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Accordia Golf Trust – Unlocking Its True Value Correctly
Corporate Digest | 05 September 2014
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Gearing Level On Balance Sheet

As we move onto the trust’s balance sheet, most investors would immediately proceed to calculate its gearing ratio. This is perfectly normal since AGT is a business trust and its level of leverage is an area which deserves to be paid attention to.

However, if an investor is to compute AGT’s gearing level simply by dividing total liabilities over total assets without making any adjustments, a gearing level of 52 percent will be derived (based on its initial public offering prospectus).

If this exceptionally high gearing level is taken into account, AGT will pale in comparison on a risk-to-reward basis when matched against other investment trusts listed on the SGX.

At the present moment, AGT is prospectively rewarding unitholders with a 9.1 percent distribution yield for FY15 based on a price of $0.97 per unit, and subsequently 90 percent of its distributable income annually.

Coupled with a 52 percent gearing level, AGT would have fallen off from an investor’s radar since one can easily find other investment options that offer a similar distribution yield, at a lower risk level as determined by the level of gearing.

Axing Off Certain Liabilities

Taking a closer look on the trust’s liabilities, apart from bank borrowings, there are two other items that made up a large proportion of its liabilities.

First, as at 31 December 2013, membership deposits totalled JPY16.9 billion over JPY89.5 billion in the trust’s total liabilities.

These deposits are paid to the trust when a player decides to be a member of Accordia golf courses.

When asked, AGT mentioned that there are approximately 10 percent (or lesser) of deposit withdrawals on this amount per year which the trust pre-empts and prepares accordingly.

The trust also noted that given the highly loyal customer base, the withdrawal rate on these deposits can be depended to a large degree of reliability.

As such, there is a reasonable basis to exclude 90 percent of the membership deposits from AGT’s total liabilities when computing its gearing level.

Next, the trust has reported JPY19.7 billion in deferred tax liabilities. AGT clarified that this amount is mainly due to the mismatch of depreciation expenses during the acquisition of assets particularly, golf-related assets.

It should be noted that deferred tax liabilities may only be realised when assets are disposed. Also, this portion of liabilities, when realised, do not require the trust to separately prepare a provision for the realised amount.

This is because the trust can utilise the disposal amount to offset the deferred tax liabilities. Furthermore, on most occasions, one can comfortably assume that the disposal amount will be higher than the amount realised on deferred tax liabilities.

As such, the net effect is a reduction on the residual amount from the disposal.

After these two items are adjusted accordingly, the trust’s gearing level would fall sharply to 31.8 percent, a level that comes closer to the investment trusts listed on the SGX (approximately 35 percent on average) and ultimately making it a more viable option for investment.

In addition, the lower gearing level would grant the trust with more headroom to undertake acquisitions of golf assets from its sponsor for growth.

Inflection Point

Granted the prospects that will benefit Japan’s golf industry as a whole, we believe that there will be further potential upside on AGT’s revenue stream. Accompanied with a sound acquisition strategy, this will provide a large degree of earnings visibility, backed by a declining level of operating expenses and growing profitability, which ultimately translates into a stable distribution for unitholders.

AGT’s OPEX And Profit Before Taxes

Source: Company IPO Prospectus

Lastly, we especially like AGT’s conservative capital structure which will offer adequate headroom for it to pursue growth from the acquisition of golf assets from its sponsor.

This is a co-written article of Shares Investment, which lays out the analytical ideas and thoughts of the authors, who are well versed in investments and market concepts.

Accordia Golf Trust  0.555 +0.005 +0.91%   
Business: A business trust specialising in investments in golf courses, driving ranges, and golf course related assets in Japan.

Insight: Feb-19, 9M19 operating income fell 2% to JPY41.1b ... Read More

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