2nd Chance Properties
Company Profile
SECOND CHANCE PROPERTIES LTD was listed on SESDAQ on 24th January 1997. On 2nd March 2004, it was transferred to the Mainboard of Singapore Stock Exchange. Second Chance Properties Ltd is involved in 3 core businesses:
- Property Investment
- Retailing of Apparel
- Retailing of Gold Jewellery
Financial Snapshot
Source : Corporate Digest
Source : AR2011
Segments
List of Properties
FAQs
- Does the Company have a succession plan in place?
To be concern on succession planning is understandable, as a Company’s share value can easily tumble with the wrong successor or in certain circumstances when a power struggle ensues.
It is a fact that some businesses are simpler to manage (like ours) than others and that there will be more capable individuals available to manage it than say certain high tech companies whose profitability is dependant on churning out new gadgets or products to replace those that are going obsolete. As such, getting the right successor for Steve Jobs of Apple or Sim Wong Hoo of Creative Technology will be much more of a gamble.
Many years ago the Nominating Committee endorsed a proposal that Mr. Hasan Marican, the Deputy CEO, who has been with the Group for the last 28 years, to be the successor to the CEO in any eventuality. Thereafter, he together with the NC will appoint a Deputy CEO either from the Company or headhunted and preferably someone under 50 years old. After a year or two on the job, the Deputy CEO, if found suitable should be promoted to the post of CEO and Mr. Hasan to being Executive Chairman. The Board of Directors who has been working with Mr. Hasan all these years and knowing his ability and his involvement in all aspects of the Group’s business unanimously agreed with the Nominating Committee’s endorsement. As part of this initiative, Dr Ahmad Magad, who is not a relative of the controlling shareholder and CEO was appointed as Chairman of the Group. Dr. Ahmad has been with the Group since it’s listing on January 1997. Since his appointment as Group’s Chairman on 1 December 2007, he had chaired numerous management review meetings without the CEO’s presence, which has enabled him to better understand the Group businesses and also the strengths of each individual in the Company’s management team.
The Nominating Committee has also noted that the controlling shareholder and his family are supportive of their recommendation that professionals should be brought in on a need to basis.
- Why don’t you spin all the properties into a REIT?
Many of our shareholders have reiterated that our company is like a REIT because we have been distributing high dividends. The question is should we be one?
One of the requirements of a Singapore listed REIT is ownership of a portfolio of properties valued at not less than S$200 million. The total value of our properties is $181 million as at 31 August 2011. The Board will review the pros and cons of taking the REIT route as and when we meet all the requirements and become eligible.
- Will your high dividend policy restrict future growth?
It is true that the more cash you distribute, the less you have for growth. We have overcome this problem by adopting the Scrip Dividend Scheme, with which more cash will be retained if more shareholders take up scrip. The controlling shareholder and present CEO have committed himself to opt for scrip on a permanent basis. Results from the recent Scrip Dividend Scheme FY10 showed that only 8.67% of shareholders opted for cash dividend.
- For how long can you continue your high dividend policy?
Barring any change in circumstances and as long as we continue to be profitable, we will be able to continue distributing high dividends for many years to come. It should be noted that as at 30 June 2011, the Group has $95 million in retained earnings that can be distributed as dividends. Furthermore the company intends to continue with its Scrip Dividend scheme whereby less cash will be paid out.
- With such high dividends, you can easily divide and distribute it twice yearly instead of just once.
The expenses of distributing dividends especially Scrip Dividend has greatly increased over the years. It cost us $40,000 to distribute the recent dividend and I would not be surprised if it cost more in the future. As such, we intend to continue distributing dividend once a year.
- Will our profits be affected if interest rate rises?
It is a common view that when there is an increase in interest rates, it will have a negative impact on profits. This is not necessarily so, as it depends on the quantum of increase as well as the businesses that one is in. In FY2011, our interest expense was $0.92 million. If interest rates doubled, it does not necessarily mean that our profits will be reduced by this amount.
Interest rate management is a tool commonly used by governments to control or mitigate rising inflation or an overheated economy. Under an inflationary or overheated economy, property and gold prices, amongst other products, would also be expected to be trending upwards. Since about 94% of our assets are in gold and properties, the expected increase in their value can easily outweigh any increase in interest expense. Furthermore our rental yield from our properties should also increase in tandem with the increase in the value of the properties.
- Will the redevelopment of Paya Lebar Central have any effect on the Company?
The planned transformation of the area surrounding Paya Lebar MRT station into a Sub-Regional Centre will be a boon to us, as it is expected to increase rental and property values in that area
The Company owns twenty-five retail properties in this vicinity valued at $37.6 million as at 30 June 2011. Twenty-three of these properties are at City Plaza and two at Blk 11, Haig Road (opposite Malay Village).
- I understand that Tanjong Katong Complex will be demolished for redevelopment. Will it affect our retail businesses there?
The tenants of Tanjong Katong Complex have been informed to vacate the premises on or before 31st December 2012.
Almost all of our retail profits in Singapore comes from the two First Lady shops and one gold shop in Tanjong Katong Complex. In anticipation of the redevelopment plans for Tanjong Katong Complex, we have already opened a First Lady outlet in City Plaza and the other First Lady store and our gold business will be opened there in due time. As City Plaza is located diagonally across Tanjong Katong Complex, we do not anticipate any major disruptions to our retail businesses.
* It was announced in August 2011 that the Government have decided to allow tenants of Tanjong Katong Complex to continue doing business for another 10 years.
- What have you done to prevent fraud in the Company?
All organisations typically face a variety of fraud and misconduct risks. Companies, big and small, lose billions of dollars every year to frauds committed by their own employees. Although there is no foolproof way to prevent this, we have implemented a Fraud Prevention Policy, which we believe will go a long way to reduce or eliminate risks.
The key aspects of our plan are as follows:
1. Being aware and alert to the various types of fraud that is unique to our business and taking the necessary steps to mitigate them.
2. Implementation of a Whistle Blower Policy with a reward incentive.
3. Emphasis on internal audits, both in house and by independent professionals.
4. Appointment of Fraud Prevention Officer to constantly review all the anti fraud controls in place and to detect, investigate and process any suspicion.A major fraud can be catastrophic to any organisation. As such, we take this matter very seriously and even had gone to the extent of imposing a mandatory Casino Exclusion Order to all Executive Directors and key personnel of the Company.
- What is the retirement age in your Company?
Problem solving and good decision-making skills are critical for the continued success of any business. These abilities are a result of innate intelligence and rational analysis backed by acquired experience in the field and intuition or instinct build up over a lifetime. Generally older employees should be better in these skills than their much younger counterpart and as such we value them especially those in management position.
We do not impose a mandatory retirement age for directors of the Company. Under the Companies Act, annually by rotation one third of all directors has to be re-elected and those over 70 years of age, on a yearly basis. As for other employees, the retirement age is 70 years. However those who are still mentally and physically fit and able to perform their duties and wish to continue working will be offered employment on a year-to-year basis. They might be given a less important role or parttime work on a need to basis. They can even work from home or home cum office if the nature of their work allows it.
- Isn’t it bad to have so many years of negative working capital?
It all depends. Negative working capital means that your current liabilities exceed your currentassets. The situation only becomes dire if you are unable to pay your creditors when they insist on payment.
Most of our liabilities/debts are mortgages from our property investments. In a way we chose to be in this state of negative working capital by taking more short term rather than long-term loans. We find that it is to our advantage as short-term loans generally demand lower interest rates and thus cheaper to finance. Another advantage is the flexibility in repaying and redrawing the loans, which is more like an overdraft facility. This further saves us interest payments as we repay the loans whenever our cash flow allows it. Our retail business is highly seasonal and produces high cash surpluses during peak periods.
The following points should allay any lingering concerns.
a. We have a stable and sustainable recurrent rental income and a consistently profitable retail division, which provides good cash flow.
b. The interest spread that a bank charges its customers is an indication of the customer’s credit standing. We have been enjoying very thin margins, which reflect our bankers’ confidence in our Company’s stability.
c. Our bankers, the people who should be most worried, do not insist or even mention that we should correct this negative working capital situation. None of our bankers include negative working capital as one of the loan covenants.
d. We can easily correct this situation by converting most of our short-term loans to long-term loans.
e. Our auditors have accepted our explanation and did not deem it necessary to make any mention in their auditors’ report.
f. If need be, to reduce debt, we can sell some of our properties or our investment in stocks/shares or raise fresh capital from our shareholders.
Negative working capital is not that unusual even amongst highly profitable multi billion dollar companies.
- Your gold business is very profitable. Why don’t you open more outlets?
Many in the local gold industry are amazed by Golden Chance’s extraordinary high profits from just one store and some do wonder why we do not open more outlets.
The business started from a small shop in December 1993 and struggled to maintain a profit in its first year of operation. To beat the competition, we realised a need to have a distinct advantage. And so, we decided to be the goldsmith with the largest/widest range of gold jewellery that appealed to Malay taste. After moving to bigger premises and with much more choice for our customers, our profits began to increase. Over the years, we’ve added other advantages that have made Golden Chance the unrivalled and undisputed market leader in the Malay market.
Our extremely high profit is due to our ability to achieve abnormally high sales relative to our operating expenses. Being located in the traditional Malay shopping district has been a great help in attracting Malays from all over Singapore to patronise our store.
We now have a very significant or lion’s share of the Malay gold jewellery market and any new outlet especially nearby will lead to high cannibalism.
Let us assume that we had opened a branch at the successful and popular Jurong Point Shopping Centre. Although we will be paying much higher rentals for the high traffic, our sales will not be enough to turn a profit. This is because Malays from other parts of Singapore will not go to Jurong Point to shop for gold jewellery and even many of the 14% of Malays in Jurong will still prefer to shop for this item in Geylang where there are numerous goldsmiths that cater to them.
- What about expanding Golden Chance into the Malay market in Malaysia?
In fact, we had opened Golden Chance in Kuala Lumpur in 1995. Thereafter, we realised that the same strategy that made Golden Chance such a success in Singapore could not be replicated there as the same set of circumstances that favoured Golden Chance in Singapore was not present in Malaysia.
The following comparisons will give us a clear understanding of the situation.
a. There is only 1 Malay language newspaper and 1 free to air Malay TV channel in Singapore which enable us to reach nearly all of our targeted customers at relatively low cost. In Malaysia, there are 12 Malay language newspapers and 6 free to air TV channels and it will be very costly to reach the target customers, unless you have many outlets all over the country.
b. Being a small island, all Malays wherever they live can easily patronise Golden Chance located in our traditional Malay shopping district. The majority of Malays in Malaysia will not visit our store there due to the sheer distance that they have to travel.
c. Sales of gold jewellery are dependent on a high level of disposable income. The ordinary Malay Singaporean has a much higher disposable income then their counterpart in Malaysia.
Although Golden Chance Malaysia was making a small profit, we knew it would be an uphill task to improve upon it. The only way to make much more profits was to open many more outlets. As it will entail very high capital outlay, we decided that it would be much easier and a better bet to use this capital to make the same profit if not more by investing in retail properties in Singapore. We have benefited from the capital appreciation of these properties and now enjoy a stable source of sustainable recurrent rental income.
- What would you consider to be the biggest risk facing your Company?
All companies are exposed to many different risk factors. Some risks can be effectively reduced with implementation of good internal controls. There are also risks and uncertainties, which are more difficult to implement counter measures and anticipate. One major risk that is beyond our management’s control is a period of prolonged and severe deflation such as the experience of Japan’s economy over the last two decades.
As inflation is good for us, deflation will be bad in that it causes a general decrease in prices of goods and services. The real estate properties we own will fall in value together with our rental income. Most businesses including those in retail will be hard hit. Our debts will become relatively more expensive to repay. We may see some tenants defaulting in their rental payments.
Awareness and understanding of this risk should help us mitigate its negative effects. If a prolong and severe deflation is anticipated in Singapore, we should sell as many of our assets as possible to raise as much cash as possible. Cash is truly KING in such a dire situation.
- You issue scrip dividend to conserve the company’s funds but at the same time are buying back shares using the same funds. What is the rationale behind this?
Indeed it looks contradictory because both schemes took place at the same time. On its own or separately, both of these schemes are generally viewed as positive by shareholders.
Both have different objectives. Basically the scrip dividend is to conserve funds to fuel future growth and the share buyback to increase shareholders’ value. To achieve both objectives of growth and improvement of shareholders’ value will require the use of the same funds.
The Company has the flexibility to determine to its advantage the use of this fund for repurchasing its shares or for growth opportunities. As repurchasing of shares will only be done at prices it deem reasonable, in all probability only a small percentage of the funds will be used for the share buy back.
In its efforts to increase profits and improve shareholders’ value, any perceived or actual conflicting situation is justifiable as long as it benefits all shareholders.
- What if the price of gold continues to go up?
The question should also include what if the price falls.
If it goes up, we can expect to see a further drop in revenue and volume of gold sold but higher gross margin due to the fact that the gold items purchased earlier will yield bigger profits.
It is also not a given that our annual net profits from the gold segment will fall compared to the previous year because it depends on the quantum of decrease in revenue/volume relative to the increase in gross margin. In FY 2010, our gold revenue fell by 2.98% but due to the increase of 2.45 % in gross margin, net profit from this segment increased by 17.08% year-on-year. It is also possible for net profit to fall with the fall in revenue even though gross margin increase especially if the increase is marginal.
The gold price can also slide to lower levels. It can collapse suddenly especially if it had run up to a very high level, in a relatively short period of time. In which event, the reverse will take hold in that revenue should increase but gross margin decrease. Our profits will be more stable if prices decrease gradually over a longer period. A sudden collapse in prices on the other hand, will be a big hit to our profitability or may even cause a first ever loss. If this happens, it should be a one-off event in which case prices will probably stabilise gradually and thereafter we should enjoy more normal profits.
Management is mindful of the hazards of big fluctuations in prices and does not speculate on the future price of gold and thus, inventories are kept at an optimal level.
- What is your gearing policy?
Leverage is a powerful tool that can rapidly increase shareholder’s wealth and as it cuts both ways, it can as easily destroy shareholders’ value too.
To maximise our profits, we take a moderate path and is comfortable with a gearing level of below 1 times. Since our listing in 1997, there was only a short period of several months at the end of 2003 when our gearing increased to 1.12 times.
Our strong profits coupled with good cash flow and multiple times of interest coverage acts as a buffer against any sudden economic downturn or negative change in circumstances.
It should be noted that our mortgage loan covenants allows us a gearing of up to 1.5 times.
- Your recent increase in profits is mainly from the surplus in property valuation and not from your core activities.
Many Shareholders still continue to perceive the gain in property revaluation as separate from profits. Probably this could be due to it being unrealized.
Under recent changes to accounting rules, we have adopted the fair value model under FRS 40 whereby all investment properties must be revalued every year and a gain or loss shall be recognized as profit or loss for that period. This mark to market approach is more transparent and makes it easier to know the real profit of a Company.
Of our three core businesses, property investment is the biggest contributor to Group profits. We invest in properties not only for the rental income but also to benefit from capital appreciation, which becomes part of the total profit or loss of the investment.
In assessing our loans, all our bankers take into account the revalued amount and not the actual cost of the property. As we have to revalue all our investment properties at the end of every financial year, shareholders should get used to the fact that there will be a gain or loss added to our total profits.
The following drastic example should provide a better illustration:
Fifty years ago a bungalow was purchased for S$50,000/-. Today it is valued at S$5 million. Sold or unsold the owner has made a S$4.95 million profit.
- Where will your future profit growth come from?
The Company has a stable and recurrent source of rental income, which is now the main contributor to the Group profits. We will continue our selective purchase of choice commercial properties to augment this rental income.
A decision has been made to focus on property as our main engine for future growth we will therefore at the appropriate time expand into other real estate activities such as developing properties for sale with experienced JV partners. When the opportunity arises we may also purchase distress and other properties for trading profits.
The probable increase in rentals on our existing leases that expire and the profits from any revaluation surplus of our properties are other avenues for future profit growth.
Another source that can increase our profit will be the gradual expansion of our apparel business in Malaysia where the much higher population of Malays allows better potential for the growth of First Lady apparel business.
- Why is your cash balance on hand always very low?
We leverage to increase the returns on our property investments, which result in the Company being always in a debt position.
As interest on outstanding debt is payable on a daily basis, it makes financial sense for us to keep our cash on hand as low as possible, thereby saving interest expenses and increasing our profits.
Being prudent, we do not utilize all our Revolving Loan Facilities at any point in time so as to allow us to draw down cash as and when required.
If need be we can liquidate our REITS investment and also part of our gold holdings to raise immediate cash.
Furthermore our retail sales and rental income provide cash on a daily basis.
- The Company’s warrants are “in the money” and I am worried that it will lead to much dilution.
The Company’s outstanding warrants will expire on 27 Sep 2013. One should not assume that most or all of these warrants will be converted into ordinary shares. A downturn in the economy or stock market volatility may result in the warrants not being exercised.
For argument sake, let us assume that the warrants are exercised leading to an increase in the number of shares of the Company’s stock that is outstanding. The question we should ask is what is likely to happen. Following are some possibilities;
(a) The degree of dilution will depend on the number of warrants converted.
(b) A lower earnings per share and in tandem a lower share price which is basically the worry of shareholders
(c) The new money raised will initially be used to pay off debts resulting in much lower gearing or leading the company into cash on hand position. Profit will increase by the amount of interest expense saved.
(d) It will strengthen the Company’s capital base making it financially stronger and providing ammunition for growth.
(e) The increase in outstanding shares should improve the much-needed liquidity of the Company’s shares.
(f) Increased liquidity and a stronger capital base might lead to investors pricing the Company’s share at a higher multiple.
(g) The drop in earnings per share might be temporary if management wisely deploys the new capital raised resulting in higher profits.
It should be noted that each time the Company distribute Scrip Dividends, the number of outstanding shares increase but we have not seen any negative effect.
The company intends to continue with its Share Buyback scheme and irrespective of whether the warrants are exercised, the Company will repurchase its share if the price falls to a level that it deems good value.
- The economic outlook for the near future is concerning. Does the Company have a strategy to overcome the next possible crisis?
The Company has in place a strategy not only to sail through this impending financial storm but also to benefit from it. Since its purchase of 22 units at Sim Lim Square for $35 million in October 2009, the Company has prudently remained less active in purchasing properties which has helped to reduce its gearing to 0.48 as at 30 June 2011.
The plan is to hold back property purchases for the time being unless Company is purchasing for its own use and concentrate its energies to grow the apparel business. As the Company is expected to remain profitable, it will lead to a lower level of debt, which will put it in a stronger financial position to take advantage of opportunities to purchase distress properties in a potential crisis.
The plan includes the continuation of its high dividend policy unless the situation becomes more serious than the last financial crisis. It also includes a much more aggressive share buy-back of the Company’s stock.
Dividends / Warrants / Bonus
Source : SGX
Share Price
Source : Yahoo Finance
Comments
Interesting company as (using Jun12 data),
- Business Segments
- Gold and Apparels : Strong Focus on Malays
- Property : Retail Shops for Rental
- Low Cash ($923k) vs High Debts (S/T = $35.4M + L/T = $21.5M)
- S/T Debts lower interest rates
- Cash invested in REITs ($41.5M) + Retail Shops ($157.7M)
- Active Share Buy-Back
- High Dividend Yield
- Payout 40% to 112% (FY09) according to Corporate Digest (To check and also against FCF)
- DRP @ 10% Discount has High Takeup (~90% for FY11)
- Unique Equity Fund Raising
- Gives Free Warrants – 2012 / 2008 / 2005 which gets Exercised into New Shares
Risks
- Cheap short term debts seems very risky as many REITs discovered during the last financial crisis and many had their NAV wiped out. But,
- Valuation of Retail Shops are ~3x Total Debts
- Valuation of REITs ~ 80% of Total Debts
- Gold Inventory (Valuation) will suffer on any drastic Gold Price Declines
- Another Enterprsing Malay Entrepreneur may copy his Singapore model to selll only in Malay Shopping area ?
- Apparels – Always a Low Margin Biz
Action
- I'll likely take a small stake so as to better understand the company ie. also force me to study more in detail
- Their FY12 had been changed to Aug (from Jun) and I'm expecting the Dividends to be higher (14mths)
- Share Buy Back had been very active @ 38.5ct, may be hard to get it lower