Please refer below for our response to your queries dated 24 March 2013.
We would appreciate it if our responses below are not published.
Global Investments Q A
GIL holds an amount of S13.5 million worth of bonds. The segment revenue is aprox $164,000 (in bonds). This translated into a return in asset of = 1.21%.
· This return is low (the 10 year US Treasury bond from Bloomberg is standing at 1.9%)
· The risk of capital loss is high (the 10 year US Treasury bond appears to by dropping in market value due to increasing rate expectations)
· The quoted weighted annual coupon of 5.64% (obtained from 2012 asset review presentation) is expected to be under capital stress as market could expect bigger yield.
Question: Please give reasons to continue laying GIL capital of $13.5 million in this term
A : Most bonds were purchased in the 4th quarter of 2012 which led to the small income recorded in 2012.
The Company will continue its strategy of actively managing a portfolio of assets to provide investors with regular dividends and capital growth potential. It will seek assets that provide attractive returns adjusted for the risk associated with the investment and which enhance the overall portfolio owned by the Company.
The 3 years track record for GIL dividend is tabulated below.
|Financial Year Dividend (Weighted) Shares Outstanding Cash Usage *FY2012 $0.015 752 million $11.3 millionFY2011 $0.015 522 million $7.8 millionFY2010 $0.010 426 million $6.4 million|
* Excludes subscription of share dividend in lieu of cash dividend
There are 2 issues here. Please answer them as separate scenarios, as we’ll be somewhere between these 2 but I like to know how your plans.
1. Cash income less cash expenses less cash dividend is insufficient to support this dividend distribution.
(there’s $24 million in cash in the kitty, operating activities generated an average $12.5 million in cash for the past 2 years (FY 2011, FY 2012). Prima facie, it would lead to situation where the business eats into its cash just to maintain dividend)
Question 1: If scrip dividend is not used (as a cash-capital management), what are the operating methods of generating more cash from the business (without selling out the business)?
A : The Company’s cash economic income comprises cash flow from operating activities including the capital gain from the sale of investment. The Company’s dividend policy is to pay out the majority of the cash economic income received from its investments, after payment or provision for operating and financing expenses.
Therefore dividends declared (whether in cash or scrip) would not exceed cash economic income.
2. The scrip dividend is increasing affecting the Price to Earnings (PE).
(If all shares converted to script, GIL has to double the income next financial year just to maintain current PER. The marginal profit required is $19 million for a saving of $11.3 million in cash. I’m not looking for any PER but performance require to maintain EPS.)
Question 2: Please detail out roadmap for the business for the next 2 years as if all dividends are converted to scripts. (Winding up of business and returning cash capital is not allowed)
A : The scrip dividend scheme has provided shareholders who wish to participate in the long term value of the Company with the opportunity to increase their investments in the Company at a discount to the market value. At the same time, the cash which would otherwise be payable by way of dividends will be retained to fund the continuing growth and expansion of the Company.
With the expansion of the Company’s investment policy approved by our shareholders in December 2011, the Company has the flexibility of looking for a good mix of investments with recurring income as well as capital growth potential. The Company sees opportunities in the following areas:
i) High yield bonds, hybrid investments and public equity investments;
ii) Loans, receivables or asset-backed securities that banks are looking to divest as they continue deleveraging to improve their capital base;
iii) Equity or debt in companies with exposure to operating leases, which pay attractive dividends and have significant potential upside.
Question: The current cash income from 2 x aircraft is about USD$3.84 million per annum. Please detail out the intended cash income replacement source, after sale of 2 x aircrafts to Federal Express with carrying value of USD$23.5 million.
A : Please refer to our reply to Section 2 Question 2 above for the possible areas of reinvestment opportunity.
Question: Why utilized the rights issue money to construct a portfolio of listed equities. Any theorist will know any portfolio will not beat the market. Please provide reasons why.
A : The Company started investing in Asian equities in 3Q 2012 to take advantage of weak prices amid market uncertainty and volatility. The equity markets have risen since then on the back of increasing global liquidity coupled with diminishing tail risk. Consistent with the expanded investment policy, the investment in equities will generate steady dividend income and potential appreciation in capital so as to deliver regular dividends and achieve capital growth for our shareholders. In addition, listed equities are fairly liquid assets which could be divested easily to fund investment in other asset classes when opportunity arises.
Question: Please detail out GIL strategies in the options, swap markets.
A : As at 31 December 2012, the Company has not participated in the options and swap markets.
Thank you for your continuous support in GIL.