Dealing with losers, First Reit and Silverlake

First REIT

I used to owned FR and during October when it plunge to 50 cents, I actually bought more of it. I calculate the worst scenario of 4 maturing 2021 hospitals' fees being halved and felt 50 Cents will be a steal. My Average price is about 72 cents. 

When Lippo announce unilaterally that they are doing restructing of all the hospitals, and price plunging, I do not have the luxury of time to re-calculate everything although I do remember DPU could well be Halved if all hospitals are reviewed and using a 10% yield as an estimate of fair value, I thought it can go to 40 cents, so I simply sold off all my holdings then for a small profit. 

After the Restructing exercise is announced, I bought back at 44 cents, believing it offer good "value". Given I intent to do it in 3 tranches and 44 cents is my first shot, I am not overly concerned with the daily price movements, there and then.

The bomb dropped when they announced the rights issue. Rights issue is not a surprise, anyone investing in reits should be ready for it. What is "bad" about this Rights issue is that it is done with a hefty discount and will be used to paydown loans and not for expansion. 

Yet, for all the negative surprises, what will I do?

Keep calm and subscribe for rights, including excesses. 

Why? 

I ask myself 3 questions. 

First, is First reit at risk of permanent loss? Well, they may if they default, so I am not buying more from the market, but will subscribe to the rights. Also, since the major shareholders will take up excessess not taken up by minority, I know the probability I will be hanging dry will be low. 

Second, will the operating matrix keep going down. To answer this question, I believe the healthcare (private) sector in Indonesia is still primed for growth. They have the right demography, and public healthcare is hardly a competitor, reasons being very obvious. 

Revenue and GP are improving. The one-off loss is due to a non-cash item

"Through the assets review, it made a one-off non-cash adjustment totaling Rp 426 billion that eroded its profit. The reviews resulted in an adjustment in the firm’s accounts receivable balance, cancellation of projects and improved policies for the firm's registration of fixed assets.

This article was published in thejakartapost.com with the title "Siloam Hospitals books loss in 2019". Click to read: https://www.thejakartapost.com/news/2020/06/02/siloam-hospitals-books-loss-in-2019.html."


In fact, not too long ago, FR is one of the most loved counter. 

Third, at 20 cents, is it value for money? If Rupiah do not depreciated by more than 5% against SGD annually, and you believe Soliam hospitals operating moat. At 20 cents, Yield is 13%. I Do not trust proforma numbers totally. If you missed it by 30%, 9% yield is not too shabby. 

So, I keep calm and carry on. I might not be able to do this, if I have already expended my 2 Average down attempts rule. But since, I have only fire one shot, and a small one, I think it is still tolerant in my whole portfolio scheme of things to continue.

Silverlake Axis

I have already reduced my stake of SAL sometimes back, booking a loss. It is the only company that is close to 10% of my portfolio, so I reduced it to less than 5% now. 

The loss is not crippling if taken together with the dividends I received, and also a short term trading gain when it went from 40 cents to 55 cents. (I sold partially then)

While the loss is insignificant in the overall scheme of things. What is frustrating is the Thesis did not hold.

1) Growth only happens in 2019, given 2020 is a Covid year, I could understand that all companies will be affected. However,

2) They further reduced their dividends payout ration by much more than the loss of profits. This is self-inflicted wound

3) The accuisitions of Goh companies are either bad timings, or really a bad deal. Since it makes no difference to both top and bottom lines. Well, at least there is no worry of top up of payments. FAT HOPES!

4) FInTech are all the rage now. Yet as a Saas company, it is not winning any major contacts. I wonder if the new digital banks will approach SAL?

Given that I have already reduced it weigtage to a rather comfortable level, I will continue to monitor it. Given its proftability, I hardly believe I have a permanent loss risk, unless it is a outright fraud. Yet, i believe the risk is low, given the high profile customers.