Non-Binding Proposals: A Case for Accordia Golf Trust

Accordia Golf Trust, a business trust, has always been a counter that is under monitoring by every batch of ERM (‘Early Retirement Masterclass’) students and yet it does not have an active role to play in all the portfolios we have built so far. We simply could not build a strong business case in the past because it primarily invests in golf courses, which is not within the core competency of most retail investors.

In my opinion, golf is an elitist sport. Furthermore, most of us do not really understand how the Japanese really view golf as a hobby. As the population of Japan ages, the question is whether will we see more people taking up the sport, or will more Japanese give up the hobby as they become older.

There is also the question of natural disasters. Being an outdoor activity in a disaster-prone country, investors would have to contend with the occasional drop-in dividends when golf courses close because of a typhoon or an earthquake.

‘Situational’ Analysis & Actions

Accordia Golf Trust was initially trading at around $0.60 with a 2019 dividend of 4.74 cts – a decent yield of 7.9%, but not decent enough for ERM students to take a bet on because we generally use business trusts to lower portfolio volatility and not enhance our returns so we tend to cherry-pick counters for their indifference to market cycles.

But on 28 November, a trading halt occurred on this counter and it was announced that the business trust has received a non-binding proposal to purchase all their golf courses.

This may be a good time to take a calculated ‘gamble’ on the counter.

When a non-binding proposal is made, there is a possibility that Accordia’s golf courses will be sold to an interested party. This should immediately be bullish for the counter.

The important question is now how much should be offered for these golf courses?

As of now, no one really knows. One of the most popular blogs in Singapore run by AK71 at http://singaporeanstocksinvestor.blogspot.com/ has the most optimistic projection of how much the golf courses are worth.

While I hope that ALK71 is correct, I prefer to consider a more muted outcome – that the offer will be slightly less than the net asset value of the business trust. On Stocks Café, if you can take the net asset value over price and multiply that by the current price, you will come to the conclusion that the net asset value would be around $0.76 per share.

So perhaps $0.76 should be the number to fixate on when if the deal concludes.

When I did the analysis, the counter was trading at $0.68 and I needed to act fast because there was also an incoming dividend of 2.61cts.

The potential upside for me was ($0.76 + $0.0261) / $0.68 – 100% or a 15% upside. We will not know when the deal with close, but I can expect this deal to conclude within a year.

A 15% upside is pretty solid and given the potential offer, there is a chance the stock will trend slowly towards $0.76 over the year instead of moving with the rest of the markets. So maybe this can be volatility reducing play as well which is critical for a leveraged portfolio that contains collateral like Eagle Hospitality Trust and Mapletree North Asia Commercial Trust.

So I have determined that I will make a leveraged bet that will be made on Accordia Golf Trust. As I do not keep a war chest, having two leveraged accounts at 200% margin account ratio gives me a decent sized line of credit to make these special situation plays when they arise real-time in the markets.

Conclusion

At the moment Accordia Trust attracts a low financing fee of 3.5%. If I employ an equity multiplier of x2, I can potentially earn 15% x 2 – 3.5% or 26.5% ROI.

Once I came to this conclusion, I took a position using my leveraged account, borrowing money to take a x2 position in Accordia Golf Trust at $0.68. At the time of writing, the counter is trading at around 0.695 so I think there is further room for upside although some dividends have already been distributed to shareholders.

Do note that executing a buy order like what I have done on Accordia is fraught with risks. The business trust has only received a non-binding order to purchase their golf courses, nothing is carved in stone. If the offer is called off, expect the price of Accordia Golf Trust to fall back to $0.60 and I will be sitting on some pretty heavy losses.

Hokkien investors can then say to me, “Kiang jiu hor, mai kay kiang.” 

Loosely translated into English: You can be clever, but you should never be too clever for your own good.

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