Global Investments

[KopiKat]

Just saw yet another SGX Annc that they'd utilised more of their rights proceed for investments in listed equities.

Could it be a listed SGX entity? If so, which is likely? Would they go for something like MIIF or Rickmers which gives ~10% Yield? I was thinking they may try to takeover some local distressed co. (esp. distress due to high gearing). Possible? I did check on the market cap and vol for MIIF and Rickmers after the previous announcement. But, Vol traded for Rickmers looks too low (unless they'd patiently accumulated over many days before they annc). Rickmers market cap is also small enough to be easily swallowed up. As for MIIF, the market cap is just too large to be able to take control (unless they borrow more).

Let's see if they annc anything on 13-Aug with the results.

Just throwing up possibilities..Don't throw rotten eggs at me...

<Not Vested>

[Nick]

I am hoping they are investing in under-priced European / American blue chips or yield plays (ie telcos or leasing companies). Guess we have to wait for their 2Q 2012 Current Asset Review Slides to see what they accumulated.

I think it will be tough to swallow RMT since the Rickmers Group have a large stake (common equity + convertible bonds) and complete control of the Management team. MIIF (or even HPHT) is a possibility if they are seeking high yield Asian plays without major forex risk. At the moment, their only listed investment is FLY Leasing.

Personally, I was speculating that they would gear up (with the preference shares) and purchase aircraft with the rights proceeds. Looks like I am completely wrong.

[l0nEr]

Hmmm... earnings are out. Dividends are as expected at 0.75 cents, giving dividend yield of 10-11%.

My 2 cents worth:
No news on the equities they bought recently, and they completely did nothing with the money in the whole of Q2 (in Q1 too). Makes me wonder sometimes why do they get management fees for not doing much. The failure to invest in a such a rising environment, when both equities and credit markets rallied, seem to point that the managers are not either too cautious or unable to understand the market. The good thing is fund is able to generate sufficient earnings (thanks to Q1) to cover the dividends, although actual cash flow per share seems to fall slightly short dividend payable.

Only like the fact that the company is still trading ~40% below NAV, with approximately 38.9% of total assets held in cash. Approximately 67% of the current share price (0.141) is actually cash, while the rest are in heavily impaired assets. This gives dividend yield of 10-11%.
Actually, i thought if the company just put the money in some high quality credit that pay 5-6% yields, it will still be able to sustain the dividend yield given the heavy discount of the NAV.

[l0nEr]

everybody loves the jet leasing business now :/

From Bloomberg:
Mitsubishi UFJ Lease & Finance Co. is nearing a deal to buy Oaktree Capital Group LLC’s Jackson Square Aviation aircraft-leasing company for more than $1 billion, said three people with knowledge of the matter.
Japanese financial firms are expanding into aircraft leasing amid increasing demand for planes from emerging markets such as China. Sumitomo Mitsui Financial Group Inc., Japan’s second-largest bank by market value, bought Royal Bank of Scotland Group Plc’s aircraft leasing unit this year, while Orix Corp.’s aviation unit plans to boost customers by 50 percent.
“The number of deliveries every year is going up,” said Paul Sheridan, head of consulting in Hong Kong at Ascend Worldwide Ltd. “Aircraft leasing offers attractive yields to investors, but you need expertise and experience and you need access to U.S. dollars.”
The jet-leasing industry has been growing since its birth in the 1970s, and about 35 percent of the global fleet is now leased rather than owned, up from 25 percent in 2000, according to a Fitch Ratings report last month. Airlines will take 34,000 new planes valued at $4.5 trillion through 2031, Chicago-based Boeing Co. said last month. That’s a 1.5 percent increase from a 33,500-jet estimate a year earlier.

[Boon]

Judging from the stability of share price over the past few days, it seems like investors of GIL are not too concern with the failure of the Management in securing investment in certain assets they were bidding for over the past few months following the equity raising through right issues. Probably, most investors are happy with the dividend payout of SGD 0.75 cents per share declared for 1H2012, which amounts to a 5.3% yield on semi-annually basis, base on the last closing share price of SGD 14.1 cents.

Actually, the FCF (net of debt repayment and interest expense) generated from operation in 1H2012 was insufficient to cover the dividend payout totaling SGD 6.19 million, which according to my estimation, is SGD 2.6 million short. However, since the Company is sitting on a lot of cash, one could argue that it is justifiable to maintain such dividend payout not only for 1H2012, but also for 2H2012.

Outlook for 2H2012:

Let’s go through the current asset review to assess the outlook for 2H2012.

a) Fly Leasing:
Additional dividend of USD 0.02 per share had been declared by FLY and is expected to be received by GIL in 3Q and 4Q, which works out to be USD 0.042 million more than 1H2012

b) GIL AIRCRAFT LESSOR NO.2:
Same rental income as in 1H2012 is expected.

c) ASCENDOS INVESTMENTS LIMITED
Share of profit of Ascendos of SGD 0.752million from February to April 2012 has been booked into GIL for 1H2012. I would expect share of profit from Ascendos (May to October -two quarters) to be booked into GIL for 2H 2012, is to surpass that of 1H2012.

d) SEIZA SERIES 2006-1 TRUST (WAREHOUSE)
Interest income of similar order as in 1H2012 is expected for 2H2012, I would expect.

e) SEIZA AUGUSTUS SERIES 2007-1 TRUST
Similar to 1H2012, no income is expected.

f) AVOCA CLO VI PLC
EUR 316,338 had been received for 2H2012 (on 18th July), this is EUR 287,480 more than the amount of EUR 28,858 received in 1H2012 (on 17th January)

g) AVOCA CLO VII PLC
This one is harder to call, but I would expect interest income of similar order as in 1H2012 is to be received in 2H2012

h) RMBS
This is a capital gains play and not a yield play. Hopefully, the management would make certain sales or divestment in 2H to lock in more capital gain. Otherwise, there would be little or no impact to 2H2012 earnings.

i) COLLATERALISED LOAN OBLIGATION (“CLO”) SECURITIES
I would expect interest income of similar order as in 1H2012 is to be received for 2H2012

j) SGD 16.17 million - new investment in listed equities
Disappointedly, the management has yet to disclose the names of the listed companies in which investment had been made. Whatever they are, additional dividend would be generated. The management has probably made more investment in Fly Leasing. This is only my speculation based on observation that the number of shares own by GIL has disappeared from the current asset review slide of FLY Leasing. I could be completely wrong on this!

k) Dividend outlook for 2H2012
With certainty of more income from FLY and Avoca VI, and the likelihood of more contributions from Ascendos, RMBS (if there is divestment leading to capital gain) and the latest SGD 16.17 million investment in listed equities for 2H2012, one would argue that it is more justifiable to maintain a dividend payout of SGD 0.75 cents per share for 2H2012, even if the FCF is insufficient to cover the payout, as the deficit gap would be likely to be narrower, if not totally closed, as compared to 1H2012.

Cash hoard
- GIL is now sitting on a cash hoard of SGD 62.65 million
- Principal of over USD300k is being returned to GIL from RMBS investment every quarter. If there is any divestment, more principal would be recouped.
- Proceed from sales (of about USD 15 to 17 million, net of debt) of the two Boeing aircrafts in GIL AIRCRAFT LESSOR NO.2 is expected to come in at end of April 2013.

Therefore, there is a lot of cash to be deployed. To sustain a dividend payout of not less than SGD 1.5 cents per share per annum, there is a lot of work to be done by the Management in putting those cash to work.

With a market cap of about SGD 116 million (of which 62.65 million is in cash) and with no single party controlling more than 10% of the total outstanding shares of the company, potentially, predators or new controlling shareholders could emerged.

(Vested)

[Nick]

Thanks for the article I0nEr.

In light of the forward sale of the 2 aircraft to Fedex in half a year time, GIL only exposure to jet leasing will lie in its 4.1% stake in FLY Leasing. With that being said, if they choose to use their substantial cash hoard to purchase aircraft on long term lease, the cash-flow visibility will be greatly welcome. GIL operating lease segment seems to be recovering with higher dividends from FLY Leasing, Ascendos is profitable and distributing income and the Boeing aircraft will be sold for over US$2 million profit in 2013. I had initially expected new investments to be channeled in this division.

The Management will probably reveal the listed equities they invested in recently during their 3Q results. Based on the current share float of 825.3 million shares, a distribution of 1.5 cents / share will require cash out-flow of $12.4 million. GIL only generated $3.59 million net distributable cash (after deducting loan amortization and interest expense) in 1H 2012. This works out to 0.435 cents per share semi-annually or an annualized yield of 6.2%. They have to utilize their substantial $60 million cash hoard to invest in appropriate yielding instruments to boost distributable cash-flow substantially. Most of the cash expenses are already fixed ie management fees as a function of market cap (not AUM or net of cash) and operating expenses should be stagnant so new investments might boost operating margins over time. The key lies in what STAM will do with the cash hoard and whether can it make decent investments to generate sustainable cash-flow over the next few years to maintain (and grow) the DPU. My personal estimate is that 7% return from $70 mil new investment is the minimum hurdle to attain the 1.5 cents dividend. Hence I suspect the recent equity investments are none other than REITs, leasing companies, infrastructure funds, telcos etc. Yet, I am puzzled why the management has failed to repay the debt entirely saving on interest expense and loan amortization.

Next year, this challenge will remain as they have to deploy the cash proceeds from the Boeing sale to new investments (and repay the aircraft debt) or else distributable income will drop further. The Management has previously highlighted that they faced competition in bidding for certain investments. This is one of the major risk with investing in GIL at the moment.

(Vested)

[Boon]

I am puzzled why the management has failed to repay the debt entirely saving on interest expense and loan amortization.

Nick,

Please refer to page 115 of the IPO prospectus which you could download from GIL's website. My guess is the debt terms had been bundled with the aircraft lease contract when the deal was structured back then, and there was probably no clause allowed for early repayment of debt which I believe is common in aircraft lease financing.

[l0nEr]

The Management will probably reveal the listed equities they invested in recently during their 3Q results. Based on the current share float of 825.3 million shares, a distribution of 1.5 cents / share will require cash out-flow of $12.4 million. GIL only generated $3.59 million net distributable cash (after deducting loan amortization and interest expense) in 1H 2012. This works out to 0.435 cents per share semi-annually or an annualized yield of 6.2%. They have to utilize their substantial $60 million cash hoard to invest in appropriate yielding instruments to boost distributable cash-flow substantially. Most of the cash expenses are already fixed ie management fees as a function of market cap (not AUM or net of cash) and operating expenses should be stagnant so new investments might boost operating margins over time. The key lies in what STAM will do with the cash hoard and whether can it make decent investments to generate sustainable cash-flow over the next few years to maintain (and grow) the DPU. My personal estimate is that 7% return from $70 mil new investment is the minimum hurdle to attain the 1.5 cents dividend.

Hi hi. Thanks a lot for the insightful analysis.

Just curious how did you arrive at the 3.59m net distributable cash? Please correct my accounting knowledge, coz im still very new at reading the statements for investment analysis.
From the P&L, if i take total revenue - total expense + depreciation, i get 4.5m.
From the cashflow statement, i get about 5.2m by taking Operating CF + loan repayment received - borrowing cost - cost of rights issue - proceeds from sale of assets.

I prefer the operating cash flow as a gauge for cash flow due to the direct method of accounting. On that note, the fund did achieve 12.56m of OCF in FY2011, while receiving 14.8m of Loan repayments (about 2m excluding the AUD8.1 repayment). That covers the 12.4m required to maintain the 1.5cents dividends.

Loan repayments --> not too sure where the repayment comes from other than early prepayment of MBS principal.
H1 2012: 1,808,000
H2 2011: 14,847,000 - 2,163,000 = 12,684,000 <--- high due to the AUD8.1m redemption of Pepper Trust No. 6
H1 2011: 2,163,000
H2 2010: 10,694,000 - 1,469,000 = 9,225,000 <--- high due to the AUD5m redemption of Pepper Trust No. 5
H1 2011: 1,469,000
Too bad all the other existing notes mature only in 2023+.

Operating cashflow has been falling though...after the divestments, though default has fallen.
H1 2012: 5,169,000
H2 2011: 5,770,000
H1 2011: 6,790,000
If they only need to generate 2m returns from the 78m cash, they would need an annualized yield of about 5%. Some Asian high yield credits or listed shares (as Nick mentioned) can more than easily fit the criteria. Perhaps buying back the own fund's shares can fit the returns requirement too.

I dont think a closed-end fund would attract a substantial shareholder. But if it does, ill be more worried that the shareholder become and activist to close down the fund and return all the cash. Coz it seems to me that the fund is significantly undervalued, and that it could potentially be worth more by liquidation.

As of June 2012:
Cash: SGD78,674,000
Aircraft: Sold forward at USD25,890,000
Fly leasing: 1,051,010 shares x USD13.04 stock price as of 17 Aug = USD13,705,170
Debt: SGD15,614,000
Other liabilities: SGD739,000
Using just purely the above liquid assets at USD1=SGD1.25, NAV is already 0.135per share.

On a side note, a USD1 movement in Fly lease, is worth about SGD0.0016 to GIL per share. Interesting. The stock has rallied USD1 since end-June.

[KopiKat]

j) SGD 16.17 million - new investment in listed equities
Disappointedly, the management has yet to disclose the names of the listed companies in which investment had been made. Whatever they are, additional dividend would be generated. The management has probably made more investment in Fly Leasing. This is only my speculation based on observation that the number of shares own by GIL has disappeared from the current asset review slide of FLY Leasing. I could be completely wrong on this!

From Slide 11 of Presentations, FLY Leasing = 9% of Portfolio Composition (by Carrying Value)
From Slide 5, Total Assets = $202,352,000
=> FLY Leasing Value = 9% * $202,352,000 = $18,211,680

Similarly for FY11 (Dec),
From Slide 15 of Presentations, FLY Leasing = 11% of Portfolio Composition (by Carrying Value)
From Slide 9, Total Assets = $167,435,000
=> FLY Leasing Value = 11% * $167,435,000 = $18,417,850

Compare the two, almost the same. Slight difference likely due to the % rounding up. Here. I'm assuming Portfolio Composition = Total Assets. I'm also assuming Carrying Value is at Cost. Just in case it's at Market Price, I did check their respective Quarter end Market Price from Yahoo and it's not significantly different,

30-Dec-11 : US$12.52
29-Jun-12 : US$12.19

As further support, Slide 9 extracts,

The Company has invested S$16.17 million in listed equities as at 10 August 2012 while continuing to explore suitable investments in
other asset classes. Listed equities are fairly liquid assets which could be divested easily to fund investment in other asset classes when opportunity arises.

It does seem to imply the investments in listed equities are meant to be very short term in nature. I won't be surprised if it's in SGX unless their cash are already in US$.

Cash hoard
- GIL is now sitting on a cash hoard of SGD 62.65 million

Sorry, how to get this figure?

I could only find,

Cash and cash equivalent = $78.674Mil

I tried to net off,

Debts = $15.614Mil or
Total Liabilities = $16.353Mil or
Dividends Payable (10-Sep-12) = $6.19Mil

But, still can't get that figure. Thx!

[Boon]

KopiKat,

For FLY, the carrying value was the market value (marked to market) at the end of the corresponding reporting period. GIL owns 1,051,000 shares in FLY. The portfolio composition of FLY changes as a result of changes in its share price + changes in carrying value of other assets in the portfolio.

The cash and cash equivalent = 78.674 at 30-June-2012
Since then, 16.17 million has been spent on listed equities, leaving 62.5 million. (it was meant to be this figure and not 62.65million).

Taking dividend payable of 6.19 million into consideration, it will be 56.3 million left.

Sorry for the mistake and thanks for the correction