MREIT: Al-Hadharah Boustead

UOA Real Estate Investment Trust

There was a mistake in my Part 2 where I was looking at UOA Holdings instead of the REIT :( Was a big mistake but luckily I caught it. After dwelling some thoughts, Boustead remains my only choice. I have updated Part 2 with corrected ratios for UOA, do read it again. 

Bear with the corporate structure. UOA REIT sponsor is UOA Holdings Group which is involved in commercial and residential property development, construction and investment. And then you UOA Holdings who is a subsidiary of UOA which is incorporated in Australia and listed on ASX (aussie stock exchange). The UOA group itself has vast experience & expertise in Malaysia real estate since 1991.

Botanica.CT, Balik Pulau, Penang

Al-Hadharah Boustead

From the name above we know that the sponsor is Boustead Group and the Al-Hadharah makes it an Islamic REIT. It is a strong dividend yielding REIT (~8%) whose primary source of revenue and profitability is driven by plantation assets and CPO prices. How? 

The major revenue source ~75%. BSDReit assets are leased back to Boustead Group for 3-year renewable tenancy with a cumulative period of up to 30 years! Fixed rental of RM41.3 million is locked for the 1st tenancy and can be adjusted upward as applicable with injection of new assets. The fixed rental review is based on historical, prevailing and expected future CPO prices, cost of production, extraction rates and yield per hectare. Boustead group has 97,700 ha of which 16,400 ha is being held by BSDReit. Boustead if not mistaken is the 5th largest plantation company by land size. It is also a government-linked company. Unco Tan's iCap holds Boustead shares as well due to his stand that their assets are severely undervalued & have much potential to grow.

Another 25% comes from the second portion which is CPO price. BSDReit enjoys a 50:50 annual profit sharing of actual CPO (crude palm oil) and FFB (fresh fruit bunch) prices realised during the year which is above the reference price of CPO. BSDReit has 10 estates in which 8 has a reference price of RM1500/MT and the other 2 at reference price of RM2000/MT. With prices of palm oil in the uptrend for the last 25 years because there is increasing demand, there is minimal downside risk I would say. Right now Aug'10 it stands at RM2650/MT.

The closest competitor of palm oil is soybean oil which has not been picking up as fast given palm oil's discounted price to other edible oils and is highly sought for biodiesel. Palm oil has other advantages as well: (1) Highest yield per hectare and (2) Lowest cost of production for vegetable oils. Demand for CPO is driven by health preferences related to transfats, renewable fuel and energy source and for food in emerging markets like China and India with huge population base.

What are the risks (by order)?
Malaysia is no longer world's number one CPO producer & exporter. It has recently lost to Indonesia. Indon could very well be future CPO price benchmarker by setting up new CPO contracts to rival our Bursa Derivatives Exchange CPO (FCPO) which is currently the world price benchmark for CPO. This means we might lose out in attractiveness among international investors and fund managers.

Another problem is scarcity of suitable land in Malaysia. We are running out of land unless Sabah and Sarawak is more developed. Research now is focused on producing better yielding clones such as Sime Darby and Genting Plantations on cutting-edge genome research which may hopefully provide our industry with new breakthroughs.

The Plantation sector in Malaysia is estimated to employ as much as 570,000 workers. With the local workforce demanding higher wages compared to foreign workers there is a problem of inadequate manpower. Further more, they are certain quarters who want to limit the number of cheap foreign labour into Malaysia. Things are quite uncertain in this area particularly the government's long term strategy.

Adverse weather can impact CPO production such as the La Nina wet weather causing floods in plantations, hampering collection activities and wet conditions impede growth of palm flowers. La Nina happens during November and December where stock can be affected and probably see price soaring slightly. There is also the El Nino.

Overall over the long-term, palm oil consumption is sure to grow hence good prospects but the question is who will hold the crown, Indonesia or Malaysia?

Read this for more info: Trends & Potentials of Malaysia's Plantation Sector

In a Nutshell

BSDReit has very good financial health, lowly geared and has a lot of room to leverage up for future asset expansions perhaps from the Group and to increase its future earnings. Palm oil industry is relatively recession proof as 80% of the oil are used as basic food needs and is something i looked upon as sustainable business.

One major drawback of REITs is their inability to benefit greatly from capital gain, unlike real estate. Investors can do without taking on the risk of mortgage payments, unscrupulous tenants and rising tax rates. However, less risk obviously comes with less reward. Again I would like to stress that REIT and real estate is a totally different playing field.

• For someone who wants to have more control of their assets and is willing to improve their value, investing in residential real estate can be a good choice.
• For someone looking for passive real estate investment, with the added benefits of portfolio diversification and liquidity, a REIT is a good option to consider.

For me, I will purchase REITs as part of a balanced portfolio (10% of my total portfolio). It is important to purchase a REIT at a discounted price as a lower invested price will translate into higher dividend yield automatically. Note that BSDReit stakeholders are Boustead Properties (60%), LTAT (14%), Tabung Haji (10%), thus only 16% free float. It would be hard to get a lot of discount on its fair value unless there is another big meltdown like the 2009 one. Too bad I missed the boat in 2009. BSDReit currently trading at 3% premium to its NAV/share.

Until I have enough capital to enter the real estate market till next time... for now it is just learning and observing other people's mistake :) This ends my REIT research since it started in late June. I am still eye-ing news on Starhill very closely. Also there is no education based REIT yet in Malaysia, perhaps we will see one in future.