Accordia Golf Trust (AGT) recently received a non-binding proposal from its Sponsor to buy out its golf courses. After a lengthy 3 day trading halt, I was quite underwhelmed when the Trust decided to announce a single figure with a distinct lack of concrete details:
JPY 63,167 mil
OK it was a 2 page announcement, but the only relevant parts were 1 or 2 lines surrounding the above figure.
This triggered confusion in Telegram-verse with people coming up various valuations for the Trust.
Intrigued, I took a stab at it and here are my thoughts.
Disclaimer: I’m approaching this valuation with no knowledge of AGT’s history and business model, as such I may not be able to pick up all the nuances long time followers of the Trust will be able to pick up. Please do your own due diligence as well before deciding whether to invest.
Offer Summary
The announcement can be found here. Here’s what we know so far:
- Non-binding offer of JPY 63,167 mil for its golf courses (not a takeover)
- This consideration includes assumption of debt held in the SPV holding the interest
Honestly, there is not a lot to work on here. Some top of mind questions include:
- Is this a all cash offer?
- What types of liabilities is the Sponsor assuming? All liabilities or just the debt?
Balance Sheet Approach
I’m using the Balance Sheet valuation approach to value AGT. This involves the following steps:
- Scrutinising the Balance Sheet and ring fencing assets and liabilities that relate and do not relate to the Golf Courses
- Remove assets and liabilities related to the Golf Courses
- Add the JPY 63,167 mil offer consideration as the value for the Golf Courses
- Compute the per unit value for AGT based on this revised Balance Sheet.
This methodology assumes that its a all cash offer and that the Sponsor assumes all debt and liabilities related to the golf courses. Let’s get cracking.
Balance sheet item classification
Here’s the latest Balance Sheet as at 30 September 2019 and my classification of the various figures:
| Balance Sheet Item | Amount (JPY mils) | Classification |
| Current Assets | ||
| Cash | 7,981 | AGT |
| Trade and other receivables | 2,240 | Golf Course |
| Inventories | 307 | Golf Course |
| Other assets | 322 | Golf Course |
| Non-current assets | ||
| Property, plant and equipment | 142,238 | Golf Course |
| Right-of-use assets | 15,738 | Golf Course |
| Intangible assets | 4,062 | Golf Course |
| Other assets | 1,041 | Golf Course |
| Current Liabilities | ||
| Lease liabilities | (2,886) | Golf Course |
| Trade and other payables | (4,346) | Golf Course |
| Membership deposits | (9,234) | Golf Course |
| Current income tax liabilities | (583) | AGT |
| Other liabilities | (2,545) | Golf Course |
| Non-current liabilities | ||
| Borrowings | (42,966) | Golf Course |
| Lease liabilities | (18,152) | Golf Course |
| Borrowing from RP | (500) | Golf Course |
| Membership deposits | (24) | Golf Course |
| Deferred Tax Liabilities | (26,154) | Golf Course |
| Other Liabilities | (556) | Golf Course |
I’ve generally allocated assets and liabilities that arise from golf course operations to the Golf Course segment. The remaining assets and liabilities are assigned to AGT.
Possible valuations
Based on the above classification, here are some valuations for comparison.
| Item | Book Value | 31 Dec 18 Valuation (Conservative) | 31 Dec 18 Valuation (Aggressive) | Offer Valuation |
| Golf Course | N/A | 144,686 | 144,686 | N/A |
| Liabilities | N/A | (107,363) | (42,966) | N/A |
| Net Golf Course | 58,585 | 37,323 | 101,720 | 63,167 |
| Remaining Net Assets | 7,398 | 7,398 | 7,398 | 7,398 |
| Net Asset Value (JPY mil) | 65,983 | 44,721 | 109,118 | 70,565 |
| Units outstanding | 1,099,122,000 | 1,099,122,000 | 1,099,122,000 | 1,099,122,000 |
| NAV per Unit (JPY) | JPY60.03 | JPY40.69 | JPY99.28 | JPY64.20 |
| NAV per Unit (SGD) | 74.4c | 50.5c | $1.23 | 79.6c |
SGD NAV Translated at 1 JPY : 0.0124 SGD
The tricky part here for the Balance Sheet approach is that we do not know 2 things:
- The valuation method used by CBRE to derive the JPY 144,686 mil valuation as at 31 December 2018. As a result, I do not fully know all the assumptions and whether certain liabilities (like lease liabilities) have already been included in the valuation.
- The meaning of “assumption of the debt of the holding company” mentioned in the announcement. As a result, we do not fully know which liabilities Accordia Inc will assume and AGT will assume.
As a result, I did a lazy method by calculating a conservative and aggressive valuation. Conservative valuation accounts for all liabilities, while aggressive valuation accounts for only borrowings as indicated by the announcement.
As a result, we can see that there is a wide spread in possible valuations. Realistically, the value of AGT should lie in between the 2 valuations.
My preferred computation
My personal preferred computation is to only account for the following liabilities:
- Debt of JPY 42,966 mil
- Deferred tax liabilities of JPY 26,154 mil
This is because lease liabilities and operating liabilities should already be taken into account when valuing the asset via the DCF method. Reading the annual report’s disclosures for deferred tax liabilities also suggest that these taxes will be incurred when AGT’s interest in the golf courses are divested, which is the case here.
Of course, you can argue that deferred tax liabilities is a accounting charge with no real meaning. If so, feel free to adjust your own computation.
Using my preferred computation, I arrive at a valuation of 93.6c. Based on the range of possible values and my preferred valuation, it seems that the Sponsor’s offer is at best fair, but more likely undervalued.
Weaknesses
It wouldn’t be a valuation if there were many moving parts involved. Here is my list of potential issues with my valuation computation:
- Latest valuation available is 1 year old as at 31 December 2018
- As mentioned, there is uncertainty over what liabilities are covered by the offer / valuation performed by CBRE on 31 December 2018
- Simply not enough information
Why is the Sponsor buying now? Is AGT truly undervalued?
Looking at the valuation computation earlier, I can’t help but wonder if there is an ulterior motive for the offer. Why buy now? Is AGT extremely undervalued and is the Sponsor trying to buy the assets on the cheap?
Here are some speculative reasons for the offer.
Tokyo Olympics in 2020
You may know that next Olympic Games will be in Tokyo next year. As such, owning 100% of the golf courses during this boost in tourist travel might a motivation to get the deal done quickly.
Recent divestment suggests extreme undervaluation
In April 2019, the Trust announced the divestment of one of its golf courses to a third party.
- Transaction value: S$2,415,751
- Valuation by CBRE: S$332,166
That is a whopping 627% over the valuation! This potentially indicates that the portfolio valuation might be already very conservative. Or alternatively, it could that there are…
Alternative land uses for golf courses?
The above transaction got me thinking if there are alternative land uses for golf courses. Intuitively, golf courses are a unproductive way to use land. Valuing the land as a golf course, might be undervaluing the potential of the land for other uses.
This is probably why somebody was willing to pay 627% over valuation to acquire the land, if they had a much more productive way to use it.
I did a general google search of golf course conversions in Japan and an interesting example dropped out.
- Japan is turning abandoned golf courses into solar farms to solve its energy problems
- KYOCERA TCL Solar Completes 29.2MW Solar Power Plant on Repurposed Land in Japan
Converting golf courses to solar farms? Given Japan’s push to move away from nuclear, this does not sound too far fetched.
Similarly, some other articles also mentioned housing and park developments, which may be viable options too. However, I couldn’t find any specific examples for this.
Final thoughts
Given this qualitative and quantitative review of the Divestment offer and the potential motivations of the Sponsor, I think the divestment offer on the table is at best fair. I feel unitholders would not be too happy with the offer and should hold out for more.
Do you agree with my valuation? Feel free to suggest improvements!
Happy Hunting,
KK
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