Thanks for an interesting idea and good write-up. As you asked for the accounting discussion in the article, here we go :-)
I will respectfully challenge the treatment of the deferred revenue for your adjusted book value. I do agree that deferred revenue is the best liablity one can possibly have because it will disappear by itself as the company performs its services and and transform into actual revenue.
That being said, I think that just adding the deferred revenue to the book value is not accurate because there will also be costs associated with this revenue. It would be more reasonable, in my view, to multiply the deferred revenue with an net income margin and add the product to the actual book equity.
Does not change the overall thesis overall, still very attractive.
Thank you for the comment! Usually, I would agree with that premise, if the deferred event was a recurring one. However, this entrance fee was really a one-time payment made by interested individuals who wanted to "join the club." After that one-time payment, members must continue to pay a subscription to maintain their membership status...so there are no incremental service costs as the deferred income transforms into revenue. Hopefully, I explained it well. In short, costs connected to servicing members would be the same even if the "entrance fee" didn't occur
The revenue (and costs) for these membership fees have not gone through the income statement yet. Even if the costs for servicing members would be the same, you have unrecognised revenue on the books. If you exclude it entirely from liabilities then how do you treat the revenue (and costs) at it enters the income statement?
Hey, thanks for the comment. There are no associated extra costs with these membership (entrance) fees, as indicated in the comment above yours. It can be treated as a one-time cash infusion/"advance payment for nothing in return" that'll be (and was) recognized over many years. My point was around adjusted book value, not R&D+book, so I'm not double counting
I would also add that in your adjusted BV you have included all net PP&E. I think around 1/3 of this relates to land which is being depreciated until 2034. The majority of the rest is leasehold buildings with the same term.
Yes, my point is the land (and buildings/infrastructure) is heavily depreciated until the term ends. It was just revalued in accounts in 2017 but will be depreciated off the books very quickly.
Ordinarily this would have resale value or be a fully depreciated hidden asset on the BS. Not with this company. So the land (ad infrastructure) is kind of illusionary protection on the BS and value is overstated.
These are non-refundable deposits from my understanding. There will be future expenses to accommodate these members. It's effectively future revenue (as per the accounting entry). These members also receive discounts across many products and services (some are free).
I don't know what the carrying value 'should' be, based on my argument, but I think 100% value of this on the books isn't right.
SUTL doesn't have any additional costs connected to that one-time deposit payment. The costs are associated with subscriptions that members pay periodically to renew their membership. So the one time deposit doesn't change a thing cost wise.
If these clients MUST pay a deposit to become a member then is that not essentially just extra, early revenue? Incredibly beneficial to the business as cash flow (and thus margins) but not free of future obligations/expenses?
Akin to receiving a tip as a waitor as soon as the client enters a restaurant...
As many have stated here be careful with singapore leasehold properties. You mentioned "Hmm...are you sure about that? I doubt they would be forced to give back PP&E for free, especially the hotel."
Yes 100%. The gov can just ask for the land back and are under no obligation to compensate. Owners can try to ask for an extension but both the approval and cost for this is up to SLA (singapore land authority)
This could be why the valuation is cheap. Also ive seen this 'value trap' before in SGX listed companies. Look at Haw Par. Singaporean promotors don't really care about minority shareholders. As long as business is generating cash, they are fine.
Yes, I was (very likely) wrong in that part of the write-up. Didn't understand those nuances. However, I'm fine with that risk considering negative EV valuation.
I'm feeling comfortable with the management and that it is not a value trap. For now, let's see
It's unquestionably cheap, well found, well written & thank you.
Any sense for what % of revenues are berthing fees (contracted) vs. likely-more-cyclical F&B&Ents? Accounts suggest 1/4 is "membership & mgmt fees" which as you say were largely pre-sold, 3/4 is "sale of goods & services" but I don't know whether some of the berthing/subscription fees are in the bigger category (e.g. selling water & power to boats, that's analogous to berthing fees). There's no visible price increases in the membership line, so if they are raising prices it must be in the other line. Revenue CAGR 2018/19 to 2022 was "only" about 6%, though I am sure with Covid it was hard/impossible to put rises through.
In most of these cases, they give back the buildings etc. to the govt at the end of the concession so there's no meaningful assets to 'sell' to any bidder that beats them. They depreciate their buildings & leasehold to the end of the concession, which supports this assumption. I agree with your base case that they'll have to pay fair value for the extension from 2034.
Does anyone know anything about the controlling guy/family and their treatment of minorities? 5c divi is a great sign, but it would be horrible if he just continues to stack up cash then creeping buyback/takeunder.
I suspect they will find another port or two to build, spend USD$50m on it which takes out the cash-backing, and make like 12% IRR on the spend. Which I'd rather they did not do, but the owner is absolutely not in need of cash and seems to have wanted to build a marina empire.
I am quite expert on other kinds of port concessions which all work like this (eg GPH LN) and my family has a small yacht and their marina works like that - after the concession the marina infrastructure goes back to the municipality. I see what you mean about the hotel but it’s leasehold, being depreciated to 2034… I would bet hard on all this being ”lost” at the end of the concession.
Not sure about SUTL, but e.g. for las vegas sands on Singapore is stated:
"5.1 Subject to Clause 5.2, upon the expiry or earlier determination of the Lease Term, the Lessee shall yield up and surrender to the Lessor without the payment of any compensation or other sum, the Land together with all buildings, structures, appurtenances, alterations, additions, structural changes or improvements thereon, in good and tenantable state of repair and condition and in a clean and sanitary order and condition."
It makes me think of the analysis of SMTPC, a tunnel in the south of France, by Pascal Quiry.
They both have leases that expire in around 10 years with uncertainties concerning the renewal, and they both have recurring cash flows.
I think there is more optionalities here, especially with third parties management, but the distribution of cash flows seems to be more predictable with SMTPC.
Wonderful idea & a beautiful write-up David. I loved your insight on adjusting the book value (Another reason why it might not screen directly on net-net screens).
Beware! Aiming for ROE > COC is an indication of deploying net cash or alike for higher (shareholder) returns. Referring to 'return on capital employed' is not such an indication, since the cash is non-deployed, right ?
Good write-up nonetheless!!! Looked at it earlier after reading some writeups, and buying at recent ex-divi would have indeed be nice, which indicates the stock trades on dividend-yield?
Thanks for an interesting idea and good write-up. As you asked for the accounting discussion in the article, here we go :-)
I will respectfully challenge the treatment of the deferred revenue for your adjusted book value. I do agree that deferred revenue is the best liablity one can possibly have because it will disappear by itself as the company performs its services and and transform into actual revenue.
That being said, I think that just adding the deferred revenue to the book value is not accurate because there will also be costs associated with this revenue. It would be more reasonable, in my view, to multiply the deferred revenue with an net income margin and add the product to the actual book equity.
Does not change the overall thesis overall, still very attractive.
Thank you for the comment! Usually, I would agree with that premise, if the deferred event was a recurring one. However, this entrance fee was really a one-time payment made by interested individuals who wanted to "join the club." After that one-time payment, members must continue to pay a subscription to maintain their membership status...so there are no incremental service costs as the deferred income transforms into revenue. Hopefully, I explained it well. In short, costs connected to servicing members would be the same even if the "entrance fee" didn't occur
The revenue (and costs) for these membership fees have not gone through the income statement yet. Even if the costs for servicing members would be the same, you have unrecognised revenue on the books. If you exclude it entirely from liabilities then how do you treat the revenue (and costs) at it enters the income statement?
You can't have it both ways in accounting...
Hey, thanks for the comment. There are no associated extra costs with these membership (entrance) fees, as indicated in the comment above yours. It can be treated as a one-time cash infusion/"advance payment for nothing in return" that'll be (and was) recognized over many years. My point was around adjusted book value, not R&D+book, so I'm not double counting
I would also add that in your adjusted BV you have included all net PP&E. I think around 1/3 of this relates to land which is being depreciated until 2034. The majority of the rest is leasehold buildings with the same term.
Yes, net
Yes, my point is the land (and buildings/infrastructure) is heavily depreciated until the term ends. It was just revalued in accounts in 2017 but will be depreciated off the books very quickly.
Ordinarily this would have resale value or be a fully depreciated hidden asset on the BS. Not with this company. So the land (ad infrastructure) is kind of illusionary protection on the BS and value is overstated.
These are non-refundable deposits from my understanding. There will be future expenses to accommodate these members. It's effectively future revenue (as per the accounting entry). These members also receive discounts across many products and services (some are free).
I don't know what the carrying value 'should' be, based on my argument, but I think 100% value of this on the books isn't right.
SUTL doesn't have any additional costs connected to that one-time deposit payment. The costs are associated with subscriptions that members pay periodically to renew their membership. So the one time deposit doesn't change a thing cost wise.
If these clients MUST pay a deposit to become a member then is that not essentially just extra, early revenue? Incredibly beneficial to the business as cash flow (and thus margins) but not free of future obligations/expenses?
Akin to receiving a tip as a waitor as soon as the client enters a restaurant...
As many have stated here be careful with singapore leasehold properties. You mentioned "Hmm...are you sure about that? I doubt they would be forced to give back PP&E for free, especially the hotel."
Yes 100%. The gov can just ask for the land back and are under no obligation to compensate. Owners can try to ask for an extension but both the approval and cost for this is up to SLA (singapore land authority)
This could be why the valuation is cheap. Also ive seen this 'value trap' before in SGX listed companies. Look at Haw Par. Singaporean promotors don't really care about minority shareholders. As long as business is generating cash, they are fine.
Yes, I was (very likely) wrong in that part of the write-up. Didn't understand those nuances. However, I'm fine with that risk considering negative EV valuation.
I'm feeling comfortable with the management and that it is not a value trap. For now, let's see
yeah sorry i didnt meant to imply this was also a value trap. jsut that sgx is full of them.
Ugggh my broker doesn't offer it! They do bigger Singaporean stocks so maybe they'll add it.
Great find!
It's unquestionably cheap, well found, well written & thank you.
Any sense for what % of revenues are berthing fees (contracted) vs. likely-more-cyclical F&B&Ents? Accounts suggest 1/4 is "membership & mgmt fees" which as you say were largely pre-sold, 3/4 is "sale of goods & services" but I don't know whether some of the berthing/subscription fees are in the bigger category (e.g. selling water & power to boats, that's analogous to berthing fees). There's no visible price increases in the membership line, so if they are raising prices it must be in the other line. Revenue CAGR 2018/19 to 2022 was "only" about 6%, though I am sure with Covid it was hard/impossible to put rises through.
In most of these cases, they give back the buildings etc. to the govt at the end of the concession so there's no meaningful assets to 'sell' to any bidder that beats them. They depreciate their buildings & leasehold to the end of the concession, which supports this assumption. I agree with your base case that they'll have to pay fair value for the extension from 2034.
Does anyone know anything about the controlling guy/family and their treatment of minorities? 5c divi is a great sign, but it would be horrible if he just continues to stack up cash then creeping buyback/takeunder.
I suspect they will find another port or two to build, spend USD$50m on it which takes out the cash-backing, and make like 12% IRR on the spend. Which I'd rather they did not do, but the owner is absolutely not in need of cash and seems to have wanted to build a marina empire.
Thanks!
That's a good point. It isn't disclosed adequately in the report, so honestly, idk. It's possible, I'll send them an email.
Hmm...are you sure about that? I doubt they would be forced to give back PP&E for free, especially the hotel.
I couldn't find anything connected to treatment of minorities online. Agree
A 12% IRR on $50 million would provide an additional $6 million in earning power. I'm more than fine with that!
I am quite expert on other kinds of port concessions which all work like this (eg GPH LN) and my family has a small yacht and their marina works like that - after the concession the marina infrastructure goes back to the municipality. I see what you mean about the hotel but it’s leasehold, being depreciated to 2034… I would bet hard on all this being ”lost” at the end of the concession.
Then I really appreciate the insight. Thank you!
Not sure about SUTL, but e.g. for las vegas sands on Singapore is stated:
"5.1 Subject to Clause 5.2, upon the expiry or earlier determination of the Lease Term, the Lessee shall yield up and surrender to the Lessor without the payment of any compensation or other sum, the Land together with all buildings, structures, appurtenances, alterations, additions, structural changes or improvements thereon, in good and tenantable state of repair and condition and in a clean and sanitary order and condition."
"The main appeal of it is that more than 90% of its business comes from owning (lease expires in 2034) and operating one of Asia's best marinas"
This confuses me a bit. Are we equating an 11 year lease with ownership? Lease assets and blue chip land assets are very different in my mind.
Since the lease was agreed upon for a 30-year period and is likely to be extended, I would equatr it more to ownership than to standard leasing.
But - yes - you're correct, the land underneath the marina is owned by the Singaporean government, not SUTL
Hi
Thank you very much for this analysis.
It makes me think of the analysis of SMTPC, a tunnel in the south of France, by Pascal Quiry.
They both have leases that expire in around 10 years with uncertainties concerning the renewal, and they both have recurring cash flows.
I think there is more optionalities here, especially with third parties management, but the distribution of cash flows seems to be more predictable with SMTPC.
The analysis of Pascal Quiry is available here in french : https://www.actionnairesminoritairessmtpc.fr/
Thanks for reading!
I'll check out SMPTC, tunnels can be great businesses
Wonderful idea & a beautiful write-up David. I loved your insight on adjusting the book value (Another reason why it might not screen directly on net-net screens).
Keep up the fantastic work.
Thank you man! It means a lot
Beware! Aiming for ROE > COC is an indication of deploying net cash or alike for higher (shareholder) returns. Referring to 'return on capital employed' is not such an indication, since the cash is non-deployed, right ?
Good write-up nonetheless!!! Looked at it earlier after reading some writeups, and buying at recent ex-divi would have indeed be nice, which indicates the stock trades on dividend-yield?
Thanks for the comment. I'm not sure that I understand the first question tho
It did trade around dividend recently, we'll see what it does going forward