Event-driven trading idea
Since our original Trading Note from over a month ago (23 January), units of Sabana Shari’ah Compliant REIT (SSREIT) have appreciated by ~15%, and investors who had bought into it would have also received the 4Q FY16 distribution of 0.88 cent/unit – bringing total return to ~17%. We believe that the odds of a re-rating for the REIT have just improved with the new substantial Unitholder coming on board.
Investment Action: Event-driven Trading Buy
Our “Trading Buy” call is specifically with a view to trade on the event risk arising from the impending general meeting, restructuring of the REIT and resultant re-rating of the REIT. It is not based on any merits/demerits of the proposed acquisitions or fundamental outlook for the REIT. Our target price of $0.54 is based on 0.90x P/NAV multiple. Key risk: A restructuring does not materialise, thus rendering our thesis void.
What is the news?
SSREIT announced through a filing made on 3 March after market hours that e-Shang Infinity Cayman Limited, a 95.2% owned indirect-subsidiary of e-Shang Redwood Limited (ESR), has crossed the threshold as a new substantial Unitholder with a 5.01% stake in SSREIT.
To give some background, ESR recently bought an 80% stake in the manager of Cambridge Industrial Trust (CIT). ESR also holds a 12.01% stake in CIT.
What do we think of this?
We do not believe that ESR, being a real estate investment firm, intends to be a passive minority investor of SSREIT. Instead, we believe that ESR has the intention of taking an active role in the REIT. We can think of a few possible scenarios: (1) ESR voting to remove the incumbent manager with the intention of taking over the helm, (2) ESR taking a stake in the incumbent manager and forming a strategic alliance, (3) an outright takeover of SSREIT or (4) ESR taking over as the Sponsor of the REIT – all of which should positively re-rate SSREIT.
Incidentally, Mr. Tong Jinquan who has a 6.19% interest in SSREIT also holds an 18.5% interest in CIT. With ESR joining into the fray, the combined interest of 11.2% by ESR and Mr. Tong is now just ~4.7% shy of Vibrant Group’s ~12% stake together with the manager’s 3.92% interest. What this means is that the fragmented minority Unitholders do appear to have a shot at removing the incumbent manager and trigger a re-rating of the REIT. Investors should monitor subsequent announcements for updates on ERS’s interest in SSREIT.
In our original note, our base case scenario was pegged to our forward NAV/unit estimate of $0.56. We continue to peg our target price to 0.90x P/NAV. Following the Rights Issue and the announcement of FY16 results, we now estimate NAV/unit to be $0.60, giving a target price of $0.54 and an implied ~26% upside to go. We believe that our expectation for 0.90x P/NAV is reasonable, given that the ESR-managed CIT is currently trading at 0.91x of its $0.634 NAV/unit.
Apart from our base case scenario, our bear case scenario is 0.8x P/NAV, or $0.48; and bull case scenario is 1.0x P/NAV, or $0.60.
We estimate that gearing has been significantly lowered to ~36%, following the repayment of $60.0 million of short-term debt from the Rights Issue proceeds.