There are two main ways a company’s business can grow. One is through expanding itself via organic growth. This means re-investing its profits back into its own business such as buying extra machinery to produce more goods to sell, or expanding its business footprint overseas by hiring more staff in those countries.
The other is to grow inorganically, that is, looking externally to undertake mergers, acquisitions, and joint ventures.
During the week, a couple of Singapore-listed companies announced that they are buying or are in talks to acquire certain assets. In this week’s edition of 4 Stocks This Week, we take a look at four such companies looking to expand via acquisitions.
SATS Ltd (SGX: S58)
SATS (SGX: S58) is a provider of food solutions and gateway services solutions mainly to the aviation industry.
On 21 September, Bloomberg published an article entitled “SATS Said in Talks to Buy $3 Billion Worldwide Flight Services”.
The report said that SATS has sounded out financing for the potential purchase of air cargo handler Worldwide Flight Services from its private equity owner Cerberus Capital Management.
Following that article, SATS came out to say that while it is in ongoing discussions regarding a potential acquisition of Worldwide Flight Services, there are no definitive terms or formal legal documentation that have been agreed upon. It added that it will make timely announcements, as needed, if there are any further material developments. You can read their full press release here.
According to its website, Paris-based Worldwide Flight Services is the world’s largest air cargo handler operating in over 160 major airports spanning 20 countries across five continents.
Badly affected by the COVID-19 pandemic, SATS’ business is slowly recovering due to the reopening of international borders and pent-up travel demand.
For its first quarter ended 30 June 2022, SATS’ total revenue came in at S$375.5 million, up 36.2% year-on-year. The company said that the increase in sales was mainly driven by a recovery in the aviation sector and the consolidation of Asia Airfreight Terminal Co Ltd (AAT) from March this year.
As for its bottom line, though, the company posted a net loss of S$22.5 million due to 50.6% increase in group expenses and the consolidation of AAT. Excluding government reliefs, SATS would have recorded a loss of S$31.9 million for the period compared to a loss of S$35.6 million a year ago.
Daiwa House Logistics Trust (SGX: DHLU)
Daiwa House Logistics Trust (SGX: DHLU) is a real estate investment trust (REIT) that invests in logistics and industrial properties located across Asia. The REIT’s initial public offering (IPO) was in November 2021 and its portfolio currently has 14 logistics properties in Japan.
On 21 September 2022, Daiwa House Logistics Trust’s manager announced that it is looking to acquire two freehold logistics facilities and a piece of freehold land in Japan (collectively known as target portfolio), marking the REIT’s maiden acquisition since going public.
The assets are:
- DPL Iwakuni 1 & 2,
- D Project Matsuyama S, and
- the underlying freehold land of D Project Iruma S, an existing property in Daiwa House Logistics Trust’s portfolio.
Both the freehold logistics properties are fully occupied, as of 30 June 2022. The REIT will be acquiring from its sponsor, Daiwa House Industry Co Ltd, and the aggregate purchase price for the proposed acquisition is JPY 4.68 billion (S$47.7 million), which is 11.8% lower than the average appraised value of the target portfolio of JPY 5.30 billion (S$54.1 million).
Source: Daiwa House Logistics Trust presentation
The acquisition will be financed through both bank borrowings and subscription of the REIT’s units by the sponsor, amounting to JPY 1.25 billion. The sponsor will subscribe to the REIT’s units at a price of not less than S$0.77 per unit, representing a premium of 14.9% to the closing price on 20 September 2022.
Takeshi Fujita, chief executive of Daiwa House Logistics Trust’s (DHLT) manager, explained in a press release the rationale behind the proposed acquisition, saying:
“We are pleased to announce the maiden acquisition of DHLT following the successful listing of the REIT in November 2021. The Proposed Acquisition is expected to improve the returns to Unitholders, as DPU [distribution per unit] is expected to increase by 1.3% on a pro forma basis.
Amidst challenges in the macro environment, we observed that logistics properties in Japan have remained resilient, while demand for logistics space is expected to remain healthy. The strategically located quality portfolio is 100% freehold and is fully occupied by high quality tenants including one of the largest integrated logistics companies in Japan. We believe that the Proposed Acquisition will enhance the quality of the existing portfolio.”
At Daiwa House Logistics Trust’s unit price of S$0.685, it has a price-to-book (P/B) ratio of 0.86x and a distribution yield of 4.5% (based on the DPU declared from the period of 26 November 2021 to 30 June 2022).
First REIT (SGX: AW9U)
First REIT (SGX: AW9U) is Singapore’s first (no pun intended) healthcare REIT and its portfolio consists of 31 properties located in Indonesia, Singapore, and Japan.
Source: First REIT presentation
First REIT announced on 21 September that its wholly-owned subsidiary, OUELH Japan Medical Facilities Pte Ltd, has sealed a silent partnership agreement (known as a Tokumei Kumiai agreement) to buy two nursing homes – Loyal Residence Ayase and Medical Rehabilitation Home Bon Séjour Komaki – for a total cost of JPY2.6 billion (around S$26.3 million), which is a 3.4% discount to appraised value. The properties, located near Tokyo and Nagoya city centres, have a combined net property yield of 5.2%.
The acquisitions will be fully funded by bank borrowings, and are expected to be DPU accretive. Currently, First REIT has a gearing ratio of 35.6%, well within the regulatory limit of 50%.
Post-acquisition, First REIT’s portfolio will be further diversified geographically, with developed markets contributing to around 25% of its assets under management (AUM). Furthermore, the REIT’s tenant diversification will improve too, with the addition of two well-established and experienced third-party operators – Social Welfare Research Institute Co Ltd and Benesse Style Care Co Ltd.
The diversification into developed markets is part of First REIT’s 2.0 Growth Strategy. The REIT targets to increase exposure to developed markets to over 50% of AUM in three to five years.
Source: First REIT presentation
At First REIT’s unit price of S$0.27, it has a P/B ratio of 0.73x and a distribution yield of 9.6%.
Parkway Life REIT (SGX: C2PU)
Parkway Life REIT (SGX: C2PU) is another healthcare REIT listed in Singapore, which has a portfolio of 56 properties located in the Asia Pacific region. In our country, it owns the Mount Elizabeth Hospital, Gleneagles Hospital, and Parkway East Hospital.
On 20 September, Parkway Life REIT’s manager said that it’s buying two nursing homes in the Greater Tokyo region from Daiwa House Industry (incidentally also Daiwa House Logistics Trust’s sponsor) for a total amount of JPY2.88 billion (around S$29.4 million), which is around 11.1% below valuation.
The expected net property income yield of the properties will be 5.2% and the acquisition should be completed by the third quarter of this year.
The acquisition will be fully funded by borrowings in Japanese yen. Following this purchase and an earlier-announced acquisition of three other nursing homes in Japan (more on this later), the REIT’s gearing ratio will increase to around 34.3%.
Yong Yean Chau, chief executive of Parkway Life REIT’s manager, said the following:
“Since 2008, we have been capitalising on our first-mover advantage to expand our presence in the Japan’s aged care market. Recognising the strong demand for quality care homes driven by the aging population, PLife REIT seeks to fortify our Japan portfolio with more quality assets. The two well-located properties will not only strengthen our portfolio but also initiate a new collaboration with Daiwa House, a reputable real estate developer in Japan. The acquisition will mark the first step for PLife REIT to work with Daiwa House and pave the way for future pipelines of quality assets.”
Separately, around the middle of this month, Parkway Life REIT announced that it would be buying three nursing homes – Blue Terrace Kagura, Blue Rise Nopporo and Blue Terrace Taisetsu – in Japan for JPY2,558 million (S$26.1 million). The acquisition was completed on 21 September.
At Parkway Life REIT’s unit price of S$4.54, it has a P/B ratio of 1.9x and a distribution yield of 2.6%.
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The post 4 Companies Looking to Expand Their Businesses Through Acquisitions: SATS; Daiwa House Logistics Trust; First REIT; Parkway Life REIT appeared first on DollarsAndSense.sg.
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