What made Accordia Golf Trust (AGT) stood out was its supposedly 12% annual yield. That was what prompted me to take a deeper look at the company. When they launched their IPO in Aug-Sep 2014, I just spent a few minutes to browse the prospectus and then decided to give it a miss. This article I am writing is a result of 3 hours of reading.
First, we look at how the 12% calculation was derived because it is a critical assumption to make us feel that it is a good buy. Dividends were promised in the IPO prospectus -- 100% of profits would be paid out -- which turned out to be 5.7 cents for the period Aug 2014 to Mar 2015 (8 months). Using straight-line extrapolation, it is 8.55 cents. At the market price of 70-71 cents/unit, the yield is 12%.
Assumptions to take note of: 1) 100% payout of profits as dividends (which will probably leave no money for the company to grow it's business for the next year unless they borrow); 2) straight-line extrapolation of earnings which may not have happened.
Next, I look into the business model. Income mainly is derived from usage of golf course (65%), restaurants (24%) membership fees (10%). The revenue stream is seasonal where 4 months of the years (winter) will see fewer golfers. How much fewer? I did a ballpark estimate based on dip in income for the winter quarter and derived 30% lower in winter months. However as the expenses are constant, annualised profit margin becomes an important factor. Profit margin is 8% for the 8-month period. Straight-line extrapolation will assume 8% for the whole year.
We also look into the history of AGT. AGT's parent is Accordia Golf Co Ltd (AGC), which is listed in the Tokyo Stock Exchange.
Goldman acquired Accordia a decade ago and used it to buy up dozens of golf courses across Japan at a time when land prices were depressed after the bursting of the 1990s property bubble but demand for the game was still strong. - 6 Jan 2011, Goldman Eyes Clubhouse in Japan Golf Deal, nytimes.com
Golf membership prices soared in Japan during the 1980s bubble economy, then slumped as the country fell into four recessions in the past two decades. At least 800 golf clubs have gone bankrupt since 1991, according to Meiji Golf, which trades club memberships in Tokyo.
Membership values at Accordia-owned courses have fallen faster than the nationwide average, Kazunari Tsutsumi, executive director of Meiji Golf, said in July last year.
- 6 Jan 2011, Goldman Sachs Sells Stake in Japan Golf Course Owner, bloomberg
Accordia is considering several options to give shareholders better value than the 81,000 yen ($990) a share offer by PGM, ... include bringing in a strategic investor and raising dividends, the people said.
- 27 Nov 2012, Accordia Golf Said to Hire Daiwa to Counter PGM’s Buyout Bid, bloomberg
Why will AGC want to create AGT? Selling some shares away to get cash seemed to be the reason to list AGT because they have high valuations for their land and boosted the maximum yield they could (100% payout). Not only did the IPO open below the IPO price, but the price had never risen back to the 97 cents per share paid by 72% of its IPO shareholders. AGC only retained 28% ownership of AGT.
In AGC's financial statement for year ended 31 Mar 2015, it wrote that AGT was a business trust-based asset-light strategy to address issues of its business management, including an improvement in asset efficiency. Due to this strategy, AGC received repayments for the consideration for transferring the operation of 90 golf courses and existing loans receivable.
As a result, capital efficiency and return on equity had improved. AGC will continue to make intensive preparations for additional asset-light strategies for golf courses with confirmed stable profitability by improving their revenues.
So AGC intends to continue to sell golf courses to AGT. How is AGT going to fund this? Rights issue? Bank loan?
The yen has fallen about 5-10% a year in the past 2 years. If that yen trend continues, the share price for AGT may continue to drop because earnings are converted to SGD. What this means is that 10% earnings will be negated with 10% yen decrease. A 10% earning decrease + 10% yen decrease will result in 20% earning decrease.
If earnings are expected to rise, why should AGC sell the golf courses to AGT? They would have been better off collecting all the earnings themselves.
Finally, the location of these golf courses are near the mountainous areas, many hours drive away from the cities. The capital appreciation opportunity is limited without population growth. The land are also likely to be too expensive to be converted into agricultural land. Immigration is not easy too because Japan speaks predominantly Japanese. Their society also excludes foreigners in many aspects -- visas, property ownership, employment, marriages.
I am also not too optimistic about "golf tourism" in Japan when there are cheaper golf courses in Asia.
Oh yes, and I normally will mention that their cash holdings is only a fraction of their debt.
Oh yes, and I normally will mention that their cash holdings is only a fraction of their debt.
The writer does not own shares in the companies mentioned.
