Difference between ICULS with warrants

Ms Connie Ong, CFA

ICULS is an abbreviation and stands for Irredeemable Convertible Unsecured Loan Stock. Because of it convertibility feature, many investors liken them to warrants when actually they are not.

All the warrants that are listed in the Bursa Malaysia today including the Khazanah covered call warrants confers the right to purchase the underlying mother share at a specific price sometime in the future within a specified maturity period. ICULS too confers similar rights but at a specified conversion ratio and this needs to be exercised within the specified maturity period.

Because they only confer rights to future ownership rather than the ownership of the mother share itself, both ICULS and warrants holders are not entitled to dividends that are paid out by the company. As such, ICULS and warrants may not appreciate in price when the company declares dividends as would normally be the case for the mother share.

ICULS are essentially unsecured loans stocks but with a feature that it can be converted into the mother share. In other words, it is a hybrid product somewhere between a bond and an equity. ICULS begins its life as a bond but ends its life as an equity once converted.

As long as it remains a bond, ICULS holders will enjoy payment of interest income at a predetermined specified coupon rate. This payment is normally dispensed twice a year rather than monthly as in the case of fixed deposits. When the bond is later converted into equity i.e. the mother share, the holder will thereafter participate in any dividend income declared and paid out to replace the loss of interest income resulting from the conversion.

How long the ICULS stays as a bond before conversion to equity is at the discretion and choice of timing of the ICULS holder. The conversion is mandatory as ICULS have a limited life span and will become valueless on expiry of its present life if it is not converted unlike in the case of straight bonds!

I believe the biggest difference between ICULS and warrants lies in the matter of `gearing'. Most investors are familiar with gearing and its effects when purchasing properties utilising mortgage loan. Property owners by merely placing a 10% deposit and borrowing the rest can expect to double their capital invested if the price of the property appreciates by just 10%. With merely 10% deposit, he has effectively leverage himself ten times on the capital invested. Therefore his returns will also be ten times the return of the investment. Likewise if he loses, his loss will also be ten times any losses incurred in the investment!

Warrant holders enjoy this gearing phenomena but ICULS holders do not. Warrant holders buy the right to purchase the mother share at a predetermined price. Therefore whenever the mother share moves up, the value of the value of the warrant should move up in tandem because the purchase price of the mother share is already fixed. This relationship is of course less obvious when the warrants are `out of the money' which happens when the predetermined purchase price of the mother share is much higher than the current traded share price. Such warrants are generally considered worthless unless they still enjoy a long expiry period or life span.

ICULS are however convertible at a certain ratio to the mother share. A conversion ratio of 1:1 means that one ICULS A can be converted into one mother share. A ratio of 5:1 means that you would require to own five ICULS B to convert to one mother share. In this case, there is no fixed purchase price. Therefore, the theoretical price of the ICULS should simply be just the mother share price in the first case and one-fifth in the second case.

If the mother share moves up by 10% ICULS A should do likewise but ICULS B can be expected to only gain 2%. Any gains greater than this ICULS B will result in arbitragers taking advantage of this discrepancy or price anomaly thereby causing the price of ICULS B to adjust back. This will result in the returns for mother shareholders and ICULS holders returning to equilibrium and as such there is no gearing effect to benefit from owning these ICULS.

In selected cases where ICULS can be converted into a mix of shares and cash, the ICULS holders will enjoy some gearing advantage albeit still not to the extent of straight warrant holders.

The greatest advantage of owning ICULS vis-à-vis the mother share is not it's gearing but its hybrid qualities. ICULS are preferred investment during periods of stock market uncertainty. During such times, despite the prospects of the longer-term fundamentals of the company being attractive, you may be concerned that the mother share price may not appreciate immediately resulting in opportunity loss of interest income.

In this instance, ICULS would be an ideal investment medium as it provides investors with a fixed interest income stream whilst awaiting stock market conditions to improve. Its convertibility is a hedge for investors in case of a stock market up tick as the ICULS price will move up in accordance to the conversion ratio even as the mother share price moves up.

The bond market being at its cyclical peak is also starting to catch onto this trend with the recent first issue of a convertible and redeemable bond by SCB Development, developer of the popular Mutiara Damansara Township in Selangor. This unlisted OTC bond is even more attractive to investors as it is not only convertible but also redeemable at the end of its 5-year life. This provides investors the added protection that ICULS holders do not normally have. Should the stock market not move up sufficiently during the life of bond, such bondholders could choose to remain invested in it as a bond without being unnecessarily forced to convert to equity.

As both the stock and bond market continues to experience substantial volatility and uncertainty, such hybrids like the Bursa Malaysia listed ICULS and the non-listed redeemable convertible bonds can be expected to become more widely sought after investment options. Investors will find that they can enjoy the best of both worlds here with the ability to move from one to the other at their discretion. Hopefully in future, we will not only be dictated by one way conversion from bond to equity but also in the reverse direction and not just once but as often as desired by the investor!

Boustead to add more value to Islamic plantation REIT

By pooikoon@nstp.com.my

November 24 2006

THE Boustead Group, which will float a RM472 million Islamic plantation real estate investment trust (REIT) in January 2007, is expected to sell more plantation assets into the fund from time to time.

Group managing director of Boustead Holdings Bhd Tan Sri Lodin Wok Kamaruddin said the group boasts over 100,000ha of land, of which about 80 per cent is planted.

As only 12,641ha will be sold to the REIT at the start, the group will still be left with sufficient assets that could be injected into the trust in the future, he said.

"We believe we have the size to grow," he told reporters in Kuala Lumpur yesterday. The property trust will have the first right of refusal in buying plantation assets owned by the group and it may also purchase from other parties when opportunities arise.

"If crude palm oil prices (CPO) continue to improve, unitholders will also benefit," he added.

The REIT has an annual profit-sharing of net incremental income based on a formula pegged to CPO and fresh fruit bunch prices. This may translate into higher dividend yield for investors.

"I cannot say about the expansion target, but we will do our best to continue adding value to the REIT and make it interesting for unitholders," Lodin said.

The Al-Hadharah Boustead REIT will be managed by Boustead REIT Managers Sdn Bhd, a subsidiary of Lembaga Tabung Angkatan Tentera. Boustead Group will hold 53.4 per cent of the property trust post-listing.

The trust will own eight oil palm estates and two mills in Peninsular Malaysia upon listing. It is buying these assets for RM472 million at a 3.42 per cent discount from the market value.

The REIT will pay at least 98 per cent of its distributable earnings to unitholders for the first three years, with a dividend distribution of at least 7.38 sen per year.

Lodin said Boustead plans to use the proceeds from selling assets to the trust to repay borrowings and for working capital.

He said additional capital is needed to expand the petrol stations under BHPetrol, to grow its plantation business, as well as for a biodiesel plan.

He gave no details of the biodiesel project but said the number of BHPetrol stations will grow by 8 to 10 per cent next year.

Shareholders of both Boustead Holdings Bhd and Boustead Properties Bhd approved the setting up of the REIT at a meeting yesterday, while the Securities Commission gave its nod a day earlier.

Hektar REIT to offer highest yield so far

November 16 2006 - Biz Times

THE Hektar real estate investment trust (REIT), which is heading for a main board listing on December 4, will offer investors a yield of 8.47 per cent in 2007, the highest offered in Malaysia so far.

"We are offering a best-in-class yield of 8.47 per cent to retail investors at an indicative price of RM1.05," said Zalila Mohd Toon, chief financial officer and director of the REIT's manager, Hektar Asset Management Sdn Bhd (HAM).

For 2008 and 2009, the company expects to offer a yield of 8.58 per cent and 8.84 per cent respectively.

"In absolute terms, it's considered very good," analyst Chan Ken Yew of OSK Research said of the 2007 yield.

Investors can expect to get sustainable cash dividends because of the way the REIT is structured, Zalila told reporters at the prospectus launch yesterday.

The REIT is expected to make RM74.6 million revenue for the 13 months ending December 31 2007, with a net income after tax of RM30.8 million.

Net income in 2008 and 2009 have been projected at RM28.8 million and RM29.7 million respectively.

The REIT, which currently comprises only two shopping malls - the 19-year-old Subang Parade in Selangor and Mahkota Parade in Malacca, is also looking to acquire a third property to be injected into it.

"We'd like to do it as soon as possible but it's got to be a yield-accretive acquisition," said Datuk Jaafar Abdul Hamid, chairman and chief executive officer of HAM.

To date, the company has received six offers to buy properties located mostly outside the Klang Valley, he added.

"It's a mixed bag of retail and office buildings, but we are (only) interested in pure retail. We think we can churn out better numbers with retail," said Jaafar.

Subang Parade and Mahkota Parade's value rose to RM523 million this year compared with RM370 million less than three years ago when the properties were first acquired by the Hektar group.

Jaafar said more retail space as well as some apartments will be built on a 0.8ha plot of land next to Subang Parade. The retail area will be injected back to the REIT, possibly next year, he added.

The Hektar group also plans to develop a lifestyle retail centre in Nusajaya, which is part of the Iskandar Development Region.

The Hektar REIT's initial public offering involves 159.5 million units, of which 16 million will be offered to retail investors and the remaining RM143.5 million to local and foreign institutions.

The offer closes on November 22.

EPF to buy more commercial properties

By sharen@nstp.com.my

MALAYSIA’S biggest pension fund, the Employees Provident Fund (EPF), wants to buy more commercial properties to help improve returns and boost its property portfolio.

Its property investment ballooned to RM1.65 billion at the end of June 2006 but represents only 0.6 per cent of the fund’s total size of RM272.24 billion in the period.

The fund can spend up to RM14 billion, or some 5 per cent, of its assets to invest in properties. However, it may also raise funds by listing a property trust to help part-fund more property acquisitions.

“EPF is also looking at buying more commercial buildings in the country to ride on the tenant rental.

This is the direction that it wants to move into, and it therefore requires additional funds for this purpose.

“It has not evaluated its potential fund size but the initial round will be in excess of RM2 billion to last between two to three years. It may double from there,” said the source.

Another source said EPF plans to launch a RM2 billion real estate investment trust (REIT) within two to three years.

It is believed that the plan will include a mixed REIT, and EPF would most likely include a string of properties like The Mall shopping complex and the adjoining office towers known as Putra Place at Jalan Putra in Kuala Lumpur, which it had acquired for over RM400 million.

It could also include the Giant supermarket and hypermarket chain and Wisma KFC at Jalan Sultan Ismail.

The REIT could post distribution yields that range between 7.15 per cent and 7.35 per cent.

“When such a REIT is formed, it could attract a lot of foreign interest due to the type of properties owned by EPF, and because of its prudent management,” said a source.

As of 2004, the EPF owned 45 properties nationwide.

Apart from its own office buildings in various states, EPF also owns the Sogo shopping centre at Jalan Tuanku Abdul Rahman, Bangunan Kassim & Chan in Kuala Lumpur, as well as shophouses, apartments, bungalows and land nationwide.

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Atrium REIT expects listing by Jan 2007

from Biz Time

ATRIUM Real Estate Investment Trust (Atrium REIT), which is the country's first industrial asset REIT, is targeting a listing on the main board of Bursa Malaysia by January 2007.

Atrium REIT Managers Sdn Bhd director John K. H. Lim said it will issue 121.801 million units. It obtained approval from the Security Commission recently.

Lim said four properties valued at RM158.3 million will be injected into the Atrium REIT, with the potential gross revenue to be RM14 million per year.

"The net distributable yield of the properties - Exel Logistics and TNT Logistics in Shah Alam, DHL Logistics in Puchong and Unilever in Rawang - are projected to be above 7 per cent per year," he told Business Times.

Atrium REIT Managers is 60 per cent owned by property developer Glory Blitz Industries Sdn Bhd, with the rest held by Atrium REIT Managers chairman Zakaria Meranun via Orion Asia Sdn Bhd (30 per cent) and Lim, via Jelatik Tegas Sdn Bhd (10 per cent).

On the issuance of the units, Lim said 60 million units will be issued to institution investors, 13.5 million units to the public, two million units for eligible directors, employees and business associates, while the remaining 46.3 million units will be retained by vendors Glory Blitz Industries and Sparkle Skyline Sdn Bhd.

Glory Blitz Industries, which is the flagship company, spearheads the group's construction and real estate activities - having evolved from general contracting to residential property developments and provider of high quality warehousing and industrial space solutions.

Its spectrum of civil engineering and general contracting services covers warehouses and distribution facilities, commercial and shopping complexes, government buildings, sport complexes, universities, factories, hotels and motorways.

It is currently bidding for five new properties worth a total of RM250 million in the Klang Valley, said Lim.

The leases for these properties are between five years and 10 years, with an extended option of another five years.