2nd Chance Properties

[smallcaps]

Looking at it more carefully, I don't think this is a good company to invest, due to the warrants issuance and ultimately dilution to all shareholders.

The warrants can be exercised at $0.40 from july 2016 to july 2017 (expiry date). Let’s dig deeper to investigate what is the consequence.

Warrants issued: 577,024,950

Let’s assume that during the period july 2016 to july 2017, 2nd chance properties share price ranges sustainably above $0.40 (e.g. price fluctuate from $0.45 onwards), a large majority of the warrant holders will exercise their warrants. Let’s put an estimate that conservatively 80% of the warrants are exercised.

Warrants exercised: 461,619,960

Assuming that total shares outstanding in 2016 is same as 2013 (meaning no shares dilution or shares buyback from now till 2016/2017),

Shares outstanding prior to warrants conversion: 637,607,158

Shares outstanding after warrants conversion: 1,099,227,118

This will result in dilution of 72% of the shares outstanding, and this is very very dilutive. What this means is that the EPS (as well as ROE and ROA) will decrease significantly. For e.g. 2013 earnings of 63.7 million will give you 0.10 EPS, but after this dilution the same earnings only give you 0.058 EPS!

Short term wise, this is bad news. Shareholders value decrease a lot, as you can see. One may argue that with this increase in capital, if 2nd chance properties can maintain the same ROE, we as shareholders benefit the same way in the long term. I shall further explain to you why this is not the case.

Let’s use the same ROE of 21.9% in 2013. Now let’s calculate the total equities.

Total Equities prior to warrants conversion: $260,842,000

Total Equities after warrants conversion: $184,648,000 + $260,842,000 = $445,490,000

Thus, net income = 0.219 x $445,490,000 = $97,562,310

EPS = 97,562,310/1,099,227,118 = 0.089

As you compared the EPS of 0.10 (in 2013) to 0.089 now, that’s 11% decrease in value for shareholders, even AFTER we assume that the company is efficient in allocating the additional share capital and give us higher earnings.

Looking at it this way, even though the earlier shareholders who were issued the warrants get to benefit from converting the warrants, in the long run they also suffer from this dilution as well.

This company also has a track record of diluting shareholders value previously, with warrants conversion in 2012/2013 at $0.32 exercise price, and the scrip dividends issuance ever since earlier periods till 2011.

The question to ask is why is the company doing this and why the 2016/2017 warrants exercise price are chosen at a low $0.40, given that the company expects growth and by 2016, should therefore expect a much higher share price?

The way I look at it, the company seems to really want most of the warrants to get converted; they want this huge inflow of capital, even at the expense of selling them cheaply. My guess is that with creative financing, they can sustain the high and ever-increasing dividends payout. Let’s analyse further.

Capital raised through warrant conversion (assuming 80% exercised): $184,647,984 (461,619,960 x $0.40)

Dividends payout for 2013 was at $36,190,879. So in essence, 5 years of dividends payout are returned back to 2nd chance properties when the warrants get exercised! (Issued warrants were exercised in 2012/2013, and then in 2016/2017, so will there be more warrants coming in 2020/2021?)

In other words, to entice shareholders to invest in 2nd chance properties with high dividends payout, the company resort to diluting shareholders value to fund the dividends. This doesn't seem right at all.

Another thing to take note is that in 2012/2013 when the warrants exercised price was at $0.32, the company were buying back shares at $0.395. What this means is that they were essentially buying back at a higher price than what they sold to the old existing shareholders for. You can say that such a practice benefit the old shareholders at the expense of new shareholders (those without warrants).

So with the warrants exercise price of $0.40 in 2016/2017, personally I will not buy this share anything above $0.40, and I will also sell it before it gets diluted from July 2016 onwards. Imagine if you bought it at $0.46 (current price now), price stay stagnant (or rise) in 2016, then the company keeps buying back shares at $0.46 (or higher) to ensure price don’t drop so that majority of the warrants get exercised. History repeats itself, the new shareholders suffer.

To put it short in summary, new shareholders suffer because of
1. Company buying back shares above warrant exercise price,
2. Heavy dilution of shares.

Personally I do not like where this company is headed, even though I have to say that Mr Salleh is a smart and shrew businessman.

(Side note: The only way that the dilution doesn't materialise is that the share price stays at/falls below $0.40 in 2016/17. But if that happens then it doesn’t make sense for you to buy this share at current price.)

Juz another observation. If ROE is 21.9%, wouldn't book value of $260,842,000 give net profit of 57.1 mil instead of 63.7 mil? Based on 637,607,158 shares, that would be 8.96 cents prior to conversions. Basically not much dilution if conversion price is near book value...

[ashparagon]

Let’s use the same ROE of 21.9% in 2013. Now let’s calculate the total equities.

Total Equities prior to warrants conversion: $260,842,000

Total Equities after warrants conversion: $184,648,000 + $260,842,000 = $445,490,000

Thus, net income = 0.219 x $445,490,000 = $97,562,310

EPS = 97,562,310/1,099,227,118 = 0.089

As you compared the EPS of 0.10 (in 2013) to 0.089 now, that’s 11% decrease in value for shareholders, even AFTER we assume that the company is efficient in allocating the additional share capital and give us higher earnings.

Juz another observation. If ROE is 21.9%, wouldn't book value of $260,842,000 give net profit of 57.1 mil instead of 63.7 mil? Based on 637,607,158 shares, that would be 8.96 cents prior to conversions. Basically not much dilution if conversion price is near book value...

Smallcaps, thanks for spotting my error! Apologies. I took the wrong value from POEMS, which is different from the value in the annual report. Net profit is correct at 63.7 million, but this gives a ROE of 24.78%, instead of 21.9%. Thus EPS will still remain the same at 0.10 (0.2478 x $445,490,000/1,099,227,118).

Hence, my previous statement "that’s 11% decrease in value for shareholders, even AFTER we assume that the company is efficient in allocating the additional share capital and give us higher earnings (meaning same ROE of 24.78%)" is incorrect. Pls take note.

However, one thing to take note is that with such a high influx of cash, how is 2nd chance properties going to allocate the capital accordingly to continue giving 24.78% ROE? It's unlikely that there are many opportunities that they can take advantage of with so much money. So at the mean time while they try to find great opportunities or business, the additional cash is not utilize efficiently.

As GFG has pointed out in a previous post, 2nd chance properties invest in bonds with the additional cash (at an average yield of 5.60% per annum), while waiting for opportunities to arise. Meanwhile during this waiting period, shareholders' return on their money decrease.

[ashparagon]

One important point was excluded from the analysis. The warrants were awarded to shareholders on pro rata basis. That means, if the shareholders kept the warrants and exercised it, then no issue of dilution for them. The bonus warrants were a generous way for existing shareholder to participate on the company growth.

For new shareholder, may be an issue. The dilution should be part of the DD before the investment.

(not vested)

My idea of dilution is that in the immediate term, EPS fall very significantly, even affecting the shareholders with warrants. Long term wise, if the company fails to keep up with previous ROE, then it's also a form of 'dilution'. Not sure if you would agree with my interpretation.

[Shulu]

Company has declared $0.02 dividend per unit, will be paid out on 17 April 2014.

[memphisb]

some developments. Reduction of proposed sale of 45 properties to 13 properties.

PROPOSED SALE AND LEASEBACK OF PROPERTIES – UPDATE
____________________________________________________________________________________
The Board of Directors (the “Board”) of Second Chance Properties Ltd (the “Company” and together with its subsidiaries the “Group”) refers to the announcement dated 6 February 2014 and the circular to shareholders dated 2 June 2014 in respect of the Proposed Sale and Leaseback of the Properties (“Circular”). All capitalised terms used and not defined herein shall have the same meanings given to them in the Circular.
The Company would like to update shareholders that it has recently been informed by Celestine REIT that due to a realignment of Celestine REIT's investment strategy, it has decided not to proceed with the purchase of the 45 Properties at $175,376,412.00, as advised by its professional advisors. Celestine REIT has instead offered to purchase 13 Properties at $55,086,774.00, which the Company has agreed to. The Company is of the view that this proposed sale is still in line with the Company’s present strategy.
In addition, the Company has agreed in principle with Celestine REIT to extend the completion date from 29 August 2014 to 31 December 2014 upon signing the relevant supplemental agreements which will encapsulate the aforesaid changes. The said extension is to allow Celestine REIT to facilitate its realignment process.
The Company shall update shareholders in due course when there are further material developments in this regard.
By Order of the Board
Mohamed Salleh s/o Kadir Mohideen Saibu Maricar
Founder & CEO
7 August 2014

[zquan]

Looks like the deal might not be going through as expected. It has been a month and there is no updated news about the 13 properties that is going to be sold off to Celestine REIT and how many more % Celestine is willing to pay over the valuation of the properties.

Btw, couldn't find much information about Celestine on the internet, anyone have any idea ?

[greengiraffe]

Ask yrself a simple question... would you consider buying Celestine REIT?

Looks like the deal might not be going through as expected. It has been a month and there is no updated news about the 13 properties that is going to be sold off to Celestine REIT and how many more % Celestine is willing to pay over the valuation of the properties.

Btw, couldn't find much information about Celestine on the internet, anyone have any idea ?

[zquan]

Ask yrself a simple question... would you consider buying Celestine REIT?

Have to take a look at their financial state,gearing, prospective yield and ultimately the backers ?

[greengiraffe]

Ask yrself a simple question... would you consider buying Celestine REIT?

Have to take a look at their financial state,gearing, prospective yield and ultimately the backers ?

Happy researching...

[koh_52]

Ask yrself a simple question... would you consider buying Celestine REIT?

Have to take a look at their financial state,gearing, prospective yield and ultimately the backers ?

Happy researching...

No need to do research lar..Celestine Riet hasn't put up for IPO yet...coming soon hehe.
They are now busy buying retail malls and larger size buildings whereby better control & future AEI is possible.