Perennial Retail China Trust - MANAGEMENT REPLY: What if St James Holdings' takeover offer fails?

(Updates an earlier story filed April 9 with replies from management, revised financial ratios and adjusted significant shareholder holdings).

11/4/2014 – Perennial China Retail Trust (PCRT) has not reached S$0.70, despite CEO Pua Seck Guan and others offering to buy the units at the IPO price, almost three years after the Trust went public.

Pua, who was once the CEO of CapitaMall Trust, launched the bid March 14 together with OSIM's Ron Sim, and palm oil company Wilmar International and its CEO Kuok Khoon Hong.

Through another listed company, St James Holdings Limited, they are offering new units in St James Holdings, valuing PRCT at S$0.70 per unit.

St James Holdings would then be renamed Perennial Real Estate Holdings Limited (PREHL).

The offer comes at a critical time for PCRT.

Earn-out arrangements, that have supported its dividend, will dry up by the end of this year.

Earn-out money is nothing but other name of income support comes that is received from Shanghai Summit (Group) under a deed.

Shanghai Summit is a partner and co-owner of the three assets in Shenyang and Perennial Dongzhan Mall.

The logic of deed is to provide dividend to shareholders as the assets were not complete at the time of IPO.

Its new properties are not yet operational to the extent where it will transition smoothly once earn-out support ends.

There is a glut of supply in its key market of Shenyang, where its only completed mall operates, with a 54% increase in Gross Lettable Area becoming available in the market at a time when almost 2-in-5 leases (by Net Lettable Area) are falling due.

Properties worth S$3 bln are in the acquisition pipeline, but it cannot afford them unless it takes on much more debt.

And with the spectre of higher interest rates, and a falling loan coverage ratio, S$235 mln worth of debt is due soon.

PCRT was touted as Singapore’s first pure play China retail development trust.

The IPO was marketed based on an attractive pipeline of at least S$3 bln of commercial developments.

But only one property was operational at the time of listing.

PRCT units never regained their IPO price of S$0.70, since listing in June 2011.

Given below is the snapshot of Trust's portfolio.

Assets were valued based on "as if complete and fully leased basis".

Upon completion, the four main shareholders will collectively own more than 70% of the PREHL.

The chart below shows what the new organization will look like.

It is slide number 5 pulled from the presentation given by St James Holdings to investors.

After giving an OUTPERFORM rating at the time of IPO with a target price of S$0.69, CIMB Research was most recently NEUTRAL on the stock with a target price of S$0.57.

The analyst wanted to see how the Trust's assets perform after the earn-out period expires by end 2014.

On the balance sheet front, it saw risk from increased borrowing to make progressive payments and a relatively low debt service ratio of 1.94.

However, PCRT was downgraded to REDUCE by CIMB Research due to potential overhang post the announcement of the Reverse Takeover.

The target price now is S$0.50.

It says investors can buy PCRT at 0.7x price-to-book (P/B) value to be exchanged for PREHL shares at 0.8x book value.

But it believes PREHL’s shares may de-rate to an average 0.74x P/BV as Singapore developers are trading at this level.

CapitaMalls Asia is trading at 0.87x P/BV, but 75% of its assets are operational, while 77% of PREHL’s assets are under development.

As PCRT has never traded above S$0.70, the analyst believes this would have been a fair deal if it was a cash offer.

The expected slowdown in China will influence the spending patterns of consumer and therefore affect the near-term performance of its malls, says the Trust.

However, China's plans announced in the Third Plenum could make the economy more consumer-driven in the long run.

While these reforms continue take shape, PCRT will stabilise its assets in Shenyang and Foshan.

The company just announced earnings for FY13:

Earnings: -39.4% to S$51.3 mln
Distributable income: +97% to S$43.6 mln
Distribution per unit (DPU): 3.80 cents vs 3.86 cents
Distribution yield: 7.17% vs 7.28%
Cash flow from operations: (S$4.6 mln) vs S$16.3 mln

As PCRT holds only a 50% stake in the Shenyang assets, revenues from these assets are recognised under "Share of (loss)/profit of jointly controlled entity".

Gross revenue comprised rental revenue generated by Perennial Jihua Mall, 100% owned by PCRT, which commenced operations in Q3.

Profit was driven by an earn-out amount of S$43.6 mln and net fair value gain of S$32.5 mln.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. What if St James Holdings' takeover offer fails?

Given all the headwinds, from immature malls to a glut in supply, to debt and interest rates – can shareholders afford not to sell into the offer?

Management Reply: Trustee-Manager: As there is an ongoing pre-conditional voluntary general offer for the Trust, Perennial Real Estate Holdings Pte. Ltd. and the Trustee-Manager are subject to restrictions under the Singapore Code on Takeovers and Mergers in relation to the disclosure of information. While we are unable to address some of your queries in this forum, do note that further information in relation to the transactions will be provided in the circular to be issued by St James in due course. We thank you for your understanding and patience.

Question

2. How was the Trust, the Trustee Manager or the Sponsor related to St. James Holdings prior to RTO?

It makes us wonder how St. James Holdings came up with a RTO, and not any other company, as it has been incurring losses since FY07.

Listed on the SGX, St. James is in the business of hospitality and night entertainment business.

The press release from PCRT says St. James will be "transformed into a sizeable integrated real estate owner, developer and manager".

Management Reply: Trustee-Manager: Neither the Trust, the Trustee-Manager or the Sponsor (Perennial Real Estate Holdings Pte. Ltd.) holds any shares in St James.

Question

3. Why is the RTO actually required?

The press release states the rationale of the offer price at a premium is to provide the unitholders to participate in diversified real estate platform at a premium.

Three years back the Trust came up with the IPO with an intention to focus only on China.

Why not just change direction, rather than go through this RTO?

Management Reply: Perennial Real Estate Holdings Pte. Ltd.: As there is an ongoing pre-conditional voluntary general offer for the Trust, Perennial Real Estate Holdings Pte. Ltd. and the Trustee-Manager are subject to restrictions under the Singapore Code on Takeovers and Mergers in relation to the disclosure of information. While we are unable to address some of your queries in this forum, do note that further information in relation to the transactions will be provided in the circular to be issued by St James Holdings Ltd in due course. We thank you for your understanding and patience.

(Total number of questions in the full story: 19)

We have sent these questions to the company to invite them for an on-camera interview, and/or seek their written response.

So far, we have had some contact with the company but have not received a reply to our questions (which is why you are seeing this message).

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