RnR Weekly is a recurring series where I cover the past week’s major news stories and earnings results in the markets from a SIngaporean perspective.
In this week’s edition, I discuss a bit about my perceived Identity Crisis at SingTel, some thoughts on Keppel Pacific Oak US REIT’s busy week and other interesting news.
Opinion - Identity Crisis at SingTel
SingTel is the single largest position in my portfolio and a constant source of internal debate for me. I’m pretty sure my fellow investors struggle with similar issues, as seen from a particularly painful AGM I attended this year (which inspired my Types of AGM Attendees article).
Today, I thought I’ll share a bit of this internal debate and perhaps readers can enlighten me further.
Company in Transition
SingTel has traditionally been structured as a telco. It invests and operates telecommunications infrastructure, and uses that infrastructure to provide communication services. In recent years, this business has been disrupted thanks to the advent of the mobile broadband and the continuous shift from expensive voice services to cheap data.
Giving credit where it is due, SingTel has been the most forward thinking of the previous 3 listed telcos. Its decision to commit resources towards developing / acquiring digital services like Trustwave and Amobee is a recognition by management that the company has to evolve from a traditional telco to a communications technology company.
However, it is a tricky manoeuvre to handle as it is risky and creates uncertainty for its traditional investor base.
Telco or Technology Company?
It is evident from the discourse during the AGM that SingTel has a very traditional investor base. They want steady increasing profits and corresponding dividends. Most investors were very uncomfortable with the continued losses at the Group Digital LIfe segment and do not understand how the loss making segment could eventually turn a profit, let alone be “severely undervalued” as indicated by management.
That said, there was a single brave soul who stood up during the AGM to convey a desire for management to cut its dividend so that the company can have more money to invest in these new businesses.
This underlines the delicate balance that management has to strike for the company.
Management recognises that SingTel is currently largely a telco dinosaur that needs to evolve into a technology company to stay relevant. In order to do that, the fastest way to do that is to invest big into new digital businesses.
However, adopting that strategy will almost certainly mandate a change in dividend policy, where the company significantly cuts its dividend to reinvest in the business. This in turn will enrage its current investor base and lead to huge sell-offs in share price. This is something management will want to avoid thanks to their share-based incentive schemes.
As a result, management seems to have chosen a compromise – maintain SingTel’s dividend as far as possible and try to reinvest in the business with whatever’s left.
My 2 cents
This chosen approach by the management has left me deeply conflicted. While I value the dividends the stock pays me, I also recognise that I am siphoning much needed cash flows that the company needs to reinvent itself. And based on what I see, the transformation is happening way too slowly with a lot of pursuing of all kinds of digital initiatives instead of a singular focus.
Should management run the company like a traditional telco and continue to pay stable dividends? Or should they recognise that they need to operate like a tech company and retain more cash for reinvestment?
I actually stand with the single brave soul in the AGM who argued for a dividend cut. But that’s just me.
Resolving this identity crisis will have seismic impact on the company’s share price, something that I increasingly do not look forward to.
REIT Watch - Keppel Pacific Oak US REIT
Keppel-KBS US REIT (KORE) has had a busy week. Between renaming itself as Keppel Pacific Oak US REIT and announcing a property acquisition within 1 day of each other, its certainly been a very news worthy week for KORE.
Here are some quick thoughts on the 2 KORE pieces of news.
REIT Renaming
Let’s start with the easier of the 2 events – the renaming of the REIT to Keppel Pacific Oak US REIT.
There is no change in the management team and properties. It is now purely under Pacific Oak Capital which is led by 2 of the KBS founders.
I’m not sure what’s the rationale for this reorganisation, the only thing I can think of is to have a clearer divide between the Prime US REIT team and the KORE team as mentioned in my Prime US REIT article on DrWealth.
The other more speculative reason would be a falling out between the KBS founders.
Acquisition of Grade A Office in Dallas
The day after the name change announcement, KORE announced a acquisition of One Twenty Five, a 2 building office complex located in Irving, Dallas. It is expected to be funded via private placement at issue price of 71c so no fun for retail investors. Announcement details can be found here and here.
Here is a quick summary of key statistics:
Property Characteristics
The property seems reasonably well located close to the freeway with residential and entertainment facilities near the building. It continues with the live-work-play theme of some of the properties in the REIT.
Pro Forma Financial Impact
The financial impact disclosed within the announcement relate to the period from listing till 31 Dec 2018. Given the number of acquisitions that has taken place towards the end of 2018 and in 2019, I thought I’ll estimate the impact of the acquisition to forecast FY2019 figures if the acquisition had been done at 1 Jan 2019 for a more accurate estimate.
Key assumptions used here is that 2018 performance of the building is representative of the building’s 2019 performance. This is probably a conservative assumption given the long nature of US office leases and fixed annual escalations of rent.
As you can see the acquisition has a flat to negative impact to on the REIT’s DPU and NAV. Aggregate leverage is also expected to remain stable at 35%.
Overall, a meh acquisition, with the only benefit is to diversify the REIT and continue its long march towards growing AUM.
Reads / Videos of the Week
1) The Promise by NTUC Income
A continuation of the heart warming and meaningful advertisements by NTUC Income about retirement planning and its social impact.
If you missed their earlier video on The Worst Parents in the World, you can check it out in my earlier article on it.
2) American Factory on Netflix
Netflix recently released this gem of a documentary about China listed company Fuyao Glass’ endeavour to operate a manufacturing plant in Ohio. The resultant culture clash and struggles is a great lesson for entrepreneurs and future leaders to consider when making big business decisions.
This Obama-funded documentary really struck a chord with me as it is the live example of one of my Masters programme’s modules.
3) WeWork IPO coverage
I’m a bit late to the game about this, but there are plenty of great write-ups / criticisms of the ethically questionable practices at the unicorn. Here are some of my favourites:
1) The Verge – WeWork is a Soap Opera
2) CB Insights – How WeWork makes money
3) Medium – Neumann’s Ark
4) NYU Prof Scott Galloway – WeWTF
I guess its safe to say that I would avoid the IPO like the plague.
4) Meaning of Stakeholder Interests
Corporate Finance Professor Aswath Damodaran is back with a commentary about the Business Round table’s press release which has an unusual focus on stakeholders rather than shareholder value.
I’ve attached the video accompanying his blog post above.
That’s all for this week. Till next time.
Happy Hunting,
KK
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