The minutes of the Federal Reserve’s December 2018 meeting released on 9 January revealed that the US central bank is adopting a more dovish stance towards the pace of further rate hikes, in light of the easing inflation readings and growing uncertainty over the global economic outlook. Against this backdrop, we noticed a rekindled interest among investors to accumulate high-yielding stocks, in the hope of receiving periodic payouts which could at least buffer their returns should there be a large drop in asset prices. This was evidenced by FTSE ST Real Estate Investment Trusts Index already rising 4.5 percent within a short span of merely three weeks since the beginning of this year.
Apart from REITs, companies which distribute high dividends have also garnered as much buying interests of late. In particular, Duty Free International, QAF and Lippo Malls Indonesia Retail Trust are three such examples which saw a marked jump in their respective share prices on higher trading volumes.
Duty Free International
Duty Free International’s (DFI) share price rose 6.8 percent closing at $0.205 on 10 January 2019 after delivering a stellar 3Q19 result.
DFI’s 3Q19 revenue climbed 19.3 percent to RM157 million due to an increase in demand for certain products and sales mix. Together with gain arising from changes in fair value of option and unrealised foreign exchange gain, net profit surged 367.3 percent to RM15.2 million. For the 9M19 period, the group’s bottom-line grew by 12.9 percent to RM36.6 million despite a 12.2 percent decline in its top-line.
DFI remained in a positive net cash position of RM226.7 million as at 30 November 2018, with RM230.7 million of cash and bank balances and RM4 million of borrowings and debts. Debt-to-equity ratio also stood healthy at 0.2 times.
Nonetheless, the group’s negative cash flows from operations could be a cause for concern, attributable to significant increase in receivables and inventories. DFI’s trade and receivables almost tripled from RM58.9 million as at FY18 to RM155.7 million in 9M19. This was resulted from the consolidation of trade receivables of newly acquired Brand Connect Group, an investment in debt securities as well as rental deposits for certain retail space.
DFI announced a second interim dividend of $0.01 per share. Together with its first interim dividend of $0.008 per share, full-year payout of $0.018 worked out to an attractive yield of 8.8 percent based on the group’s market price of $0.205 as at 21 January 2019.
QAF gained 6.7 percent on 11 January 2019 closing at $0.64 a share and a trading volume of 0.4 million shares on that day.
In terms of profitability, QAF’s 9M18 revenue dipped 2.5 percent to $601.5 million mainly dragged down by poorer performance from its primary production segment as Rivalea continued to face lower average selling prices. Together with increased operating costs attributable to higher feed and energy costs, the group’s net profit declined considerably by 86.7 percent to $4 million.
QAF’s financial strength has also deteriorated in recent quarters. The group’s cash equivalents have decreased by more than 50.6 percent from $136.5 million in FY17 to $67.3 million in 9M18. With borrowings of $100.6 million, QAF sank into a net debt position of $33.3 million as at 30 September 2018.
For the period 9M18, QAF generated $15.7 million of cash flows from its operations while incurring $55.7 million of capital expenditure, putting it in a state of negative free cash flows. The management had revealed plans that it wishes to continue to invest heavily in expanding production capacity for its downstream bakery business and to upgrade older bakery and warehousing facilities. In order to maintain its dividend distribution of $0.05 a share, the group will need to cough out around $28.5 million every year. In times of weaker cash flows and heightened capital expenditure requirements, we cannot help but wonder if the group can continue to sustain its dividend payouts.
Lippo Malls Indonesia Retail Trust
Lippo Malls Indonesia Retail Trust (LMIRT) saw a 7.5 percent jump in its share price on 11 January 2019 closing at $0.215 a share. 8.7 million shares were traded on that day which represented 2.6 times of the group’s average 3-month volume of 3.3 million.
LMIRT’s 9M18 gross rental income declined 4.1 percent mainly due to the weakening of Indonesian Rupiah and lower rental income following the expiry of master leases over the 7 Retail Spaces. This was supported by other revenue from the collection of service charge and utilities recovery charges, bringing total gross revenue 12.5 percent higher at $166.6 million.
However, total property operating expenses climbed 357.2 percent arising from increased costs incurred for the maintenance and operations of the malls and retails spaces as well as higher net allowance for doubtful debts made during the period. Consequently, net property income fell 9.2 percent to $126.6 million.
Distribution per unit for 3Q18 slid 43 percent to $0.0049 a unit. Despite the lower payout, LMIRT’s yield remained high because of its depressed unit price. Based on its market price of $0.215 as at 21 January 2019, annualised yield of 3Q18’s distribution worked out to around 9.1 percent.
Nevertheless, investors of LMIRT should also be mindful of the foreign exchange risk as well as the credit risks faced by its sponsor, Lippo Karawaci.