09 July 2012

Bets on Orchard Parade

One of the recent stocks under the spot light is Orchard Parade, after they announced a proposed launch of Hospitality Trust, which they will inject numbers of properties under its name to this newly set up entity. The rationale given by the management was to estabilish hospitality management business as well as venture into healthcare sector which provides stable income stream as well as unlock YHS shares that the co. hold for 49.5% through its subsidiary.

I have just run through some research reports from various research houses and they would imply some 20%-30% discount to its NAV post transaction ($3.18) which is in the price range of $2.22 to $2.39.

If we look at the chart on the left, we notice that there was a surge of price to more than $1.80 from around $1.60 after the news was released on 13 June 2012. So how would you analyze and determine the fair value of this counter?

Some points from the media release by Orchard Parade are listed down here:
  • to inject its hospitality assets (Orchard
    Parade Hotel, Albert Court Village Hotel and Central Square Village Residences)  into a proposed Far East H-Trust for a cost of minimum S$720M In return, it will act as a operating lessee and own 33.0% of the shares in each of the REIT manager and trustee manager. 
  • to enter into an asset swap with parent Far East Organization to acquire its hospitality management business and selected healthcare properties (45 units of medical suites in Novena Medical Center (NMC), 48 units of medical suites in Novena Specialist Center (NSC)). As purchase consideration for these assets, OPHL will be divesting 35.0% stake in YHS to FEO at a 40.6% premium to its last traded price, with the balance to be settled in cash.  
  • Proposed special dividend and dividend in specie to shareholders, subject to shareholders’ approval for the restructuring and successful IPO of Far East H-Trust. OPHL proposes a special one-tier tax-exempt dividend of S$0.12 per share and a dividend in specie of the Company’s remaining 14.5% stake in YHS, which amounts to approximately 0.229 YHS shares per OPHL Share (i.e. 229 YHS shares per 1,000 OPHL shares) as at 31 May 20124.
  • Name change to Far East Orchard Limited to better reflect new positioning
  • The NAV per share post transaction but before distribution of dividend will be S$3.18
Summary of its hospitality assets lease:
  • Orchard Parade Hotel - 50 years leasehold will be transferred to Far East H-REIT starting from listing date. OPHL will then lease back on 20 years period and with another 20 years renewal options.
  • Albert Court Village Hotel - 75-year leasehold interest transferred to Far East H-REIT commencing from listing date. OPHL will then lease back on 20 years perio and with another 20 years renewal options.
  • Central Square Village Residences - 80-year leasehold interest in CSVR to Far East Residences commencing from the Listing Date
Detail of the transaction:
  • S$1M in connection with REIT transaction
 Use of Proceeds from sale of Hospitality assets ($702M):
  • $356M to discharge existing circumbrances over the Hospitality Assets
  • $58M as part of consideration of the Asset Swap Acquisition 
  • $9M as stamp duty chargeable on Asset Swap Acquisition
  • $44M for special dividend payment
  • $2M for fees incurred in connection with the Transactions
  • $233M used as working capital and to fund future business needs in property development and hospitality and healthcare sector
In my own calculation, the company currently has a total liability of $573M (as stated annual report end FY2011), the total asset after minus total liability should be {($702M [hospitality asset] + $362M [Asset Swap in between healthcare units and YHS shares] +  $149M [15% YHS Share @ $1.80] + $1,132M Total Asset minus Investment Properties and Investment in Associate Companies } - total liability ($573M) = $1,772M

Below are some of the figures extracted from company report on proposed REIT and related transaction.
Figure 1: Breakdown of the S$702M sales of hospitality assets to FEH-Trust. Further details on the formula for the determination of the sale consideration will be set out in the Circular. Source from Company.

Figure 2: NAV of Hospitality Assets at Annual Report - 2011 and relative figures to total NAV. Source from Company.

Figure 3: Net profit and NMC business value relative to OPHL. Source: Company.

NAV per share after the post-transaction, special dividend and dividend in Specie

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