I got a gentle poke from Kyith, and decided to write a post to crystallize my thoughts.
So here go:
1) Expect 7 cents dividends to be maintained and sustained
Simple and only reason.
Why I expect CMPH to continue paying:
- Enlarged shares base would be about 1.8 billion shares
- They need to pay about 743 mio HKD if they want to keep this dividend payout. (1SGD : 5.9 HKD)
- 9 Months FCF is already is already in excess of 1 billion
- Full contribution of Yanping and part of Guixing and GuiYang would be captured in this quarter
- Negative goodwill of the 3 acquisitions will provide good headline numbers and perhaps fool Mr Market? LOL
- Operating numbers wise, Yanping managed to edge out a small profits. It is loss-making when the acquisition is announced. Jiurui revenue while falling, share the same story. It means one thing to me only, execution track records.
- Yongtaiwen, its biggest contributor, is still reporting strong operating numbers. Although the rest of the JVs and Beilun are all weakening.
- Since the 3 acquisitions are largely financed by equity and not loans, there is no risk of balloon interest cost
What are the risks:
1) China economic slowdown affecting revenues and cause all expressways to go down further.
That could happen. When it happens, I will suck thumb.
2) The dilution effect offset the benefits of contribution
If you look at the 3 acquisitions as one, it is a deal that really is nothing to shout about. If you look at the Net profits and the amount paid, it is very obvious the 3 deals is one package. You will be scratching your head why GuiXing is more expensive than GuiYang (beside the fact that they have 5 more concession years)
So taken together, the NP yield would be about 5%. and 15% based on acquisition costs and 2014 Net profits respectively, while the dilution is 33%.
However, I believed I should be more concerned about cash flow, which should be higher than 5%, since they pay dividends through cash flow.
3) The concession years are short:
Road toll concessions are 29/30 years long. Yongtaiwen Have only about 14 years left. If you are those who shun industrial reits because you think 30-60 years of lease is too short, then CM pacific is....
4) Regulation risk
Lower tolls to be mandated or more toll-free periods