Ascendas I-Trust

Ascendas I-Trust

Links 

www.tradingeconomics.com/india/indicators
http://ir.a-itrust.com/home.html

https://www.dbs.com.sg/treasures/investments/EquityArticle.page?dcrPath=templatedata/article/equity/data/en/DBSV/012014/AIT_SP.xml

http://www.marketresearchreports.com/countries/india
http://www.hindustantimes.com/business-news/reits-opportunity-in-india-estimated-to-be-rs-1-25-trillion/story-wBs70nkKOnpla7PO6FGoVJ.html 
http://fortune.com/2016/12/13/blackstone-reits-india/
http://economictimes.indiatimes.com/wealth/by-2020-indian-realty-to-provide-77-billion-reit-investment-opportunity-report/articleshow/55703151.cms
 http://investmentmoats.com/?s=ascendas+India

Yahoo finance, Wall Street Journal, Morningstar, POEMS

https://sg.finance.yahoo.com/quote/CY6U.SI?ltr=1

http://financials.morningstar.com/valuation/price-ratio.html?t=CY6U&region=SGP&culture=en_US

http://quotes.wsj.com/ACNDF/financials

https://www26.poems.com.sg/Stocks/ViewPrice/StockSummary?stockCode=CY6UR&companyName=Ascendas-iTrust&exchange=SGX&compCode=ADIT.SG

High Level Summary
Hold off buying, Wait for events to happen if price shock. NO margin of safety for now

**Edit** Price shock on 19 May 17 Probably due to issuing of dividends. Bought 2500 shares at 1.125 by pricing it below close of 1.13. Growth Stock in its sector but with a Stalwart structure (dividend play based on Dividend policy and REIT structure)

Ascendas India Trust (“a-iTrust” or the “Trust”) is a Singapore-listed business trust established with the principal objective of owning income-producing real estate used primarily as business space in India.  a-iTrust may also acquire, hold and develop land or uncompleted developments to be used for business space with the objective of holding the properties upon completion. Although a-iTrust is a business trust, it has voluntarily adopted certain regulations governing Real Estate Investment Trusts (“REITs”) to enhance the stability of its distributions to unitholders.

a-iTrust’s policy is to distribute at least 90% of its income available for distribution. a-iTrust retains 10% of its income available for distribution to provide greater flexibility in growing the Trust. a-iTrust makes distributions to unitholders on a half-yearly basis for every six-month period ending 30 September and 31 March.

Base of Operations (India)(As of 31 Mar 2017)

Hyderabad (31%)
The V, Hyderabad(Completion expected by 2H 2017, lease commitment 16.6% )

CyberPearl, Hyderabad

aVance Business Hub, Hyderabad

Chennai (31%)
International Tech Park Chennai

CyberVale , Chennai

Bangalore (38%)
International Tech Park Bangalore (2.24 million sq ft of additional space can be developed over time, where special economic zone is located, developed Victor building whereby Lease commitment 100%)

Pune

Blueridge Special Economic Zone Phase II, Pune (“BlueRidge 2”). 

The portfolio comprises 11.1 million sq ft of completed properties. In addition, the Trust holds land with potential built-up area of 3.0 million sq ft.

300 tenants, Generally healthy portfolio occupancy
Top 10 tenants accounted for 34% of  portfolio base rent
1  Bank of America 

2  Cognizant 

3  General Motors 

4  Mu Sigma 

5  Renault Nissan

6  Societe Generale 
7  Tata Consultancy Services

8  The Bank of New York Mellon  

9  UnitedHealth Group   

10 Xerox  

3rd party: Acquisition criteria 

Target cities: • Bangalore • Chennai • Hyderabad • Pune  • Mumbai • Delhi • Gurgaon
 Investment criteria: • Location • Tenancy profile • Design • Clean land title and land tenure  • Rental and capital growth prospects  • Opportunity to add value 

India Outlook
7.3% GDP Growth, 56% of global sourcing market in global IT and Business Process Management which is estimated to grow at 10-12%
Most cost competitive cost center globally, strong leasing demand as MNCs seek to relocate back end and Manuel intensive operations there
1 US IT engineer = 2IT Spore = 13 IT India
1 backend Banker = 3 India Backend
 
High Exposure to for-ex risk which is assumed by Ascendas. For-ex risk hedged through plain vanilla forwards. Debt is denominated in SGD and managed through cross currency swaps
 
1) Business Outlook
Lines of business + Prospects

2) SWOT
P
E
S
T

Political

Modi is focused on bring political stability and is highly open to attract Foreign Direct Investment in India. General stability in India's political scene.

EconomicIncreasingly affluent country, Interested in getting a local listed stock with exposure to emerging BRICS markets.
Double digit growth in India Processing and line of business from the bank I worked in. Projected direction moving forward is to outsource even more processes there.
India forex risks is controlled as it has many currency restrictions and is still recovering from its currency notes recall.
 
Social 
Social stability since Modi took over. Generally open to foreign investors

Technological
With advancement in Internet technology and network, financial services could outsource much of their manual processes that cannot be automated or requiring Manuel processing, to low cost centres ( India). This trend is likely to continue as India is well educated in English and well educated professional can be procured at a low price.

Porter 5 Forces (Pricing Power)(Franchising)
IT Parks
Threat of New entrants
Entrant of Black rock Investment Trust in Jun 2017. Might grab market share from ascendas as it is an organisation with large reaching connections. Unsure if it will upset the first mover advantages from Ascendas I trust

Bargaining power of suppliers
Unknown

Bargaining power of Buyer
Yes, Large MNCs have the option of going to Blackrock if they actually present a better deal. However if Ascendas I-trust plays its cards right and made moves to lock in the loyalty of those MNCs, they are most likely to invest in their existing infrastructure than venturing to the unknown.

Threat of substitutes in products and Services
Cost advantage of business parks in India far exceed other foreign locations. This makes it attractive to set up business in those concentrated High tech offices and economic zones that ascendas own. First Mover Locational advantage is not easily upset by new entrants.

Rivalry among existing competition
NIL, very underdeveloped market, potential entrant of BlackRock


Warehousing (Unknown prospects with great potential)(hidden book value)

Threat of New entrants
Unknown

Bargaining power of suppliers
Unknown

Bargaining power of Buyer
Unknown

Threat of substitutes in products and ServicesUnknown

Rivalry among existing competition
Unknown

Organisational Life Cycle
What type of stock it is and what I am looking out for. - Growth in sector, Stalwart and Dividend due to REIT structure
Growth rate - 7% based on FY2013to2017 Geometric Mean
Beta - 0.62

CAPM (required rate of Return)(RFR as 10 year t bonds)(Obtain adjusted Beta, Use STI ETF as Rm, - 1.28494%



2) Financial Ratio Health Analysis with peers

Profitability - Great

Gross Margin (TTM) (%)  60.31 Operating Profit Margin (TTM) (%)  109.29 Net Profit Margin (TTM) (%)  94.63

Liquidity/ Leverage - Most of its debt is long term debt denominated in SGD. It is reasonably leverage to take on sufficient debt in pursue of returns. Minimal risk of bankruptcy as it is backed by substantial assets  / book value which is to appreciate in value over time. Very High Exposure to Forex. Generally company will experience large fluctuations in cash flows, FCFE will be poor model to gauge its outlook.
Cash Ratio = (Cash + cash equivalents) / Current liability
Current Ratio = (Current Asset / Current Liability)
Debt ratio = (Total Liability / Total Asset)
Quick Ratio
Operating cash flow - Cash flow from operations has increasing well with high volatility
Investing cash flow - Cash flow from investing always negative, high fluctuation between years
Financing cash flow - Cash flow from Financing is volatile between positive and negative

Current Ratio	1.46
Quick Ratio	1.44
Long Term Debt to Equity (%)	59.73
Total Debt to Equity (%)	60.07
Interest Coverage Ratio (TTM)	-
Free Cash Flow to Firm (TTM) (SGD 'mln)	43.91

Performance - Great
ROA improving over the years - 24.11
ROE improving over the year - 48.57
DPS increasing over the years generally - 0.0569
Earnings per share improving well - 0.1498
Sales Turnover - Generally increasing over the years - 0.18


Return on Investment
Tax Retention Rate (tax efficiency, higher better) = (EBIT - tax exp) /EBIT
Interest Expense Rate (lower better)  = int exp / Totalasset

Return on Equity - 7.99 (WSJ), Great Profit Margin, Ok Asset Turnover, Low Financial Leverage
Dupont ROE analysis - Profit Margin x Asset Turnover x Financial Leverage
Profit Margin - 49.42
Total Asset Turnover - 0.12
Financial Leverage - 1.3472952920545 (GoalSeek)
ROE = Net Income/Net Sales x Net Sales/Total Asset x  Total Asset x Common Equity

4Q FY16/17 vs 4Q FY15/16 
Total property income for the quarter ended 31 March 2017 (“4Q FY16/17”) increased by 21% to ₹2.1 billion due to: · income from CyberVale 3, which was acquired in March 2016;  · income from Victor at ITPB, which was completed in June 2016;  · income from BlueRidge 2, which was acquired in February 2017; and · positive rental reversions.

In SGD terms, total property income increased by 23% to S$44.2 million. The SGD depreciated by 2% against the INR over the same period last year.

Total property expenses for 4Q FY16/17 increased by 18% to ₹718 million (S$15.2 million) mainly due to addition of CyberVale 3, Victor and BlueRidge 2 property expenses. 

Net property income for 4Q FY16/17 increased by 23% to ₹1.4 billion due to the above factors. In SGD terms, net property income grew by 25% to S$29.0 million. 

Income available for distribution for 4Q FY16/17 grew by 8% to ₹749 million. In SGD terms, income available for distribution increased by 11% to S$15.9 million. 

Income to be distributed (DPU) increased by 7% to ₹0.72. In SGD terms, DPU increased by 10% to 1.54 S₵. 
 

Committed portfolio occupancy remained healthy at 98.5% as at 31 March 2017, excluding BlueRidge 2 which was acquired in February 2017. The weighted average lease term and weighed average lease expiry stood at 6.4 years and 4.1 years respectively. In FY16/17, the retention rate was 80%.

Gearing as at 31 March 2017 was 29% on a loan-to-value basis. Gearing is calculated by dividing effective borrowings6 by the value of Trust properties. At 45% gearing limit, the debt headroom was S$456.0 million.

Net Asset Value (“NAV”) per unit as at 31 March 2017 increased by 17% to S$0.81 as compared to 31 March 2016. Excluding deferred tax liabilities arising from fair value adjustments on properties, the adjusted NAV per unit was S$1.05.

3) Valuation Models
1) DDM  = V=D(1+g)/(Re-g)
i) Requires consistent Dividend policy and payout
ii) Gorgon constant Growth model
iii) Good to value mature companies with stable growth, profit, dividend growth
iv) Not good to value companies prone to macroeconomic and cyclical factors, large fluctuation in profits and dividend growth

DDM	8.03, Undervalued

http://www.miniwebtool.com/dividend-discount-model-calculator/

 

Discount rate:	3.6892
Dividend growth rate:	0.82
Dividends per Share ($):	0.2304

 

average Dividend	0.2304
Projected Dividend Yield based on recent 3 years (Philips)
0.82
2017 Dividend	0.185
2016 dividend	0.2775
2015 dividend	0.27
2014 dividend	0.2325
2013 dividend	0.187

2) FCFE
Net Profit After tax
- (CAPEX-dep exp)(1-debt ratio)
- (Change in working capital)(1-debt ratio)
= FCFE

i) Estimate of Equity Capital Usage, Determine whether Dividend and stock repurchases is paid via free cash flow or other financing methods. If FCFE > Dividend payment and cost to buy back shares, Company is using debt of existing capital for share buyback, essentially propping up share price.
ii) Good to value growth companies and start-ups with no dividends.
iii) Cannot value companies with drastic change in working capital.
iv) focus on net profit after tax, ignore cash flow issues such as investments in fixed assets, net borrowings and working capital.



3) Price Earnings Ratio

Historical P/E Ratio	7.91
P/E Ratio (TTM)	7.91

EPS TTM (SGD)

0.1498

i) Must have consistent earnings and growth, take average of 4 quarters
ii) Use to compare companies within same industry, Low P/E undervalued and great performance, High P/e investors expect high earnings growth
iii) Essential to do Dupont analysis, Can be manipulated by increasing leverage
iii) Not good to Value start-ups, loss making, unstable profits or growth focused company.
iv) Not good to value economies with high inflation, insufficient discounting factors time value of money


4) 

P/BV (latest interim)	1.46
BVPS (latest interim) (SGD)	0.8104

i) Low P / BV = undervalued or fundamental weakness, how much is company worth after liquidating everything
ii) Only use to compare with companies in same industry, with positive book value, short run negative earnings
iii) Not Good for Companies focusing on Branding and Goodwill (BAML), change in accounting methodology, Comparison across countries, Change in technology, change in asset prices (depreciation, amortisation, appreciation), inflation or present market of assets, improved products and services.
iv) Not good for technology companies (No fixed assets) and consistent loss making companies.


5) Price Sales ratio = 6.12(WSJ)
Sales per share - 0.18 (WSJ)
i) Less Prone to Accounting manipulations, Low P/S undervalued or not profitable
ii) Only compare between close competitors, when company no P/E ratio or no earnings.
iii) Good to value start-ups, growth companies, unprofitable companies at mature phase
iv) Not good as it ignores expenses and liabilities

Compare with Mkt P on fixed date, Over/Under Valued, Buy / sell

Intrinsic Value vs Market Value (
DDM - Dividend rate much higher than CAPM discount rate, unable to use
FCFE - High fluctuation in cash flow, not reliable

EPS TTM (SGD)

0.1498 -

BVPS (latest interim) (SGD)

0.8104

Sales Per Share - 0.18 (WSJ)

Relative valuation

Historical P/E Ratio	7.91
P/E Ratio (TTM)	7.91

P/BV (latest interim)

1.46

P/S - 6.12 (WSJ)
4) Buy / Sell Decision
1) Fundamental Target Price Range - Overvalued based on Intrinsic Value. Book value per share suggests it has a minimum cap of 0.8104 in the event that company is completely liquidated.

Relative Valuation (with respect to Singapore REIT) suggests it is severely undervalued. Although its PE is equivalent to historical PE (suggesting overvaluation), its PE, P/BV and P/S is much less compared to its Singapore Peers. From a P/E perspective, I will need 7.91 years to recoup my investment based on earnings, 6.12 to recoup based on sales, and 1.46 years based on book value.
2) Consider Support Resistance Lines
3) Consider Technical Analysis input by POEMS
4)Consider Analyst consensus opinion, Favouring stocks with minimal analyst coverage
5) Buffet Valuation Checklist

Business Tenets
1) Is business simple and understandable? (choose companies within your circle of competence, not the size of the circle but rather how defined are its parameters) - YES
2) Does Business have consistent operating history? (Operating performance, Cash Flow especially for SME) - YES
3) Does business have favourable Long term Prospects? (American Steel industries decline, avoid commodities, Porter's 5 forces - choose franchises that products are needed and desired, with no close substitutes, unregulated, quality, weak competitors.  branding / quality allowing company to retain market and pricing power to pass on costs to consumers) - Incredible

Management Tenets
4) Is management rational and track record of competence? (SMRT clowns and Singpost lack of due diligence )  - Yes
5) Does business have strong track record and consistent good leadership and management (management changes, adopting of technology, recognition of fundamental changes in economy) - Yes
6) Does management resist institutional imperative? (Manager Mismanagement and inertia to change) - Uncertain

• The organisation resists any change whatsoever in its current direction, and will seize upon any evidence that they are doing the right thing while fastidiously ignoring evidence to the contrary.
• Just as work expands to fill time, and waistlines expand to fill belts, projects and acquisitions will materialise to soak up all available capital.
• Any business plan of the CEO, however stupid it may be, will receive immediate support from a legion of lackeys who will produce copious data and detailed rate of return and strategic studies to support the boss's thesis.
• The behaviour of peer companies, irrespective of differences in circumstances, whether they are acquiring, expanding, setting dividend policy, downsizing, putting the troops through customer service training or setting executive compensation will be immediately and thoughtlessly copied.
• Poor capital management skills. Buffet buying over entire companies to decide financing policy )

Financial Tenets
7) What is the ROE? (Revenue, Expenses, Cash Flow, Labour relations, pricing flexibility, capital allocation needs). Look out for cash flow, indebtedness  and changes in interest rates - Sufficiently Healthy
8) What is the company's owner earnings? - ?????
9) What are the operating margins? - Great
10) Has company created at least 1 dollar of market value for every dollar retained? - Yes

Value Tenets
11) What is the value of the company (Intrinsic, Book, Market).  Buy a good company at an undervalued Price. Buy a very good company at a fair price as good companies are closely monitored

12) Can it be purchased as significant discount to its value? (undervalued, Very good prospects / projects) - Relative Valuation suggest it is severely undervalued. Intrinsic Valuation based on past results suggests it is slightly overvalued. Not much margin of safety

Reflection
1) I may have bought this company based on certain bias I had accumulated while working in the finance industry. Automation and outsourcing of Manuel process to cheap business partners is a norm rather than an exception. It brings significant cost savings to the organisation. As long as the risks are well managed, the direction moving forward is to move more of the non client facing, manuel tasks there.

2) This company is unique as it is a business trust with a REIT structure. Its operations is based in India but it is owned and listed in Singapore. Ascendas probably created this subsidiary to manage its risks and exposure to India, a country with great prospects and growth, but it does not want to assume its inherent risks (Political, Forex, Business Outlook) on its parent company balance sheet. In other words, it can tap on expertise and funding from its parent company. It also has other hidden book value by leveraging on the systems and brand name of Ascendas. 

3) Ascendas has first mover advantage in securing prime locations as well as special economic zones in India. It has business relationships with MNC organisations whom had already began their outsourcing processes. These entrenched first mover advantages are not easily displaced by second movers such as Blackrock.

4) There is also untapped book value in the business relationships that Ascendas had set up with the local authorities. One Key challenges of foreign business setting up shop in India is that their culture is immensely different. Indians are more laid back and less proactive and will not move unless specifically tasked. Blackrock will have mountains of hurdles to overcome and in the short term unable to threaten or capture Ascendas market share. Rather, by entering into the market, speculators might pay attention in India Investments and by invoke positive movements in my share price.

5) There is untapped hidden book value in the assets that Ascendas already own. Capacity and lease space is not fully utilised. There is also potential in diverging into e-commerce and logistics as stated in a macro report by ascendas. Will monitor for updates. 

6) Share Valuation models may differ from REITs. I had discovered a REIT valuation metrics from a relatively successful retail investor. Other metrics like occupancy rate and Book value should have more weight.
http://inthej.blogspot.sg/2017/05/thought-process-when-selecting-reits.html

In summary, my valuation is nowhere near perfect.Furthermore, I bought this share without sufficient margin of safety (from a historical values perspective and historical price) but rather based on relative valuation ratios. Relative ratios are even compared in Singapore Market rather than India Market, as there is no basis of comparison!

I find that valuation is a art rather than a science as there are always exceptional circumstances to consider and there is no one-size-fits-all model. Even Peter Lynch and Warren Buffet broke their own investing rules at times if they believe that the company has incredible qualitative prospects rather than historical quantitative ones. Investing is a juggle between risk and return, and you have to make decisions based on uncertainty and sometimes lack of full information. Knowing how to manage your emotions and stick to your picks over longer time periods is another good practise to adopt.