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I have now received a few emails from readers supporting my analysis. I very much thank everyone for that. I would also like to hear from people who disagree with my view and who can back that up in a logical, thoughtful manner.
Following from previous posts, there are several more issues I would like to address.
Stop Press: Capital Initiatives
But first, as I have been writing this post, MacarthurCook has made an announcement regarding two capital initiatives: first is a buy-back of up to 10% of the units for $3.5m. This equates to an average price of 6.9c per unit. Next is the confirmation that quarterly distributions will be re-commenced from the period ending 31 December 2013. We haven't been told what the new distributions will be. Previous guidance indicated the yield would be 6.1% however this was based on a higher NTA (13.6c at the time) which was pre capital raising and we don't have further news on future legal costs and the St Kilda Road property.
Other AIMS Property Funds
AIMS also manages the Singapore Exchange listed AIMS AMP Capital Industrial REIT. In Australia, AMP is a very blue-chip, household name. It currently trades at a fairly tight discount to book value of 0.89. It is much bigger than MPS: market cap A$714m.
I find it curious as to why MPS has attracted controversy while AMP Capital and AIMS jointly manage a big property fund seemingly with less issues. The fund even has an official credit rating. AMP Capital still jointly manages the fund and has a small stake in the actual fund.
Here is the share price graph:
AIMS took over MacarthurCook in late 2009 - roughly where the share price graph starts. The fund was recapitalised late 2009 (hence the initial share price drop). The share price dropped again in late 2011 was due to a 1 for 5 consolidation. Taking this into consideration the share price appreciation been strong: currently S$1.57 or S$7.85 pre the 1 for 5 consolidation.
MacarthurCook also manages a number of other unlisted funds. I have not done detailed analysis on these funds. Nor have I done much work on other AIMS activities in securitisation, property and so forth. More analysis could be done on AIMS. The work I done has not revealed overtly untoward action. Am I missing something?
Liquidity
One of the key arguments against winding up MPS is illiquidity. The proposed wind-up will be completed over a three year period. Further, MacarthurCook argues the fund should not be wound-up, in part due to an improving property market. If their theory turns out to be correct, then liquidity should increase, negating the illiquidity argument. Therefore current illiquidity is irrelevant as a reason not to wind-up the fund. Liquidity ebbs and flows. It's a matter of being patient.
I have profited and witnessed wind-ups that have produced high returns and low volatility outcomes for shareholders, so I personally know it can take time, which is in many cases is driven by liquidity. I have discussed several of these situations elsewhere in this blog.
MacarthurCook note the agitating shareholders have a) not provided details as to how One' will achieve best price and b) have not provided One's experience.
These are very reasonable concerns. Yet I can't see how it is reasonable for the Directors to unanimously recommend reject the proposal on this basis.
Regardless, I wanted to know the answers to these questions myself. So I spoke to One'. One' confirms the strategy would be an "orderly realisation of the assets" and specifically not a "distressed seller". The maturity profile and the composition of listed/unlisted assets were discussed - and this information is freely available from previous MPS announcements. Regarding experience, One' informed me they have wound-up 15 funds and there others in the pipeline. This includes the EBB Income Fund and Alleasing Trust. I am familiar with both of these situations. This all makes sense to me.
For my money, I can't see liquidity and appointing One' as a reason not to wind-up the fund. The capital initiatives announcement is a meatier rebuttal, yet I would like to see an estimation of future distributions provided. Without further evidence as to why shareholders should keep current management in place, I will vote for a wind-up. But it's clearly now game-on and I'm happy for shareholders about that.
Kristian
BAO, formerly known as the Brookfield Australian Opportunities Fund, provides a useful template for what could be done to maximise value for MPS unitholders.
ReplyDeleteLike MPS, BAO’s assets mostly comprise a portfolio of unitholdings in various unlisted property trusts. Several of the funds in the MPS portfolio are also in the BAO portfolio.
In 2012, BAO announced that it would be delisting from ASX, running off its assets and distributing the proceeds to BAO unitholders.
Fortunately, most of BAO’s investments are in property trusts that themselves have targeted wind-up dates over the next few years – i.e. those property trusts plan to sell their property assets and distribute the proceeds to their unitholders, including BAO. When BAO receives that money, it has stated that it will distribute the proceeds to BAO unitholders.
A few of BAO’s trusts have no wind-up date. BAO has said that it intends to try to sell its units in those trusts. If it cannot sell them at an acceptable price, those units will eventually be distributed to BAO unitholders to enable BAO to be wound up.
Prior to its delisting, BAO had stated net tangible asset value of 13.4c per unit. It paid a 1.5c distribution immediately after delisting, followed by further 1.3c in the 2012/13 year, and 2.17c in August 2013.
BAO’s managers have kept unitholders reasonably well informed of their progress and appear to be taking a rational approach to selling assets, avoiding fire sales. BAO has estimated that most of the assets will be sold and cash distributed to BAO unitholders within 4-5 years of delisting. This estimate is, of course, inherently uncertain. Based on their progress so far, I think 4-5 years is looking achievable.
I believe that a similar outcome could be achieved by the proposed new managers of MPS. I believe that continuation of the present strategy by current MPS management will lead to the MPS unit price continuing to trade at a substantial discount to NTA per unit. Accordingly, we intend to vote for change at MPS, and encourage other unitholders to also vote for change.
You can read about BAO Trust at
http://www.au.brookfield.com/investment-platform/unlisted-securities/bao-trust
Fred Woollard
Disclosure: We are long both BAO and MPS
www.samuelterry.com.au
Fred,
ReplyDeleteThanks very much for the feedback.
hi Kristian
ReplyDeletenice to read your cigar butts posts
I am a mps unitholder over at SGX
I watch the vote on conference 3 and 1/2 hours ago
What does the vote meant for mps unit price going forward?
So, the 17 odd million is non recourse?? since this zhaofeng is empty vessel and PREIT is now let off
would u have bought PREIT to hedge in light of the uncertainty on the appeal?
pls continue to post interesting cigar butts
Have a nice day.
vincent
Hi Vincent,
DeleteI too was at the meeting yesterday.
Well, as you know the vote was unsuccessful. I suspect another challenge may occur, however for the time being MacarthurCook remain as the investment manager.
So it is now in MacarthurCook's court to execute the strategy they have previously announced. First, I expect they will proceed with the buy-back. Given the price dropped ~1c a few days ago, this is actually good news for shareholders as it means management can buy-back stock more cheaply and therefore boost future EPS. Next, as management have indicated, distributions will re-commence at the end of the year. In the newspaper article released by MacarthurCook, it was indicated that MPS should be earning between $2.5 - $3m. This translates to an EPS of 0.0049 to 0.0059 PRE buy-back. Most of the earnings should be paid out as distributions, so potentially the indicative yield should be between 7%-8% p.a. based on a share price of 7c. Earnings of $2.5m to $3m looks very light compared to the asset base (it translates to an earnings yield of around 4.3% to 5.1%. I would like to see more information as to why the projected earnings are so low.
I have previously noted I expected nothing from the legal case. This was just taking a conservative view: I had no idea as to the legal merits. Costs have been awarded against MPS, so we need to know how much these costs are. However, I think an appeal may be lodged, so this drama could go for sometime yet. As usual, the lawyers are the winners. I have not yet fully understood the implications of the legal case. I am reading through that at the moment.
I wish I had bought PXT!
And yes, I am always on the lookout for money making ideas and will let you know when I find them.
Kristian