Analysis of REEF in depth

sapumal

sapumal

Vice President - Equity Analytics

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Join date : 2010-07-30

Shajesh wrote:

sapumal wrote:you will see a huge profit in CARS /Buki income statement. They (Palm oil) don't do translations in SLR, but statements are prepared using SLR. After rupee devalue All the net assets (foreign) marked in foreign currency will converted into SLR. That's 3% of the NAV
Also you have to consider strength of their currency relative to USD

I can see that you are crying. but i cant help u

I don't need your help. I don't have any CARS group share. I owns only reef.

Tue Jan 24, 2012 10:14 am by stumpy · Tue Jan 24, 2012 10:14 am by stumpy

Sappa,

Can I ask thing, if you don't mind!

Why do you going after Citrus this much?
I am expecting a honest answer from a big fan of REEF!

Thankx in advance!

Tue Jan 24, 2012 10:48 am by sapumal · Tue Jan 24, 2012 10:48 am by sapumal

stumpy wrote:Sappa,

Can I ask thing, if you don't mind!

Why do you going after Citrus this much?
I am expecting a honest answer from a big fan of REEF!

Thankx in advance!

I only have REEF. I bought it much higher. But there were some other I bought on higher. But I didn't had any faith on their potential than trading. I didn't post about them. But I believe potential in Leisure sector.
REEF is exponentially growing company. They 100% invested on no 1 sector in the Island. Within 2 years new management has done a great thing.

They have finalized 150 roomed 2 new hotels (Kalpitiya and Waskaduwa) 50 villas in kalpitiya - No burden to us. all the money is allocated
They build 40 new rooms in Hikkaduwa. Refurbishment 50 rooms
Purchased land in Passikudah to build another hotel
(Planing to build 200 room city hotel in Hambantota)

Other than that last two years, REEF have EPS = 9 ( Last year EPS = 7, this year upto now it is = 2 )

Most of the people saying new hotels won't in operation for next 2 years.
For me They will do something to make EPS even in difficult conditions.
They can sell CLND, They planing to early lease Villas in Kalpitiya. Still They have CLND stake @31. They will work to get the 9Acre land from UDA and sell CLND above 75

I can see NAV of this share can be improved to 40-45 during next two years. That is not difficult with having CLND stake and building 50 villas with allocated money.

Tue Jan 24, 2012 10:57 pm by **Chinwi** · Tue Jan 24, 2012 10:57 pm by **Chinwi**

@ sapumal,

Do you have the Independent Advisor's Report on REEF with you ? It was sent to the shareholder in Feb 2011 when Imagewise offered to buy all the REEF shares . You can see their cash flow forecast for next few years in that report.

As per the document, REEF will have 164,250 room nights in 2013/14 against current 18,250. That is an increase of 9 times. (900%)
This will generate a revenue of 2.2 billion against 71 million recorded in 2010. NAV can achieve an yearly increase of Rs. 15-20.

Wed Jan 25, 2012 9:49 am by sapumal · Wed Jan 25, 2012 9:49 am by sapumal

That's great news. Thanks for info Chinwi
No. I don't have that report. I didn't had reef normal share. It was mistake. After that I bought 100 voting shares in reef

Wed Jan 25, 2012 10:32 am by innam · Wed Jan 25, 2012 10:32 am by innam

Chinwi wrote:@ sapumal,

Do you have the Independent Advisor's Report on REEF with you ? It was sent to the shareholder in Feb 2011 when Imagewise offered to buy all the REEF shares . You can see their cash flow forecast for next few years in that report.
As per the document, REEF will have 164,250 room nights in 2013/14 against current 18,250. That is an increase of 9 times. (900%)
This will generate a revenue of 2.2 billion against 71 million recorded in 2010. NAV can achieve an yearly increase of Rs. 15-20.

@Chinwi you've been a very rational and common sense investor but in this case you may be getting carried away by all the magical future promises (remember all the magical future promises made by GREG).
For NAV to increase by 15-20 rupees yearly they will need a profit of 3.3 billion (by 2015 they will have shares outstanding of around 170 million so to increase NAV by 20 you have to multiply 20 *170). Now magic revaluations can be used to show NAV increases of 20, BUT they can't achieve that from hotel operations.
They can achieve a top line sales of 2.2 billion (easily achievable if they have 164,000 room nights by charging 15-20k a night) but the bottom line would only be around 400 million by 2017 (or EPS of 3)
Also broker/advisor forecasts should be taken with a grain of salt (remember the magical EPS forecasts for EXPO by brokers and the magical valuation figures for CSF by independent advisors).

Only way for them to achieve EPS of even 5 a year is to open a couple of casinos in their hotels (do they have the political muscle to pull that off?)

Wed Jan 25, 2012 10:42 am by cseguide · Wed Jan 25, 2012 10:42 am by cseguide

well said innam and thanks for your analusis

Wed Jan 25, 2012 11:18 am by sapumal · Wed Jan 25, 2012 11:18 am by sapumal

Wellcome back Innam. Nice to see you
These are not revaluation gains. Minor parties who going to buy shares from PP or IPO has to buy at higher price than the founders. Major shareholder will get a gain what it diluted from minors. That's what REEF did.

That gain was taken by all the parent companies of the listed companies.
VONE, LOLC (LOFC), UBC, BRWN (FLCH), SHL,... took that profit. No one sold without taking a profit. That's why they listed

If it is unethical all are unethical. Not only reef.

Innam , Forcasting possible CLND gain , Kalpitiya Villas gain and 3 new hotels in 3 years , do you think that REEF is not attractive at current price ?

Wed Jan 25, 2012 11:37 am by **Chinwi** · Wed Jan 25, 2012 11:37 am by **Chinwi**

Thanks innam.
You are halfway correct. :-)

I am also not looking at it blindly but wanted to tell him they have forecast like that. Actually I wanted to know whether he refer that report also for his comments. If not I wanted to send it to him as he was interested in this Company. Not to make him blind but to provide some additional data on this subject.
I also do not know how they can forecast a profit over 2 billion with this revenue. I did not go to analyze that, yes, because I was 'carried away' (as you said :-) ) by some other feeling which I cannot escape.
May be I am wrong or day dreaming .

Actually, I am having this kind of thinking and I wanted to clear my mind:

IF they succeed in increasing the room numbers that way and make it a attractive hotel chain with other services there will be huge interest in their shares. In that case new investors ( specially foreign) or fund managers will look at it in long term and broad prospective, not by EPS or other indicators we use.
I was engaged in estimating similar hotels in middle east and Morocco before 'end of war' brought me here. The rates and cost of construction was huge compared to what we see here. Still those developers got international investors due to location factor and other reasons I do not know.
If Sri Lanka become a place like that in 2-3 years of time I feel we will see revaluation of everything.

I know this is not an appropriate way to evaluate a share . I think you can remember I was criticizing REEF same as we did to GREG.

Thanks

-----

Sorry. I have to sign-off. See you later.
Thank Innam for coming here for me .

Wed Jan 25, 2012 1:21 pm by cseguide · Wed Jan 25, 2012 1:21 pm by cseguide

by the way innam was a moderator earlier. why he is not a moderator no more?

Wed Jan 25, 2012 1:54 pm by rijayasooriya · Wed Jan 25, 2012 1:54 pm by rijayasooriya

Moved to expert chamber.

Wed Jan 25, 2012 2:06 pm by cseguide · Wed Jan 25, 2012 2:06 pm by cseguide

rijayasooriya wrote:Moved to expert chamber.

Name of the post should be changed. because mainly discussing about reef

Wed Jan 25, 2012 2:07 pm by **Monster** · Wed Jan 25, 2012 2:07 pm by **Monster**

cseguide wrote:

rijayasooriya wrote:Moved to expert chamber.

Name of the post should be changed. because mainly discussing about reef

It's interesting topic. It's better, if you can split in to two topics.

Wed Jan 25, 2012 2:19 pm by rijayasooriya · Wed Jan 25, 2012 2:19 pm by rijayasooriya

Monster wrote:

cseguide wrote:

rijayasooriya wrote:Moved to expert chamber.

Name of the post should be changed. because mainly discussing about reef

It's interesting topic. It's better, if you can split in to two topics.

Done.So that first post is some what misleading.Sorry for that.

Wed Jan 25, 2012 3:03 pm by sapumal · Wed Jan 25, 2012 3:03 pm by sapumal

Let me to summary all my findings

NAV = 30 , regular profit last year = 14.3 Mn ,
shares = 78,653,255 , W18 = 31,461,302 W19 = 62,922,604

Total shares when all the warrants get converted (if) = 173,037,161
Total money comes from warrants = 3.46Bn

Future earnings

Irregular Gains

Profits (based on NAV change) from listing Kalpitiya and Waskaduwa = 78.88 + 22.05 = 101Mn
Transfer gain , Hikkaduwa Land = 72Mn {366 (transferred) -294(book)
Hikkaduwa PP gain = 109 Mn (NAV will be 13. shares 36Mn *3 )

Total possible gain this year = 280Mn

Future possible gains

Leasing 50 villas in Kalpitiya - profit = 937Mn (Pros of Kal)
Selling CLND stake : average cost per share = 31.5
Listing Hikkaduwa
Passikudah (Land transfer, PP , Listing)

Regular earnings

From every subsidiary hotel REEF expecting a management fees. 3% of the Rev + 2% gross profit

Kalpitiya estimated Rev in 2018 = 1bn Gross profit around 700Mn

Estimated annual management fees from Kalpitiya = 46Mn
Waskaduwa = 46Mn
Hikkaduwa = 23Mn

Possible management fees from all the subs (Kalpitiya, Waskaduwa, Hikkaduwa, Passikudah, ... ) = more than 200 Mn

Profit share from regular hotel operations = ???

Citrus Leisure @2016

Citrus Hikkaduwa ( 92 rooms )
Citrus Waskaduwa (150) + 50 Villas
Citrus Kalpitiya (150)
Citrus Passikudah (50 villas initially)
Citrus Hambantota with 200 rooms (??? . on card)

Last edited by sapumal on Wed Jan 25, 2012 3:06 pm; edited 1 time in total

Wed Jan 25, 2012 3:04 pm by greedy · Wed Jan 25, 2012 3:04 pm by greedy

The below is a matrix... showing profits required by REEF to justify its share price by 2016 at different P/E levels. REEF will have 173mn shares by 2016 after the conversion all of its warrants.

Analysis of REEF in depth Reef_b13

Wed Jan 25, 2012 3:29 pm by innam · Wed Jan 25, 2012 3:29 pm by innam

Chinwi wrote:

If Sri Lanka become a place like that in 2-3 years of time I feel we will see revaluation of everything.

Well that's fair enough, you have invested based on your experience and gut feel...less experienced investors with no profits to play with shouldn't invest on future magic. Trading is an entirely different matter.

Since you have invested in warrants hope you manage your risk. Remember if the price of the share is below 40 on conversion day the warrant price goes to 0.

Other negatives to note
-Whenever a warrant factory converts it increases the shareholding towards smaller retailers who are likely to get caught on margin calls (what happened over the last two trading day will repeat in future as well). in 2012 10 million shares (provided the big guys buy their allocation fully) will be issued to smaller retailers when the warrant converts.
-If you look at the shareholding and warrant holding list of REEF, it is eerily similar to GREG in that most of the big boys are on margin accounts. (funnily enough it's the same margin provider in both cases)

Wed Jan 25, 2012 4:04 pm by lokuayya · Wed Jan 25, 2012 4:04 pm by lokuayya

innam ,

Nice to see you back.
You are one of the most seasoned analyst.
i would like to ask you about the current market situation because you are a one who always post comments without any bias.
How do you asses the current market situation , will it perform this year positively?can it reach beyond 6800.

Wed Jan 25, 2012 4:14 pm by smallville · Wed Jan 25, 2012 4:14 pm by smallville

innam,

Being speculative in nature since some big boys are swinging this share time to time;
Since REEF is going to be a hotel chain, I expect some demand for their hotels situated in down-south region..

If REEF's going price is 40 now, putting all the fundamental aspects aside, isn't it fair to assume REEF N price will be over 100 in 3 years time? (at the time of conversion)

If so if you buy REEF.19 around 10, costing the conversion to 50, when these warrants listed at least the N price could be expected to be at 80 which if you sell gives u a good capital gain.. Even selling at 70 if margin calls occur is a good gain to me..

Just my thinking Smile

Wed Jan 25, 2012 4:49 pm by cseguide · Wed Jan 25, 2012 4:49 pm by cseguide

lokuayya wrote:innam ,

Nice to see you back.
You are one of the most seasoned analyst.
i would like to ask you about the current market situation because you are a one who always post comments without any bias.
How do you asses the current market situation , will it perform this year positively?can it reach beyond 6800.

going away from the topic somewhat but still relevant. I am also asking the same question from you innam ? please give your valuable comments on this.

Wed Jan 25, 2012 5:08 pm by innam · Wed Jan 25, 2012 5:08 pm by innam

cseguide wrote:

lokuayya wrote:innam ,

How do you asses the current market situation , will it perform this year positively?can it reach beyond 6800.

going away from the topic somewhat but still relevant. I am also asking the same question from you innam ? please give your valuable comments on this.

Sorry i'm pretty useless at predicting market directions.

Just a simplistic analysis is that for the index to go past the figure @lokuayya mentioned.....1) PE has to go past 18 (looks unlikely given the current mood) or 2) EPS has to grow by 23% y-o-y while trailing PE remains at the current 14 levels (possible but a lot will depend on the overall economy) or 3) a combination of 1 & 2

So the key question is do you beleive that EPS will grow 25% y-o-y over the next 4 quarters?

Wed Jan 25, 2012 5:24 pm by lokuayya · Wed Jan 25, 2012 5:24 pm by lokuayya

thanks innam,

Wed Jan 25, 2012 5:42 pm by lokuayya · Wed Jan 25, 2012 5:42 pm by lokuayya

yes, innam, as you said the mood is still not good.when in good mood people can do any thing.

Wed Jan 25, 2012 6:31 pm by cseguide · Wed Jan 25, 2012 6:31 pm by cseguide

Thanks innam

Wed Jan 25, 2012 6:35 pm by smallville · Wed Jan 25, 2012 6:35 pm by smallville

On another thread Antonym mentioned the current PE of our market is still relatively too much compared with other developed markets while its cheaper than rest of the world..

http://mobile.bloomberg.com/apps/quote?ticker=CSEALL%3AIND

Then it has room for another crash may be to 5000 before coming up.. Who knows even all these can be manipulated know?