Why Accordia Golf Trust (AGT) can't be trusted.

Rosesyrup Research

Call: Short Upon Opening                     Target price = $0.623

Why Accordia Golf Trust (AGT) can't be trusted.

1.    Japanese market for GOLF COURSE has been shrinking drastically since 1991. Further projected to suffer for the next 5 years.

2.    Although there are some increasing interest for golf in the niche MARKETS (Women, handicapped etc), there is still not much hope for a recovery. Reason being these are niche market (small in size) and the memory of 1991 golf bubble is still fresh.

3.     Accordia 2014 profit halved as compared to profit from 4 YEARS ago.

4.    Accordia owns 135 GOLF COURSES of which 89 courses will be sold to AGT.

·         If golf courses business is expected to benefit from aging population, as claimed in the prospectus, why Accordia chose to sell 2/3 of its business?

·         THE PRICE paid for this 2/3 of  Accordia's business is only SGD 782 Mil or 46% of Accordia's market capitalization. It is either this 89 golf courses are mainly made up of worthless lands (ie. inconvenient location) or they are sold at a large discount due to unfavorable prospect.

5.    Accordia was once a failing company and owned by Goldman sach, who dumped it in 2011. Goldman sach can't see any MORE upside to this business.

6.    Lands in JAPAN, which are currently occupied mainly by agricultures, will worth much lesser after economic reform and opening up to world trade. Thus capital injected into AGT is expected to depreciate rather than appreciate.

7.    AGT profit and cashflows are in JPY while the REIT payouts are in SGD, this will lead to a FOREIGN EXCHANGE risk. For your information (refer to the following chart), JPY has depreciated by about 25% (or 5% per year) against SGD for the past 5 years. This mean that the actual yield from AGT won't be the promised 6.8% -7%. In fact the real yield will decrease by 5% each year. We can assume this trend to continue as PM Abe tries to stimulate Japan ailing economy and boost export.

8.    The reason, claimed by Accordia, for selling and leasing back its 89 golf courses is to be asset light. However Japan is currently in a LOW INTEREST RATE environment which should encourage businesses to own more rather than less asset. Why would Accordia go against the trend?

·         Thefinance.sg observed that since 2013, Accordia has increased its dividend payout by 4 times to 55 yen per share. This is even more than its net income per share of 45 yen per share. (REFER TO http://thefinance.sg/2014/06/30/accordia-golf-trust-6-8-to-7-distribution-yield/)

·         My own deduction from the information above=>

o   The deal was meant to help Accordia's shareholder to CASH out and exit the business by obtaining cash upfront which is then paid to Accordia's shareholders as fat dividends. Obviously, subscribers of AGT become the scapegoats.

9.    AGT is totally undiversified: Golf courses are the only asset of AGT and all the golf courses are located in Japan. Meanwhile AGT's main customer, Accordia, is highly LEVERAGED at 65% of total asset. In short AGT is a very risky asset which defy the stable and conservative nature of most REITs we see in Singapore.

10. Despite exposing its investor to significantly higher risk, unfortunately AGT does not offer higher return.  For example, Keppel Reit OFFERS a slightly lower 6.6% yield but

a.    Its properties are well diversified in both Singapore and Melbourne

b.    Its office towers are rented to a diverse customer base

c.    Much lower leverage: Debt stands at only 42% of total asset.

Valuation

Model: DCF              r = 4.817%                 g = -5%          CF (perpetuity): 6.8cents

Optimistic Price: $ 0.693                                       Pessimistic TARGET Price: $0.554***

Call: Short Upon Opening                                   Target price = $0.623

Return from subscribing to IPO ( @ $0.97) = -28.6%  to - 42.8%

***$0.693 is considered an optimistic valuation. One likely factor which might threaten this TP is the pending hike in Singapore's interest rate which would cause AGT's risk/reward ratio to be much less attractive- since AGT's value mainly comes from its yield as it has negative growth. For this reason, I personally think it is prudent to DISCOUNT the TP by another 20% and the lower end of the value would be $0.554

Conclusion

All in all, AGT is a REIT involved in a troubled industry and promised yields that are unlikely to materialise.  Furthermore, it exposed subscribers to huge amount of risk but fails to offer a fair return. What it does offer is an exposure to a new and interesting class of asset known as golf course. Instead of losing their mind to the excited generated from owning a new class of asset, savvy INVESTORS should pay more attention to how AGT add value to their portfolio.

As an ending joke: If AGT were to  successfully float after IPO, I might consider LISTING dustbins and toilet bowls as REIT next.