Review of OCBC FY2021 Results

Final dividend declared: $0.28 per share

 

Full year dividend: $0.53 per share

 

Dividend payout date: 20th May 2022

 

Dividend yield on my cost: ~6%

 

Overall an acceptable set of results from OCBC for FY21. We can't possibly say bad to 35% increase in net profit and resumption of full year dividend to pre-Covid level right?

 

 

However delving deeper into the numbers there are a few observations that I would like to highlight as follows.

 

Net Profit

 

Propped up by the non-interest income, contributions from associates and lower allowances catered for loans.

 

Net Interest Income

 

Fell slightly which is expected due to the fall in NIM. Looking from another angle, this segment should perform better next year due to the rising interest rates and coming off from a low base this year.

 

Non-interest Income

 

Traditional cash cow from Great Eastern Holdings saves the day again with a 63% YoY increase.

 

Associates

 

A big part of the jump in overall net profit comes from the associates which contributed a 35% increase in income YoY.

 

However not much is mentioned about the associates. I dug around and managed to find some information on who are these entities from last year's annual report.

 

Lower Allowances

 

There is a 57% drop in allowances catered for FY21 as compared to FY20.

 

However looking at the details, there is a 180% and 92% increase in allowances for impaired loans in Malaysia and Greater China respectively, suggesting sustained risks in these markets.

While the Malaysia market accounts for about 9.5% of the total loans to customers by geography, a greater concern lies with the Greater China market which accounts for 25.6% of the total loans by geography.

This is something to take note of.

 

Non-performing Loan Ratio

 

Remains at 1.5%

 

Non-performing Assets

 

Increased 8% YoY

 

Capital Adequacy Ratios

 

While the business is doing fine, I also want to know whether my money is safe in the bank.

 

OCBC Common Equity Tier 1 (CET1): 15.5% (vs regulatory minimum of 6.5%)

 

OCBC Tier 1: 16% (vs regulatory minimum of 8%)

 

OCBC Total Capital Adequacy Ratio (Total CAR): 17.6% (vs regulatory minimum of 10%)

Earnings Per Share

$1.07 (FY20: $0.80)

Return On Equity

9.6% (FY20: 7.6%)

Net Asset Value Per Share

$11.46 (FY20: $10.82)

 

Conclusion

 

With the expected improvement in the net interest income coupled with continual strong performance from the non-interest income segment, I believe OCBC should report a much better set of results in the next full year report.

 

Having said that, there lies certain areas of concern where there is room for improvement.

 

Among the different subsidiaries - GEH, OCBC Malaysia, OCBC NISP and OCBC Wing Hang; all posted 17% - 20% increase in net profit except for OCBC Wing Hang Hong Kong which suffered a 19% drop in net profit YoY.

This further proved the challenges faced by OCBC in the Greater China which is their third largest market by profit contribution.

 

Also, although the EPS and ROE has improved YoY, they are still lower than the figures of FY19 (pre-Covid).

 

Earlier in the post I mentioned that this is an acceptable set of full year results for OCBC. However breaking down into Q4, their result actually pales in comparison to DBS and UOB.

The market promptly sent the share price down this morning although it has somewhat recovered by noon.

 

OCBC has brought the full year dividend back to $0.53 per share - a level last seen before Covid. This represents slightly below 50% of the net profit after tax.

OCBC has always been prudent with the dividend payout ratio over the years. They are in fact, the most prudent among the three local banks. However if the new CEO can increase this payout ratio slightly to the levels offered by DBS and UOB, I'm pretty sure it will have a corresponding effect on the share price.

 

Last but not least, the leadership acumen of Ms Helen Wong will be important in steering OCBC forward especially with her background in Greater China. I will be looking forward to her first full year results as Group CEO next year.

Overall I am satisfied with the full year performance of FY21 and I am in no hurry to sell my current holdings. In fact I will add if the opportunities arise.

Review of CapitaLand China Trust FY2021 Results

CapitaLand China Trust (CLCT) is another counter of mine which has released their full year financial results last week. 

This is one counter whose result I am keen in following closer as I have high expectation for it in terms of growth due to the expanded mandate approved by unit holders last year.

I have ran through the results and made some observations and views as follows.

 

Summary

 

Overall great results with huge jump in incomes YoY which is expected with the expanded mandate.

 

Distribution announced is 1.80 cents per unit and will be paid out on 7th March 2022, Monday.

 

This is on top of the 2.70 cents per unit of advance distribution paid in November 2021.

Total DPU for FY2021 is 8.73 cents per unit.

Based on today's close price, yield is 7.28%.

 

The Good

 

Diversified asset class of the traditional retail malls and the new economy - business parks and logistics parks located in Tier 1 and 2 cities.

 

Clear plan laid out by the management with their 5-year acquisition growth roadmap which resonates pretty well with what I had in mind.

 

 

Record high revenue and NPI.

 

Huge jump in DI and DPU YoY (though base unit is also enlarged).

 

NAV increased to $1.54 from $1.48 YoY.

 

Interest coverage increased to 4.9 times from 3.9 times YoY.

 

With interest rates expected to rise this year, it is good to see 77% of borrowings on fixed rate.

  

Portfolio WALE by GRI of 2.2 years and 2.6 years by NLA.

This is similar to CLCT's WALE historically even when they were a pure retail play.

A short WALE can be a double edge sword but in this case, it is beneficial for CLCT as more than 80% of the logistics park leases have rental escalation of 3% - 5% built in.

 

The relatively short WALE also allows the Reit to be more nimble in handling the market dynamics of the retail segment.

All three asset classes reported higher occupancy.

 

96.3% occupancy for retail portfolio.

 

96.2% occupancy for business park portfolio with 7% positive rental reversion.

 

97.4% occupancy for logistics park portfolio with 2.7% positive rental reversion.

 

As mentioned, I particularly like that >80% of the logistics park leases have rental escalation of 3% - 5% built in. 

It is also a big plus point when the Reit manager's interest is aligned with the unit holders'.

 

The manager's management fee comprises of two components - base fee and performance fee.

 

The base fee is 0.25% per annum of the deposited properties value while the performance fee is 4% per annum of the NPI.

The manager may elect to receive the fees in cash or units or a combination of both.

 

For this FY, the manager has elected to receive $14.3 million (out of $21 million payable) in new units. In other words they share the same confidence in the prospects of the Reit as the other common unit holders.

 

Also, since the bulk of the management fees is tied to the NPI, it would do them and us good to grow the income year on year.

 

The Not So Good

 

Gearing increased from 31.8% to 37.7% YoY.

 

This is not surprising given the borrowings for the acquisitions from the past year.

 

 

Cost of debt of 2.62%. Could have been lower.

 

Negative rental reversion (-3.4%) for the retail portfolio points to the continual pressure faced in this segment.

 

This would be a major cause of concern in the past but is now somewhat mitigated by the diversification of the Reit into other asset classes which provided positive rental reversions.

This is the power of diversification - to reduce concentration risks.

Management has guided that the leasing environment for retail to continue to be competitive.

Other than that, the main risk I can see here is the political environment in China which is somewhat unpredictable and the danger is often not visible until it hits you.

Conclusion

CLCT is a Reit that has been growing organically (through AEIs) and inorganically (new acquisitions) aggressively over the past year.

 

This is the first full financial year after the mandate to diversify into other asset classes was approved by unit holders.

 

Subsequently, CLCT invested into 5 business parks and 4 logistics parks located in 12 cities in China.

 

Together with the 11 retail malls, it is not surprising that this enlarged portfolio with diversified asset classes achieved the highest gross revenue and NPI for CLCT since listing.

In fact anything less would be a damper isn't it?

Based on the closing share price of $1.20 today, CLCT is still trading at a 22% discount to its NAV.

 

With a more than 7% yield and a solid growth plan ahead, I would say this is a no brainer addition for serious income investors.

 

I last added to my holdings in August 2021 and depending on the share price, I am looking to add some in the coming days.

Review of Ascendas Reit FY2021 Results

It's earnings season again and several counters of interest have released their financial results over the past week.

 

While I have not had the opportunity to review all of them, I found some time to run through Ascendas Reit's FY2021 results which were released yesterday.

 

Ascendas Reit is my biggest holdings and I have added some more couple of weeks ago.

Below are the summary and some of my observations and views for sharing purpose.

 

 

Summary

 

For results comparison, I am more interested in YoY rather than QoQ as I find it more meaningful.

 

Overall it is a good set of results I must say.

 

Distribution announced is 7.598 cents per unit and will be paid out on 11th March 2022, Friday.

Total DPU for FY2021 is 15.258 cents per unit.

 

 

The Good

 

Revenue, NPI, DI and NAV all improved, largely driven by contributions from the newly acquired properties.

 

Overall portfolio occupancy improved to 93.2% and positive rental reversion of 4.5% achieved.

 

DPU also increased YoY.

Portfolio WALE by gross revenue of 3.8 years.

Cost of borrowing dropped to 2.2%.

About 79.4% of borrowings are on fixed rates. This is good for a rising interest rate environment.

 

Interest coverage increased to 5.7 times. Well covered.

Australian portfolio has average rental escalations of approximately 3% per annum.

USA portfolio has average rental escalations of 2.5% to 4% per annum. 

 

Well diversified customer base and portfolio means lower concentration risk.

 

Top 10 customers account for only 18.3% of the monthly gross revenue.

 

No single property accounts for more than 4.3% of the monthly gross revenue.

 

I also like the fact that the Reit manager's interest is sort of aligned with the unit holders'.

 

The management fee payable to the manager comprises of two components - Base fee and Performance fee.

 

The base fee is 0.5% per annum of the deposited properties while the performance fee is 0.1% per annum of the deposited properties.

However the latter is only payable if the annual growth of DPU in the FY exceeds 2.5%.

In other words it will do the manager good to achieve a DPU growth of at least 2.5% yearly.

The performance fee payable in FY2021 is supposed to be S$15.8 M. However actual payout is S$7.4 M as the manager has made a one-off waiver.

 

The Not So Good

 

Gearing increased from 32.8% to 35.9% YoY.

 

Personally this is still fine with me. Moreover there is ample headroom of ~S$4.8 B for future acquisitions before hitting MAS's leverage limit.

 

The 4.5% rental reversion is nice but if we delve deeper into the different segments, rental reversion for business spaces actually dropped from 7.2% in FY2020 to 2.9% now. 

This might point to a softening in the demand for this segment which is a slight cause of concern because among the leases expiring in FY2022 and FY2023, this segment contributes to the largest share at 33% and 43% respectively.

Having said that, the management is expecting overall rental reversion for FY2022 to be positive albeit in a low single digit range. This is for about 18.7% of the overall gross rental income for the year.

Conclusion

No doubt a well-run Reit. Although the share price has ran up today as a reaction to the financial results, it is in my opinion, still cheap.

Relative valuation

 

Based on the reported NAV and today's closing price of $2.31 and $2.88 respectively, Ascendas Reit P/NAV stands at around 1.25.

 

I did some manual calculations of the Reit's historical P/NAV based on values from its website for 2017 to 2020.

 

The P/NAV ranges from 1.20 (in 2017) to 1.37 (in 2019). Averaging out we get 1.29.

 

Hence the current P/NAV is at a slight discount to its 5 year historic P/NAV.

 

DPU

 

Although it is more important to look at the overall picture of the various metrics to gauge the performance of the Reit, investors myself included, often look at the DPU first to assess the Reit.

 

Afterall this is the reason for buying into Reits in the first place.

 

Hence I want to include a short piece on the DPU payouts by Ascendas Reit.

 

If we compare the DPU from FY03 all the way to now FY2021, the Reit has a yearly increase in DPU payouts except for FY09 and FY2019.

 

This is nearly 18 years of consistent DPU growth YoY.

 

In FY09 where the DPU dropped, it increased again immediately in the next FY and the uptrend continues all the way to FY18/19.

 

(One thing to note though, it took 6 years for the DPU to reach the level prior to the drop in FY09)

 

Of course historical trend is for reference only. But personally I believe the Reit is well poised to continue the uptrend trajectory in DPU.

 

Lastly, current DPU yield is 5.3%. Whether this is good enough is up to individual.

Jan 2022 Update

Jan 2022

 

Local Portfolio Value after market close (excluding USD and HKD)

S$139,687.14

Purchase

 

Ascendas Reit @ $2.87

AAPL @ $167

MSFT @ $318

PYPL @ $189

Sold

None

Dividends

 

SingTel @ $360

MLT @ $146.10

CICT @ $261.90

 

Total: $768

Short-Term Transactions

 

Sold 2 x DIDI Call 220520 at $10 strike with $0.17 premium.

  

Closed early at $0.35 for 3 x GREE Put 220121 at $15 strike with $0.60 premium.

 

Sold 1 x AMD Put 220128 at $125 strike with $2.21 premium. Closed early at $24.75.

 

Summary

SGD portfolio:

  

Added 1,100 units of Ascendas Reit. 

Syfe Core Growth portfolio:

 

Seeing negative returns for this month mainly due to the correction from the US market. 

 

Apparently this portfolio is not as resilient as I anticipated.

However this was the whole idea when I started it nearly a year ago - to see how it perform against the market. 

Will monitor further before deciding on next course of action. 

USD / HKD portfolio: 

 

Continue to add small positions in MSFT, AAPL and PYPL. 

 

The correction in the US market this month saw the tech stocks tanking heavily which presented nice opportunities to build up positions. 

However also because of the same correction I made a loss in my overall options positions in January. 

This is due to the AMD put which I sold last month. I decided to close it early without taking assignment. 

Options P/L for this month: -US$2,192.37