Tan Kin Lian's Blog: Market price understates the value of the shares

Friday, January 02, 2009

Market price understates the value of the shares

I invested in a REIT a few months ago at a dividend yield of 6%. The price has dropped by 50% during the past few months, due to the global financial crisis. The REIT now yields 12%.

During the economic recession, the rentals may fall. If it drops 50%, the REIT will still yield 3% based on my purchase price or 6% based on its current price for a new investor.

Eventually, the economy will recover and the rentals will go up. The price of the REIT will also go up.

There is little risk that the REIT will go bust, as it comprise of a few good, well managed properties. The borrowings are capped at a certain percentage (maybe 30%) of the value of the assets.

The current price represents the price that a distressed holder has to sell the shares and the lack of buyers. The price is low, compared to the intrinsic value of the assets and the rental income. According to the experts, the "valuation is attractive".

For a long term investor, the current prices are attractive. When the economy recovers, the price will run up rapidly and many investors will not be able to catch the low prices.

21 comments:

Anonymous said...: There are so many "REIT". Some may be bad. Which one you are talking about? Thank you.; January 02, 2009 11:01 PM
Tan Kin Lian said...: You should ask your stockbroker to give you an analysis of the REITs. If you have a large amount to invest, you should spread it among a few REITs.

I made my own selection based on the information given by my stockbroker. I accept responsibility for my own decisions.; January 03, 2009 2:52 AM
Anonymous said...: Hi Mr Tan, I normally trade on my own online and do not have a stockbroker who can provide me the analysis. How and where else can I seek help ?; January 03, 2009 3:10 AM
Anonymous said...: "Eventually, the economy will recover and the rentals will go up. The price of the REIT will also go up."

Hi Mr. Tan,

Assuming you are right and as the economy recovers and the price of your reit follows and if we believe what some market pundits say in that based on past experience (1996-2001~5years, 2002-2007/8~5 years), it will take 5 years.

Then, even if the reit manages to pay 3% pa for 5 years before the price recovers to original principal value (which is still a big question mark), the yield and overall targeted return seems insufficient for what seems to be a rather risky investment.; January 03, 2009 3:40 AM
Anonymous said...: Dear Mr Tan,
can u share your insight with us? which REIT did u purchase ?; January 03, 2009 8:40 AM
Anonymous said...: Hi Mr Tan,

I understand DBS will be offering Rights Issue on 6/1/09 in order to raise substancial amount of money.Being a small investor, is it advisable to subscribe or not to subscribe .......need some advice as I've really have no idea!; January 03, 2009 9:55 AM
Tan Kin Lian said...: Hi 9:55 AM

I have no idea also. I am also a small shareholder of DBS Bank.

If you do not wish to take it up, you can sell the rights to somebody else, and get some money.

In my case, I will probably take it up as a long term investment.; January 03, 2009 10:27 AM
Anonymous said...: Be careful of toxic convertibles. Some companies desperate enough to raise cash actually poison their own shares in return for upfront cash raised to tide over present difficulties. To these management it does not affect them personally that much because their main aim is to ensure that the company is able to continue paying them their high salaries.; January 03, 2009 10:53 AM
Anonymous said...: I had also invested a number of Reits & Shipping & Utility Trusts, etc last year. Some are very good and strong names backed by government or major regional banks or corporatoins. Although the prices had gone down,I believe this is temporarily, they will recover in the latter half. Meanwhile, I just collect the dividend which is also ridiculessly high. At the minimum, they are much higher but safer than MB, P and JL notes. The chances of those companies defaulting is very very low plus their properties, ships, utilities, etc, are not empty shells like those American notes. I can saw those assets are worth a lot of $ plus the share prices are way way below their assets valuations. Mr Tan is right to say that you will not be able to catch them at those prices anymore then. Some people will think we are crazy, because both of us deviate from the herd's mentality, but think again...I will continue to buy.
As for DBS, I read a broker's report for insider transactions that Temasek's ownership had drop from 28% to 27.93% on 30 Dec 08. What happened, I don't know? But I won't touch it for the time being, borrowing the incident from MLT Rights which was also backed by Temasek last year. Luckily I did not take up the Rights and let it lapse, but picked up from the market later at a much lower than offer price to average down. It's still a good company afterall but price is what yo need to decide.
So you have to decide for yourself. I'm not a broker and have no interests to make any recomendations. Don't blame anyone later, it's your decision.; January 03, 2009 2:42 PM
Anonymous said...: Suspect anything? any need for a rights issue? to cover losses or to raise to pay for compensation?
Toxic definitely.; January 03, 2009 2:48 PM
Anonymous said...: Mr. Tan,

If you are confident that the economy will recover resulting in increase in price of the stock market, you should not buy REITs because it is a defensive instrument. You should buy more into growth and large cap company. Large cap because it needs to be big to weather the storm (small companies may close shop) and growth because its return is expected to be large when market rebound.; January 03, 2009 2:57 PM
Eaststopper said...: Dear Mr Tan,
In the current market, there are loads of stocks whose market prices is below the historical NAV or at very favorable PE levels (from a historical perspective).

The reason why REITs have fallen in prices is attributed to the fact that many of them will see a depression in the rental yield going forward as well as a credit risk incurred in servicing their debt. Singapore Reits have credit rating of between Baa1 to Baa2. Lehman, before it collapsed, was rated AA.; January 03, 2009 4:45 PM
Anonymous said...: Hi 2.48pm

I agreed with you and is also very skeptcial of the need to raise cash in this kind of global sentiment. Most importantly, if we remembered that many analysts were predicting and questioning DBS for the last 2 months on a possible fund raising in the near future, what did DBS spokesperson reply. No there is no such need and our balance sheet is very strong and we are above the threshold stipulated by MAS. So what a mockery...the Rights issue was announced a few weeks later. It's like slapping yourself and in self-denial. I was also thinking whether DBS is a buy or not and why several analyst including citigroup rate it as a Sell when it was trading at $9+.
Also the analyst pointed out that DBS had only provided 30% provisions for its hundred of million $ CDO in its balance sheet. Why only 30% and not 100% like what many companies did? Remember waht happened to LB and ML who also suffered $billion debt from CDO. They went burst or were taken over.
I am not a high note holder and have no investment except a savings bank account with DBS. Hopefully those info helps in considering before you throw your $ in.; January 03, 2009 10:10 PM
Anonymous said...: I would rather invest in UOB and/or OCBC, not DBS shares. Just observe recent events.; January 04, 2009 7:01 PM
Anonymous said...: it is better to err on the side of caution , a phrase very much used by ministers and gahmen spokesmen.
Don't throw away good money.; January 04, 2009 11:55 PM
Anonymous said...: According to many analysts reports that I read, stay out of banking section as a whole for now, whichever banks it is. One analyst poll DBS at $7! Many predict the worst has not come, there are still a lot of toxics in their balance sheets and SIV. The CDO and derivatives embedded in the SIV and between banks are so complex and intertwined that no one knows how to calculate the extent of writeoff correctly. More banks in the US and Europe and maybe Japan will go burst this year, just turn on your TV and wait for the news. When one bank goes down, it drags along many others because of the cross-selling and borrowings. Wachovia, Lehman, Merryl and Bear Sternes are classic examples and history now. The effects spread across the world faster and worse than bird flu. Whether chinese, europe, asian banks, all kana hit, no one can escape because of the nature of the banking industry. Don't forget Goldman Sachs and Morgan Stanley are still around, who knows....There are many other smaller US and Europe banks that we have not heard of, they're still trying to avoid bankrupcy. So take your own risk if you think the price will not go down further, cheap can be cheaper.
Go for defensive like utilities, consumer goods if you must invest. McDonald share price is up the last 3 months, when all the Fortune500 companies are down by >50%. Why? Because it's cheaper to eat in Mc in the US compared to restuarants, got it?; January 05, 2009 2:22 PM
Anonymous said...: Why is dbs raising money? This question is bugging everyone . In the light of structured notes debacle raising money now will surely set tongues wagging.; January 05, 2009 7:59 PM
Anonymous said...: I invested in a REIT a few months ago at a dividend yield of 6%. The price has dropped by 50% during the past few months, due to the global financial crisis. The REIT now yields 12%.

During the economic recession, the rentals may fall. If it drops 50%, the REIT will still yield 3% based on my purchase price or 6% based on its current price for a new investor.
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If the rental drops 50%, the yield will not drop proportionately.; January 09, 2009 5:22 AM
Anonymous said...: Is Maple Tree Log a good REIT to invest now? The price is low and I heard that there is only major repayment in 2012..; January 10, 2009 1:46 PM
Anonymous said...: Be careful when u invest in banks shares, still many unknowns especially dbs, just like some of u who wonder why they need to raise money in this kind of market sentiment. In general this sector is rated under-perform by almost all analysts that i read. I predicted on 03 Jan that price will fall further although it shot up to $10 for a few days. The temporary surge to $10+ was a window dressing and prop up by some big guys. It's a 20% loss in a week! I hope none of you bought last week. It should drop to $7 if the american based analyst is correct and i think so. After 31 Jan, we will know, haha. It was $6+ during asian financial crisis!
Some reits should be ok, i have some including mapletree. The yield is good and the portfolio is diversified across asia, just like another diversified hospitality reit which i bought. Rentals are locked in for quite long. So risk is not so high. There's been some run up last 2 weeks though still far away from the tops, i guessed people starting to realised their under-value and predictable good yield. I take reits as another form of savings account. I buy and average down my costs and collect dividends. I cannot afford to buy real properties to rent it out so this is a good substitute for me. I collect "rental" in the form of dividend every quarter but avoid the risks of big losses in real properties investment and the challenge of managing it. I have collected $ thousands in dividends in the last few years, better than FD interest. But one have to be able to stomach temporary paper losses without losing sleep because i only plan to sell when i retired. The prices should be mucher higher then because properties prices in growth driven asia increase over longer period of time. Again there are risks in any investments, but nothing beats the minibond.; January 11, 2009 8:09 PM
Anonymous said...: Hi,
I dumped all my shares in last May when I suspected the bad news would keep on coming out. I only went in to buy shares, mainly a few industrial Reits, last September. The returns was fantastic and I believe they are better than any annuity and savings. I have no regrets but only satisfaction. Cheers!; January 12, 2009 2:24 PM