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06-03-2013, 05:08 PM
Attached is the updated report from DMG on Kingsmen.
So two scenarios - either extend lease or purchase/construct new building.
Option 1 - If lease is extended it would mean no upfront capex in near term and just higher opex from 2016 onwards. If market rents are substantially higher than historical then MLT will actively pursue rental reversion, so I guess rental exp may go up 2x or more? This may bump up opex substantially and NPM may fall below 5%.
Option 2 - If construct new building assume high end of $50m needed, so capex spread out over 24 months. I'd assume they take up a loan of about $25m (50%) and finance the rest using internal cash flow and cash stash. If they have FCF of about $20m a year (FY 2012 was $30m), then they can use $10m + $2.5m from cash balance over 2 years (total $25m) and still be able to maintain 4c/share dividend. Cost of debt should be negligible at 2-3%. But once completed, building would add to depreciation expense which would also lower margins, though by not much (useful life = 50 years), certainly lower than the bumped up operating lease expenses if the lease were to be renewed.
Option 2 seems more sensible as it would smooth out their cash flows + enable them to occupy a larger space with adequate capacity for expansion and growth. It is a more viable long term solution as it would not tie up further capital, and they are not subject to landlord's rental reversion demands.
Also, if they continue to lease, they will face a lose-lose situation - higher operating lease expenses with the same capacity (meaning no room for expansion of their business)! Doesn't seem logical from an economic standpoint.
If the lease is coming due in 2016, they can start to plan by 2H 2013 and still have time to commit to a land purchase and hire a contractor to do a design and build. Question of course is cost and timeline for the payments, plus the amount of gearing they take up and the cost of financing.
So to summarize, I am supportive of building new premises rather than extending the lease with MLT. Even if this means freezing dividends at 4c/share till 2016, I will not mind for the longer-term benefits.
So two scenarios - either extend lease or purchase/construct new building.
Option 1 - If lease is extended it would mean no upfront capex in near term and just higher opex from 2016 onwards. If market rents are substantially higher than historical then MLT will actively pursue rental reversion, so I guess rental exp may go up 2x or more? This may bump up opex substantially and NPM may fall below 5%.
Option 2 - If construct new building assume high end of $50m needed, so capex spread out over 24 months. I'd assume they take up a loan of about $25m (50%) and finance the rest using internal cash flow and cash stash. If they have FCF of about $20m a year (FY 2012 was $30m), then they can use $10m + $2.5m from cash balance over 2 years (total $25m) and still be able to maintain 4c/share dividend. Cost of debt should be negligible at 2-3%. But once completed, building would add to depreciation expense which would also lower margins, though by not much (useful life = 50 years), certainly lower than the bumped up operating lease expenses if the lease were to be renewed.
Option 2 seems more sensible as it would smooth out their cash flows + enable them to occupy a larger space with adequate capacity for expansion and growth. It is a more viable long term solution as it would not tie up further capital, and they are not subject to landlord's rental reversion demands.
Also, if they continue to lease, they will face a lose-lose situation - higher operating lease expenses with the same capacity (meaning no room for expansion of their business)! Doesn't seem logical from an economic standpoint.
If the lease is coming due in 2016, they can start to plan by 2H 2013 and still have time to commit to a land purchase and hire a contractor to do a design and build. Question of course is cost and timeline for the payments, plus the amount of gearing they take up and the cost of financing.
So to summarize, I am supportive of building new premises rather than extending the lease with MLT. Even if this means freezing dividends at 4c/share till 2016, I will not mind for the longer-term benefits.
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