## Sunday, August 30, 2020

### The Accounting Equation And How It Helps In Your Fundamental Analysis

Those who had studied accounting or have had an accounting subject back in school would have encountered the accounting equation, which is:

Assets = Liabilities + (Owners’ / Shareholders’) Equity

Or:

A = L + E

For the uninitiated, the accounting equation shows that a company’s assets are made up of debt (liabilities) and shares issued to shareholders (equity). The equation forms the basis of the double entry accounting system which is universally used by accountants worldwide.

The practical application of this equation is shown in a balance sheet, which is one of the three financial statements reported by companies. Here is an example of the A = L + E in real life:

Fig.1: Balance Sheet (excerpted from Singtel 2019 Annual Report, p139)

From Figure 1, you can see that 48,914.1 (A) is equal to 19,105.1 (L) plus 29,807.7 (E).

So how does it help in my fundamental analysis (FA)?

As you can see from the balance sheet, there are many details and things that made up the assets, liabilities and equity parts. For this post I will not go into their intricacies, but instead I will provide an overview with a few pointers and nutshell explanations, which could be useful for people who do not know where and how to start their FA.

Ratios

Two ratios can be derived with this accounting equation alone, and that is debt-to-asset and debt-to-equity ratios, which are L / A and L / E respectively. A high number in both ratios indicates that the liabilities portion is large, especially so when the L / A ratio is closer to 1. For L / E, it is common for some companies to have liabilities larger than the equity portion, depending on their sector and industry.

On a related note, you can roughly tell the constituents of the assets of the company by just looking at the liabilities and equity numbers. Still, a thorough FA is required to look deeper into the nature of these components so as to form a better opinion of the whole scheme of things.

Calculating Net Asset Value

From the accounting equation, you can also see how the net asset value (NAV) of a company share can be calculated. By knowing the number of shares outstanding (which can be found in the company’s annual report), NAV is simply:

A = L + E

E = A – L

NAV = (A – L) / number of shares outstanding

Bear in mind NAV alone may not give a full picture of the true value of a company share, and other valuation methods may have to be taken into account, like price-to-earnings, discounted cash flow, etc.

Rights, Bonds, Bank Loans, Perpetual Bonds And Preferential Shares

A company has three main ways of raising additional capital; rights, bonds and bank loans. In the accounting equation, rights are considered equity, while bonds and bank loans form the liabilities part. The addition of rights meant that equity will increase, which translates to having more shares being issued and thus creating a dilution effect, i.e. more “slices” of the company pie are being created. For bonds and bank loans, their additions will increase the liabilities part, and along with it a rise in the debt-to-asset and debt-to-equity ratios.

The tricky part is there are some types of securities that may be considered either as liabilities or equity, depending on how one views them, like for instance perpetual bonds and preferential shares. While conducting FA, there is no hard and fast rule on how to treat such securities, though some prudent investors may treat them as liabilities in their calculations, while the more optimistic ones may take them as equity.

## Sunday, August 16, 2020

### The Work From Home (R)Evolution

In the last four months, we are seeing the rise of the telecommute, now better known as work from home (WFH) phenomenon. This is a result of simultaneously keeping a semblance of economic activity and staying safe from COVID-19. The WFH concept is not new and it has been popularized for the past two decades, particularly when the internet and its related technologies took off. However, the proportion of WFH in a general populace is dependent on the management or even societal culture and attitudes toward it, e.g. typically Asian management tend to be more reluctant to allow WFH than their Western counterparts. Other factors, such as data security and productivity, are also oft-highlighted obstacles to WFH.

Recently there were surveys conducted and opinions reported that WFH was slowly gaining traction and it could see a shift towards it. Tech firms such as Twitter had already declared their workforce to be able to WFH completely. Granted that not all jobs can be fully done on WFH only, but it could probably be the next new norm or paradigm shift that may affect the way we work, or work-style as I call it.

There is a general consensus that if WFH is getting prevalent, the concept of the office would gradually become moot and there is an increased utilization of home spaces doubling up for work purposes, like probably having a home office corner. In this case, the first concern in most investors’ minds is likely the slowly diminishing importance of office and commercial properties, resulting in their oversupply.

The impact of WFH goes far beyond offices and shift of home property use; there will be changes to the entire ecosystem that supports the traditional work-style. Suddenly the notion of waking up early to prepare oneself for work would be of less relevance. The human traffic that makes up the familiar peak hour squeeze on public transportation and roads would be reduced tremendously. The peripheral services (depending on where they are located) that support the old work-style such as the go-to coffee shop for a quick cuppa during teatime and the friendly stationery shop owner that sells you the much needed blue-ink pens may be affected. Human resource attitudes and practices may also change, and this will bring us to a whole new dimension. I could go on and on, and the material thought of may qualify as a standalone book.

Just imagine a simple shift of norms will create a butterfly effect all around, highlighting the symbiotic and fragile relationships in the whole scheme of things.

However, norms and things do change all of the time, mostly gradual while others are almost overnight. Viewing from the COVID-19 perspective, it did hasten some styles (life and work) and technologies that would perhaps be thought of as not implementable in the near future. The rise of teleconferencing (or Zooming or Skyping, depending on what one uses), increased volume of e-commerce and the accompanying delivery services of goods and foods, and the popularity of using virtual or pseudo-virtual concepts that mimic or replace physical ones like using the Mural app for online group brainstorming, to name a few.

Some elements of society do want to go back to the good old days when the whole COVID-19 thing is over, which in my view is that probably they are not ready to adapt or think the whole new norm could be just a fad and may die down. Thing is, we may be already heading to the new norm, just that it will be creeping in subtlely and sub-consciously. Humans are a contradicting species; sometimes we may be resistant to change and sometimes we are open to it, whether known or unknown, overtly or covertly. Adaptability and improvisation are key at such times.

If you are an active investor, you will need to consider and think deep on the abovementioned points. They may provide some clues and indications to work out on your next “guesstimate” in determining where the next growth (capital and dividend wise) areas would be. Viewing things from different facets are required if you want a glimpse of the next big thing to invest in.

So how will the WFH (r)evolution pans out?

We shall see.

## Saturday, August 15, 2020

### Kings Of The North And South

The two mentioned “kings” are actually two REITs, namely Frasers Centrepoint Trust (FCT), the “north”, and Mapletree Commercial Trust (MCT), the “south”. Why they were given these monikers was because of the location of their respective properties (directly owned, indirectly owned and/or potential) in the geographical regions of Singapore. If you take out their annual reports and read up on their assets, the geographical concentration was obvious.

In this post, we shall take a brief look on these two REITs.

FCT: The Northern King

Seasoned REIT investors would have known about FCT; a retail REIT that included Northpoint, Causeway Point, Changi City Point etc. as part of its portfolio. On top of these, there are also indirect and minority stakes in other malls such as Waterway Point, Century Square, White Sands Mall, etc. Its only international holdings are a 31.15% stake in Malaysia-listed retail Hektar REIT.

From Figure 1 (below), FCT’s malls are like everywhere, but the key area is in the north, where it held a near-captive share on the category of heartland malls in the estates of Woodlands, Yishun and Sembawang. Causeway Point and Northpoint themselves in FY2019 had a combined footfall of 83.8 million1, a very high number indeed.

Fig.1 – Locations of FCT-related malls2.

Besides being dominant in the north, most of FCT’s malls are situated just next to MRT stations and this is a huge benefit (PS: for more information on the analysis of retail REITs based on location, you can read up my post here). These factors had contributed to the premium of FCT, which most of the time was trading above its NAV.

FCT’s sponsor, Frasers Property Limited (FPL), is no stranger to the real estate business; it has multiple properties that spans across sectors like hospitality, office, logistics, etc. and in several countries like Australia, China, Singapore, etc. Retail wise in Singapore, Centrepoint and Northpoint City’s South Wing are under FPL and there may be a possibility of them being brought into the FCT family.

MCT: The Southern King

All of MCT’s six properties are situated in the southern part of Singapore; Vivocity, Mapletree Business City (MBC) I, MBC II, PSA Building, Mapletree Anson and Bank of America Merrill Lynch Harbourfront (MLHF) (see Figure 2 below). Unlike FCT which is mainly retail, MCT has a sizable office and business park component.

Fig.2 – MCT properties3.

The crown jewel of MCT is its retail asset Vivocity and it contributed to about 42% of the REIT’s net property income (\$158.7m/\$377.9m)in FY 19/20. MCT’s office and business park properties deserved a mention as well. Their top tenant, Google Asia Pacific Pte Ltd, is situated at MBC and contributes 10.1% of the gross rental income for MCT.

MCT’s sponsor, Mapletree, is a leading real estate development and management company, and they have a slew of properties that could be injected into MCT5.  The said properties include Harbourfront Centre, the neighbouring Harbourfront Towers One and Two, St James Power Station, etc., and they are literally next to the Vivocity and MLHF. Hence, if they are brought into MCT, their kingship for the south is undisputable, even more so with the development of the Greater Southern Waterfront to come.

The COVID-19 Impact

When mandatory measures to curb the spread of COVID-19 was declared in early April 2020, retail properties took a big hit with the suspension of non-essential businesses, effectively reducing the footfall to malls. Though after Phase 2, shopping centres are starting to see crowds coming back, but it may not reach its previous peaks since crowd controls are in place. Judging from my view of our local culture, malls (especially heartland ones) are still very much part of our lives and in my opinion, they are here to stay.

Office properties may be affected, too, in the future, as their relevance is being questioned with the increasing trend of telecommuting, or better known now as “work from home” (WFH). No doubt some businesses and sectors still require offices, but there may be a shift to a new norm with regards to work styles and locations. Only time can tell on how this aspect will develop.

Addressing The Elephant In The Room

Very much was written on these two REITs, but if you are observant enough, I may be missing the proverbial “elephant in the room”, and now I am going to address it.

Yes, that elephant would be the merger of CapitaLand Mall Trust and CapitaLand Commercial Trust. By their properties combined, they could be classified as the third king with the title “king of everywhere else in Singapore”. They also have malls right next to MRT stations and office spaces in the heart of the Central Business District. The upcoming combined CapitaLand REIT is also a good consideration, but maybe we will leave it for another post.

Disclaimer

The Bedokian is vested in FCT.

1 – Frasers Centrepoint Trust. Fact Sheet. 19 Nov 2019. https://www.frasersproperty.com/reits/fct/-/media/feature/project/frasers_fct/reports-and-presentations/fct_factsheet_19_nov_2019.pdf (accessed 14 Aug 2020)

2 – Frasers Centrepoint Trust. Financial Results Presentation for the Second Quarter ended 31 March 2020. 23 Apr 2020. https://fct.frasersproperty.com/newsroom/20200423_073633_J69U_U8ZS0QDNEFGPSGRK.3.pdf (accessed 14 Aug 2020)

3, 4 – MCT Annual Report 2019/2020. https://www.mapletreecommercialtrust.com/services/view_file.aspx?f={6DA58A79-7E05-4128-A7B0-9CCAEF92B959} (accessed 14 Aug 2020)

5 – Mapletree Commercial Trust Investor Presentation. 22 Jun 2020.  https://www.mapletreecommercialtrust.com/services/download_file.aspx?f={24EE051C-C206-4DFC-9153-A1BF12CD0E1C} (accessed 14 Aug 2020)