory loan payment as part of the LTV waiver and reduction in revenue from Groda default.
6) NAV has declined due to its depreciation policy.
IndiaBulls Trust
1) Net Property income has increased substantially this year as its development projects slowly come online. However, it faced substantial delay initially and hence was not able to meet their forecast.
2) Gearing was reduced due cash raised from rights issue
3) Most of the assets are not yet online so I cannot judge
4) Gearing is low. As a developer trust, it may divest assets to repay loans.
5) No DPU was ever declared
6) NAV declined due to unfavourable foreign exchange rates
KGT (newly listed)
1) Highly defensive industry. Cash earnings should remain stable
2) Debt-free
3) It is operating as a self-liquidating trust since they are not retaining income to replenish assets when the concession period ends.
4) Debt free
5) Cannot judge since it just listed
6) NAV will most likely decline with time.
Pacific Shipping Trust
1) Revenue and profit remained stable with all vessels fully chartered out to its sponsor and CSAV. It did face the possibility of cutting its rates with CSAV a year ago though it was not implemented since CSAV undertook its own equity fund raising program. This underscores how fragile counterparties are in a recession.
2) It faced no financing problem during the credit crunch. It has no LTV covenants.
3) It is operating as a going concern since cash-flow from depreciation is not paid out to shareholders.
4) It takes on long term amortizing debts whereby loans are paid down on a monthly basis in line with its depreciation. It has secured financing for its first 4 vessel acquisition of US$150 million from banks. It has yet to secure debt and equity financing for the 5 Glovis vessels.
5) DPU shrank in 3Q 2009 due to a change in dividend payout policy from 90% to 70% of its net income.
6) Since the Trust is retaining 30% of its earnings, NAV has been trending upwards from US$0.379 in 4Q 2008 to US$0.406 in 3Q 2010.
Rickmers Maritime Trust
1) Revenue and profit has been stable. RMT charterers are blue chip container vessel companies. There was a slight dip in revenue as the charter contract for one of its vessels leased to Maersk expired in early 2010.
2) It breached its LTV covenants and was not able to finance its US$0.9 billion acquisition resulting in a huge restructuring in 3Q 2010.
3) It is operating as a going concern at the moment since merely 30% of its net income (or 13% of cash-flow) is paid out to shareholders.
4) After the restructuring program was approved, RMT repays its loans on an annual basis. It has obtained 3 year LTV waiver. Its debts are now long term amortizing loans.
5) DPU shrank dramatically due a reduction in payout ratio. There is a DPU cap imposed by its lenders for the duration of the LTV waiver.
6) NAV shrunk due to the one off US$64 million loss from the cancellation of the newbuilding projects.
Treasury China Trust
1) It is a new Trust so it is difficult to judge. Its current properties have renewed leases at higher rental rates. Refinancing will reduce interest expense substantially next year. Management expects revenue to double in 2-3 years' time when its development projects are online.
2) No loan financing issue highlighted. Development projects have secured financing.
3) Properties are not freehold. But as a developer, it may seek to divest its assets for a profit and recycle capital.
4) No loan payment schedule. Gearing is below its self imposed 45% limit.
5) DPU forecast of 2.5 cents per quarter for FY 2010 and FY 2011. DPU is being funded primarily by retained earnings from a previous asset sale.
6) NAV has increased due to fair value gains in property valuation.
I did not touch on the 3 listed funds - Global Inv, MIIF and MPSF as they are terribly complicating !
Disclosure: Vested in PST. This represents my views only. I may be wrong. Not a call to buy or sell. Please point out any errors made.
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.