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This Trust Is Trading Near Its 52-Week Low: Is It Worth Investing?

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Since the Nan Fung Group bought a 30% stake in Forterra Trust (SGX: LG2U) in August 2013 in addition to becoming the trust’s manager, there’s not been any significant positive news coming from the latter.

Forterra Trust is a business trust that focuses on real estate investments in China. Currently, the trust owns five properties in Shanghai and Qingdao. Since Nan Fung Group’s investment, the unit price for Forterra Trust has been declining steadily over the past 12 months from a high of close to S$2.40; today, it’s sitting at S$1.64, just slightly higher than its 52-week low of S$1.60.

With the trust trading at a mere 0.34 times its net asset value, is the trust a hidden gem or is the market trying to tell investors that there are more risks than meets the eye?

When the troubles began

Nan Fung Group is one of the largest privately-held property developers in Hong Kong. The group invested in Forterra Trust to gain more exposure to China’s commercial real estate segment. After Nan Fung had completed its investment, the manager of Forterra Trust underwent a restructuring of its Board. A new chief executive, Mr. Andrew Seah, was brought in on November 2013. Many of the trust manager’s top-level management, including the chief investment officer and chief operating officer, also left during the restructure.

All was quiet for a while when something interesting happened: Tthe new CEO actually left after only half a year on the job. He had suddenly resigned from both his CEO and executive director posts at the end of May this year. There was no handover period and it left the trust without a leader in charge. As a result, the trust’s remaining board members had to form an executive committee to take over the operations.

Taking A Step Back

Looking at the boardroom drama I depicted above, it seems that taking care of five pieces of real estate is an extremely complicated affair.

That said – and putting any issues about management personnel challenges aside – if we take a step back and look at the trust’s assets, it does seem to be sitting on some quality real estate.

In April this year, Forterra Trust had sold its logistics park in Beijing to Global Logistic Properties (SGX: MC0). The property was sold for a S$86.2 million including all debts outstanding. As the property’s sale value was higher than its last-appraised book value, the transaction actually resulted in Forterra Trust recording a gain of S$13.2 million. This is quite a significant development because it might be a clue on how the recorded value of the rest of Forterra Trust’s properties – on the trust’s balance sheet – might actually be an underestimation of their true market value.

So to reiterate, with the trust trading at only 0.34 times its book value – and now with some clearer indication on the quality of its assets – is it a legitimate hidden gem?

Foolish Summary

Although the trust might seem attractive in terms of its price-to-book ratio, we must take into account the high debt levels the trust currently has. Furthermore, the trust has yet to make any distributions for its unit-holders, making it a business trust with no distribution yield whatsoever. Investors should take into account these other factors as well and not just focus solely on its seemingly “cheap” looking price-to-book ratio.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.