Analysis of investment in Accordia Golf Trust

Accordia Golf Trust (Accordia) is a business trust which assets are golf courses across Japan. It forms a small portion in our portfolio. Accordia’s financial year ends on 31 March. For the latest financial year (FY16/17), it distributed S$ 6.04 cents DPU (distributable Income per Unit). Based on current price of $ 69.5 cents, this represents a distribution yield of 8.7%. The ultimate questions here are:

  1. Is the DPU sustainable?
  2. Based on current price, is there any possibility for capital gain?
  3. What is its future prospect?

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Company Background

Accordia owns 89 golf course (and related assets) located across Japan, valued at approximately S$1.9 billion. Close to 90% of the initial portfolio golf course are located in three largest metropolitan areas in Japan. An investment in Accordia provides exposure to Japan golf course industry. The increase in number of senior golfers in Japan and the coming Olympic Games 2020 in Tokyo are two main factors that will enhance Accordia value. Another catalyst would be the potential for privatization as Accordia’s sponsor (Accordia Golf Co.,Ltd.) was recently taken private by South Korea private equity firm MBK Partners in late 2016 for US$760m (its stock got delisted from Tokyo Stock Exchange in March 2017). The business strategy of Accordia is primarily focused on the middle class, loosening the strictures of golf in Japan and encouraging the “casual golfer” with the promise of a cheaper day out.

Revenue and Cost Structure

Accordia derives its revenue from three sources: golf course revenue (~65%), restaurant revenue (~25%), and membership revenue. While majority of its costs incurred are labour & outsourcing expenses (~37%), golf course management fee & maintenance fee (~20%), SG&A (~18%),  and merchandise & material expenses (~8%).

Listing History

Accordia Golf Trust was listed in Singapore Exchange (SGX) back in August 2014. Ever since it got listed (IPO price of S$ 97 cents) till today, its share price has dropped 28% (~S$ 27.5). On the other hand, those IPO investors have received S$ 18.38 cents of distribution from IPO to date. Hence overall, IPO investors are still 9.4% underwater. The lesson learnt here is IPO may indeed stand for It’s Probably Overpriced. With close to 1.1 billion outstanding units, the IPO valued Accordia Golf Trust at S$1.1 billion.

Distribution Analysis

Income varies based on seasonality.  Unlike the normal REITs which are able to collect rental fees from their tenants rain or shine, Accordia’s performance may be detrimentally affected by weather condition, such as earthquake, heavy rains or typhoons. Distribution is paid on semi-annual basis. The DPU tends to be higher on 2H (Oct – Mar period) due to better weather. The 2H DPU is usually distributed in the month of June. FY16/17 dividend (S$ 6.04 cents) is 8.9% lower than the previous fiscal year FY15/16 (S$ 6.63 cents). A 2.4% decrease of operating income at the same period causes a 25.6% drop in operating profit. Accordia only has 3 year history of distributions – hence it cannot provide sufficient data whether future distribution will be stable.

Entry Price

The decision of entry price can make or break the investment. During IPO times, the company provided guidance of 7.0% distribution yield (~S$ 6.79 cents) based on normalized DPU excluding non-recurring items (based on IPO price S$ 97 cents). Since the latest FY distribution only stood at S$ 6.04 cents, we can’t be sure whether next year distribution can be maintained. Although the company has a policy to distribute 90% of its distributable income, and assuming that SGD/JPY exchange rate doesn’t fluctuate that much (currently it stands at 80.2 Yen vs 81.52 Yen during IPO Prospectus time), we still need to put some buffer assuming our case goes wrong.

Summary

Is current share price worth it to add position in Accordia? At current price S$ 69.5 cents per unit and distribution yield of 8.7%, there’s still likelihood that distributable income may fall another 10%. Looking at how operating profit drops 26% although top line only marginally decreases by 2%, we need to be realistic in setting the valuation. Assuming “stabilized” distribution at S$ 4.65 cents (or equivalent to its EPU) and expecting 9% minimum annual return (purely from distribution), we arrive at calculated entry price of S$ 51.5 cents. Price has to drop another 26% to reach our target entry price. In summary, a prudent investor would wait until the share price has reached or even dropped below his target entry price. Meanwhile for existing unit holders who bought at current market price (S$ 69.5 cents), it may be prudent to exit the position (and forgo the 8.7% yield) while waiting for price to further drop before re-accumulating at lower price.

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This year’s EPU is much lower than DPU – there’s a likelihood that DPU is not sustainable

Suggestion: SELL (Accumulate at S$ 51.5 cents or lower)