Risk Capital and REITS

REITS are Defensive

Doing Well

With the impending IPO of IGB and KLCCP planned REITs,investors will have another go at this better than FD category of investment.

Star Performer

If you are happy with Malaysian bonds and sukuks that regularly pays out 5% dividend, then REITS could be your cup of tea.

Glittering

Looking at the way Pavilion Reits and Stareits have ascended in its stock price as well as the gross dividends paid out thus far,those who have spare cash should seriously look into this type of investment. Other reits from Quills to Capitalmalls have also done well.

High End Office Reit

Let us look at some of the merits trotted out.

It is claimed that they bring in higher-than-market average yields

They have defensive qualities in the current uncertain economic and market environment [a low-beta proxy to the economy]

These days, analysts do not discount the possibility of eventual increased attention on REITs, saying that this could be a prelude to a re-rating for the sector.

“These two REITs are huge in terms of potential flotation volume and market capitalisation. For IGB REIT, its asset valuation of RM4.6bil will make it the largest retail REIT to date,”  RHB Research Institute's REIT analyst Loong Kok Wen said over the telephone.

Loong said the huge asset base due to high liquidity in the financial system would also attract the attention of institutional investors.

“This is a good opportunity to buy into such initial public offering REITs amid the sustained global uncertainties,” he added.

Loong noted that interest in REITs was currently high and this could be sustained, moving forward, should global uncertainties persist.

“There has been a lot of attention lately on consumer-based dividend-paying stocks and their prices have been going up.

“It is the same for REITs their asset revaluation had seen increased prices on the backdrop of high liquidity in the economic system,” Loong added.

A property analyst with TA Research said the other qualities of REITs that would be appreciated by investors in these volatile times were their dividend yielding nature compared with other fixed-income securities.

“I am positive about retail REITs as their dividends are stable because these cash stream comes from their rents.

“Retailers are resilient amid booming economies in the East. And locally, consumers here are always shopping and buying goods during the weekends,” the analyst said.

However, the analyst noted that while REIT yields had declined slightly from the past, one could still find yields as high as 8%.

Yields today still offer 2%-3% premium over fixed-deposit (FD) rates.

“For example, if I am a person with a lot of money, I would like to diversify my returns and risk. So REIT is the next best alternative after FD.

“Today, we are also looking at richer valuations for REIT stocks,” the analyst said.

In a report, Hong Leong IB said foreign funds and investors were continuing to show strong interest in Malaysian retail assets due to their attractive yields and pricing.

“The retail segment is blessed with a highly favourable macroeconomic backdrop sustained consumption theme in Malaysia, rising disposable income and discretionary spending, high consumer confidence, strong employment market (and) the tourism boom of Malaysia,” Hong Leong's REIT analyst Sean Lim wrote in the report.

Perhaps, I will do a posting on how reits have fared. 

BJFood Investors-Take Note of Trading of Rights

Trading to Profits

BJF has informed Bursa that the rights will be traded as follows:

1) The Rights commence of trading :  17 July 2012  

2) The Date of Despatch of the Prospectus and Provisional Allotment Letter of Offer :
- 18 July 2012

3) The last day and time for Acceptance, Renunciation and Payment :
 31 July 2012 @ 5:00pm.

4) The Rights cease quotation :  24 July 2012

The Stock Short Name, Number and ISIN Code [ BJFOOD-OR, 5196OR and MYL5196OR003 ] respectively

Theoretical Ex-Pricing BJ Foods and Its Warrants

Restaurant Ambiance

With a week to go before BJFoods (BJF) go ex-rights, it would be good to know how and why the valuations were fixed as such.

The issue price of the rights at RM0.65 was arrived after taking into consideration, amongst others, the five (5)-day VWAP (Variable Weighted Average Price) of BJF shares up to and including 23 August 2011 of approximately RM0.81 and the theoretical ex-rights price(TERP) of BJF Shares of RM0.75.

For illustrative purposes, the TERP as at the date of the announcement was RM0.75 (without adjusting for full exercise of Warrants), based on the closing price of BJF shares on 23 August 2011 of RM0.825. Based on the above, the issue price of RM0.65 per rights share represents a discount of approximately RM0.10 or approximately 13.3% to the TERP of BJF shares.

The Board believed then that the RM0.10 or approximately 13.3% discount to the TERP of BJF shares should be sufficiently attractive to entice shareholders to subscribe for their respective entitlements.

Now let us look how the warrants were priced at 0.70 sen for conversion.

The exercise price of RM0.70 for each Warrant was arrived at after taking into consideration, amongst others, the 5-Day Average Price, the TERP of BJF shares (RM0.75) and the prevailing market conditions.

The Board believed then that the RM0.05 or approximately 6.7% discount of the Warrants exercise price of RM0.70 to the TERP of BJF shares (RM0.75) would further enhance the attractiveness of the proposed rights issue.

At today’s price of RM1.38, such valuations are now ‘out of the window’.

Paying a mere 0.65 sen for each BJF shares is tantamount to getting another one free. A bonus issue?

As for the warrants, exercising it for conversion at 0.70 sen is equivalent to getting per share at a steep discount of 49%.

It would be interesting to watch how the rights and warrants are traded after the documents are issued for subscription and trading.

BJFoods-The Facts,please!

Capturing the Food Dream

 Let’s get some facts straight about Berjaya Foods Berhad (BJF) first.

Number of Kenny Rogers Roasters (KRR) restaurants-88

BJF-owned -67

Franchisee-owned-10

Indonesia-11

Same store sales growth is 8% per annum.

For current FY13F, three new restaurants have started operations-namely at Paradigm Mall, Setia City Mall and Shaftsbury Square.

Wholesome Restaurant Experience

 Six more will open soon and BJF is on a look-out for locations to open another 6 to attain its targeted 15 new outlets per annum.

In Indonesia, BJF has opened three new KRR outlets in Indonesia in Jakarta. It has been confirmed that 4 will open up in Medan and another 4 in Surabaya. BJF’s management expects to break even in Indonesia after it exceeds a threshold number of 20 restaurants by FY13. It is estimated each restaurant will conservatively yield a revenue stream of between RM600K-RM900K.

BJF will also get into drive-in way with its first drive-through service in the upcoming

stand-alones in Setia Tropika and Kota Kemuning within the next 6 to 9 months.

Nevertheless, for the time being, expansion remains focused on retail malls and subsequently, branching into standalones. Additionally, management is gradually growing the delivery, Roasters On The Move (mobile restaurant) and catering segments (<10% of revenue) via active marketing and advertising.

Though average ticket size for KRR is around RM40 – almost equivalent to Pizza Hut, it is reckoned that it is unlikely to affect KRR’s business model as it targets the niche market – middle-income consumers – and advocates a well-balanced eating lifestyle. (For comparison: fast food chains like McDonalds and KFC are about circa RM15)

Another development area for BJF is the Middle-east focusing on Qatar.

Now, let us look at BJF’s acquisition trail-adding Starbucks to the revenue sheet.

The business of BStarbucks is complementary to that of BJF. BStarbucks is in the business of

providing quality food and beverage to niche and premium markets, catering towards discerning

consumers.  It is envisioned that taking in BStarbucks BJF’s wings  will contribute positively to its future earnings on the basis of the generally positive economic climate and the demands of discerning consumers for quality food and beverage which BStarbucks is in a position to render given the locations of its stores, branding of its products and services, etc.

Cool Delights!

  To date, BStarbucks has 119 Starbucks stores located throughout Malaysia and its revenue has been growing from RM116 million for the FYE 30 April 2009 to RM145 million for the FYE 30 April 2011 whilst its profits have accordingly improved from a loss of RM1.1 million in the FYE 30 April 2009 to a PAT of RM4.2 million in FYE 30 April 2010 and its PAT further increased to RM10.6 million in FYE 2011. Based on the past performance of BStarbucks and barring any unforeseen circumstances, BStarbucks expects the improvement of its revenue and earnings to continue in the future.

The BStarbucks acquisition is likely to be completed by August 2012. Unbelievably, same store sales (SSS) for Starbucks is 26% for the first 6 months of 2012-the highest ever within South-east Asia!

The proposed acquisition of a 50% stake in Berjaya Starbucks is expected to be completed by early August. Starbucks achieved SSS growth of 26% in the last six months – the highest within Southeast Asia.

Starbucks in Taman Tun Dr Ismail is premised on a different concept, consisting of three storeys, where two conference rooms occupy the third floor priced at RM50/hour per room. This is the first such concept outlet in Malaysia. Nonetheless, depending on the suitability of location, BJF is unlikely to open another Starbucks of a similar concept, moving forward.

More importantly, earnings are on an upward trend, accompanied by a growing number of restaurants, improved product offerings and higher margins from a new menu. Not forgetting, earnings are expected to rise further from the proposed acquisition of Starbucks. Given the strong franchise value, earnings CAGR of 51% remains robust over FY13F-FY15F.

The BFood Group principally operates in the food and beverage industry in Malaysia. The business

of BStarbucks is complementary to that of BJF’s Group, as BStarbucks is in the business of

providing quality food and beverage to niche and premium markets, catering towards discerning

consumers.

 BJF is of the opinion that the BStarbucks acquisition will contribute positively to the future

earnings of the BJF Group, on the basis of the generally positive economic climate and the

demands of discerning consumers for quality food and beverage which BStarbucks is in a position to provide given the locations of its stores, branding of its products and services, etc.

For information purposes only, to date, BStarbucks has 119 Starbucks stores located throughout Malaysia and its revenue has been growing from RM116 million for the FYE 30 April 2009 to RM145 million for the FYE 30 April 2011 whilst its profits have accordingly improved from a loss of RM1.1million in the FYE 30 April 2009 to a PAT of RM4.2 million in FYE 30 April 2010 and its PAT further increased to RM10.6 million in FYE 2011. Based on the past performance of BStarbucks and barring any unforeseen circumstances, BStarbucks expects the improvement of its revenue and earnings to continue in the future.

While Amwatch has downgraded BJF to a HOLD, with an unchanged fair value of M1.45/share pegged to a 13x PE on CY13F earnings, given a limited potential upside, the share price which has performed well (+39% since our initiation report on 25 May 2012), continued to attract buyers pushing the price to touch RM1.45 by mid morning on 3 July 2012 before stabilizing to close at RM1.38 for the day.

Let us watch what will its price be as it draws to its ex-date on 12 July 2012.

The general perception is BJF’s earnings trajectory remains strong, supported by a greater certainty in growth as its expansion spree remains well on track especially on the impending acquisition of BStarbucks which will  lift its earnings portfolio.

BJFoods-The Last 6 Days Before D-Day

Food,Glorious Food

The long wait is almost over.

Originally planned to be completed by the Q1, 2012, the rights issue will go ex on 12 July.

There are still 6 days to go  for investors to climb on the bandwagon  and prayerfully achieve a ringgit for ringgit return from the rights with a free warrant component to boot. All the counter needs now to have traction at RM1.30 for this to happen.

Today, BJFoods hit RM1. 45 before settling down at RM1.38 for a 15 sen gain. Volume was fair with  4,367 lots done as compared to less than 500 lots daily before this.

As can be seen, BJF is a tightly held share with sellers not desperate to sell. Buyers still wanted to bargain. This is reflected in the wide bids on BJF during the first trading session. The afternoon showed sellers appearing and selling down the counter from RM1.45 to RM1.38.

Once, the rights issue option forms go on sale,  we will know the latent underlying value of BJFoods. The free warrants will also be on sale.

We need to know when this will occur.

I will  review the prospects of BJF in the next posting.