Short Position - properties sold at a discount

  • Corporate News
  • Saturday, 04 Apr 2020

Sold at a discount

THE best time to buy properties is during times of crisis, such as the current environment where the Covid 19 pandemic has thrust the global economy into a tailspin.

Almost all the countries are affected – even as far as icy cold Iceland.

In July last year, Berjaya Land Bhd acquired a 75% stake in Icelandair Hotels ehf from the Icelandair Group for US$55.31mil (RM222.03mil).

The transaction paves the way for Berjaya Land to control a majority stake in Icelandair hotels which has 20 premises with some 1,811 rooms under its belt.

Over the months, Berjaya Land paid RM35mil for the deal with a balance outstanding of US$20.3mil.

In its latest announcement, Berjaya Land said the seller decided to give a discount of US$10mil due to the adverse effects of Covid-19.Berjaya Land paid the balance of US$10.31mil to complete the deal.

Icelandair is very much in the tourism sector of the country. Apart from hotels, it also operates an airline focusing on international travels.

The airline industry is in dire straits without any prediction of when people will start travelling again.

All airlines in the world are crying for assistance from governments. From Boeing in the United States to Qantas in Australia and Singapore Airlines – they are seeking financial assistance as they are left holding incurring fixed cost without any cash from the business.

Hence it is easy to fathom why Icelandair decided to give the discount of more than 18%. It probably needed the money for its other operations.

As for Berjaya Land, the deal makes its entry into the tourism industry of Iceland even cheaper. However, it will be holding assets in an industry that is probably one of the worst hit by the Covid-19 pandemic.

Famous hotel chains have shut down their operations because it is uncertain when tourists are going to start travelling again.

No sugar coating

BANK NEGARA, over the years, has always managed crises with a consistent message – there is a silver lining during any time.

Those covering the central bank during the days of the Asia Financial Crisis (AFC) will attest to this. There was always a sense of urgency but no panic.

That tone was also conveyed to the media during the briefing ahead of the release of its annual report. The projections in the report were scarce for 2020, with only mentions being made for gross domestic product growth, inflation and the current account surplus.

But the projections had to be made with certain assumptions. And they were made, and revealed, to the media. Transparency is important always but more so now when uncertainty reigns supreme among all walks of life.

The outlook was not good. Even with the massive stimulus, Malaysia has a slim chance of avoiding a recession, at best showing a 0.5% growth with the risk of the downside being 2%.

Private economists have started to disagree with those projections with some expecting the contraction to be worse.

Bank Negara did base its assumptions on what we know. It says the AFC is used as a yardstick in comparing the two different crises.

The AFC, in its estimation, was worse than now as the banking system was not as strong as it is at the moment.

Even the banks were not as robust during the Global financial Crisis over a decade ago then they are now.

It is the strength of the banking system that will steer Malaysia away from more troubles other countries with weaker financial sectors are experiencing.

It did acknowledge that should the data prove to be worse than anticipated, then its outlook too will change. But for now, everyone is fastening their seat belts bracing for the worse.

The United States just announced that 6.6 million people put in unemployment claims in a week. Together with the week before, that makes about 10 million people filing for jobless claims in just two weeks, an astounding record that obliterated all historical numbers.

Malaysia is expecting unemployment to creep up to 4%, but that is based on what the expectations are during the movement control order period. Many will say it is going to get worse.

That will have a devastating impact on consumption, which is the bedrock of the economy. That’s where the cash aid will help. But the question is for how long?

With Singapore instituting its own “lockdown” measures yesterday, the Covid-19 outbreak is going to be a tough fight for all countries. The hope is that Bank Negara’s projections are right as they seem to be the best case scenario of what is transpiring globally.

Oil and gas counters

THE upswing in oil prices late this week was driven by speculation rather than anything fundamental.

Recall that oil surged some 20% to US$31 per barrel of Brent this week. That surge came after a tweet by US President Donald Trump that he is working with Russian’s President Vladimir V. Putin and Saudi Crown Prince Mohammed bin Salman to cut the global oil supply by 10 million barrels per day, which is equivalent to 10% of total supply.

As a result of that oil price surge, locally-listed oil and gas service providers saw significant gains in their share prices on Thursday, with some jumping as much as 50%.

But as Friday came, reports emerged saying Russia denied being involved in any such talks.

Financial Times, quoting analysts, says the Trump administration is doing a good job of distracting the markets at a time when bad economic data such as a record 6.6 million unemployment claims in the United States is hitting the market.

Analysts also said they are “sceptical” on the kind of production cuts projected by Trump at 10 million to 15 million per day. This is equivalent to both Saudi and Russia cutting their production by half respectively.

For oil-related stocks, their success boils down to this: the higher the oil price, the bigger their profits and vice versa.

At this point, with many major economies slowing their economic activities, it is hard to imagine any spike in oil consumption in the next three to six months.

While some might say that the investors are looking to get ahead of the curve, hopes for any increase in the oil price to last for long remain murky.

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