• Skip to main content
  • Skip to secondary menu
  • Skip to primary sidebar
  • Home
  • About KK
  • Resources
    • Income Tax Calculator
  • Freebies
  • Blog
  • Ask KK

Risk N Returns

Personal Finance and Investment Ideas

  • Email
  • Facebook
  • RSS
  • Twitter
  • Start Here
  • Current Portfolio
  • Personal Finance
  • Invest

RnR Weekly 080919: Identity Crisis at SingTel, Keppel Pacific Oak US REIT and More

September 8, 2019 By KK

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

0
WALE (years)
0 %
Freehold
0 %
Occupancy
0
NLA (sq ft)
$ 0 m
Value

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

If you love the articles I write, follow me on Facebook, Twitter, InvestingNote, StocksCafe or subscribe to my blog and never miss another article!


Related

Filed Under: Invest Tagged With: Keppel-KBS US REIT, SingTel


Primary Sidebar

Subscribe to Blog via Email

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Join 338 other subscribers

Search my site

Top Posts & Pages

  • My Guide to the CPF Investment Scheme (CPFIS)
    My Guide to the CPF Investment Scheme (CPFIS)
  • Singapore Savings Bonds (SSBs) - August 2019 Issue
    Singapore Savings Bonds (SSBs) - August 2019 Issue

Archives

  • January 2022 (1)
  • November 2021 (1)
  • October 2021 (1)
  • September 2021 (1)
  • August 2021 (1)
  • July 2021 (1)
  • June 2021 (1)
  • May 2021 (1)
  • March 2021 (1)
  • February 2021 (2)
  • January 2021 (2)
  • December 2020 (2)
  • November 2020 (1)
  • October 2020 (1)
  • September 2020 (1)
  • August 2020 (3)
  • July 2020 (3)
  • June 2020 (1)
  • May 2020 (2)
  • April 2020 (2)
  • March 2020 (1)
  • February 2020 (7)
  • January 2020 (4)
  • December 2019 (4)
  • November 2019 (4)
  • October 2019 (2)
  • September 2019 (3)
  • August 2019 (7)
  • July 2019 (7)
  • June 2019 (8)
  • May 2019 (7)
  • April 2019 (8)
  • March 2019 (12)
  • February 2019 (8)
  • January 2019 (4)
  • December 2018 (4)
  • October 2018 (4)
  • September 2018 (6)
  • August 2018 (6)
  • July 2018 (3)
  • June 2018 (6)
  • May 2018 (4)
  • April 2018 (6)
  • March 2018 (9)
  • February 2018 (6)
  • January 2018 (10)
  • December 2017 (7)
  • November 2017 (2)
  • October 2017 (1)
  • September 2017 (3)




Copyright © 2023 | Risk N Returns