Description

This idea is very small. Market cap is $45 MM, freefloat is about $20 MM and it trades $100k on a good day. The reason I bring it up is that I think it is an attractive little investment for a personal account esp. if that account is non-taxable. Throughout the write-up I will refer to SUTL Enterprise by its ticker BHU to distinguish it from SUTL Group its 53% shareholder.

Summary: Operator of little local monopolies trading at 7.3 LTM PE with a 7.6% dividend yield (no withholding tax in Singapore). The market seems to believe that earnings disappear at the expiry of the leasehold of its most important asset in 2034. However, I think there is a good chance that the leasehold will be renewed on favourable terms in the not too distant future which could be an interesting catalyst. In case I am wrong about the leasehold, returns should still be decent due to the sizable dividend and cash flow. For those brave souls who like classic Ben Graham style investments, BHU is very close to being a net-net with assets consisting mostly of cash (though I do expect that to be reinvested eventually rather than distributed).

What does BHU do?

BHU is a company listed in Singapore that is controlled by the Tay family (54% ownership). BHU operates three high-end marinas and has a pipeline of four marinas in various stages of development (but mostly fairly early stage). The main asset is the marina on Sentosa in Singapore (“Sentosa Cove”), which I would argue is the nicest marina in Singapore by a margin and which the company operates under a leasehold (more on that later). Beside Sentosa Cove, they operate marinas in Brooklyn and a small marina off the coast of Singapore in what is technically Indonesia. The marinas outside Singapore are typically operated under management contracts structurally similar to a hotel management contract with a base fee component and some success fee component, but financially these assets are not that important.

Beside operating marinas, the company also operates associated F&B, small hotels, a yacht chartering business (asset light they just clip a commission) and a service business related to customer yachts (fuelling, repairs, and the like).

Why is BHU an attractive investment?

• Valuation: It’s pretty cheap. Excess cash = market cap. LTM PE is 7.3x and earnings in five years are much more likely to be higher than lower. P/B (which consist of cash and assets turning into cash) is 0.88. Dividend yield is 7.6%. The counter argument is that valuation is dependent on what happens to the Sentosa Cove leasehold. I think a manageable risk, more on that below  
• Competitive positioning: Marinas esp. high-end marina are local monopolies. Only a small subset of oceanfront properties are suitable for building a marina and even if you find a suitable spot there are regulatory constraints as well (you need a permit in Singapore as in most places) which seem to get ever more difficult to obtain 
• Economics of the marina business: Pretty decent. Customers self-select to be price insensitive (if you were a penny pincher you would not own a yacht, would you?) and yachts are often used for representation and entertaining. Having your yacht moored at less nice marina that costs less is therefore usually not seen as a viable option for many yacht owners. And the price of tha marina often pales in comparsion to the other expenses of owning a a yacht. Yacht owners are also an attractive customer base for ancillary services (catering, F&B, ship maintenance, fuelling, charter) all the while facing limited competition. The cash flow profile of marinas is attractive as well. Cash costs and capex to maintain the marina are fairly limited.
• Revenue visibility: Fairly high. First, customers sign multi-year contracts. The contracts have an upfront component and yearly component. The upfront component is between several thousand and several tens of thousands of dollars and is not refundable in case a customer wants out of his commitment. Second, demand for berths outstrips supply. I understand there is a multi-year waitlist for Sentosa Cove. Meaning many yacht owners will think twice before relinquishing their spot. Third, once a yacht is commissioned you have to put it somewhere. Dry storage is possible, but esp. for large yachts spaces are quite limited.
• Industry growth: Yachting has grown substantially (the number of large yachts in Asia has grown by about a third over the past 5 years) and continued growth seems likely
• Economies of scale: Marinas are a fragmented industry. Yet you would think that there are some mild scale advantages in this business. You can cross sell between marinas in physical proximity and there should be some advantages on the services side. In addition, there are advantages with regards to visitor berths and swapping of berth spaces. In addition, having successfully developed several marinas should be helpful in winning new projects. And there should be a few such opportunities upcoming. Master planned communities are common in Asia and having a marina component makes for a nice brochure. Yet real estate development and marinas are very different businesses so giving the marina piece to third party operator seems logical. All this is to say that I think BHU has the potential to grow into a decent little business and their strategic goals point in that direction, but I recognize there is no large marina operator so maybe there is a reason for that I am not aware of
• Management discipline: Over the years, management proposed several marina projects that did not end up working. Cuts both ways, but they do have a track record of walking away when they think the economics don’t make sense. The flip side is that management did burn some cash in the attempts, but the sums involved seem reasonable to me relative to the opportunities and in absolute terms 
• Alignment: The Tay family owns c.54% of the business and is therefore well incentivized. Then again Arhtur Tay seems to love marinas and yachts so it’s possible that he wastes capital in pursuit what may be his hobby. However I have not seen any signs of that and while Arthur is a rich man the sums involved here are still material to him and his family

What is not so great

• Capital allocation: Most Asian investors do not value excess cash on balance sheet and that is generally wise because there are ton of companies that are hording cash irrationally. In this case, I think the company may have a legitimate reason. The renewal of the Sentosa Cove leasehold will come with a substantial cash outlay and some of the growth projects may require capital as well. Time will tell.
• Sentosa Cove renewal: It is the signature asset of the company and they may feel compelled to renew the lease on terms that are irrational. I do think there are some mitigants. See below
• Growth pipeline track record: As discussed above. A lot of the projects they worked on did not pan out. And some of the projects in the pipeline have been there for many years. The market therefore rightly discounts future growth from these projects, but at current prices the pipeline gives shareholders some additional potential upside without paying for it
• Climate change: By nature marinas are close to the water, so rising sea levels are not good news. Extreme weather can also give rise to significant customer property damage and potential liability for the marina operator (though my understanding is that the burden on the operator is not very high in Singapore)
• Singapore: First, the takeover code in Singapore reads like it was written by an intern with lots of ambiguities and loopholes that have been exploited by many controlled companies to acquire minorities on the cheap. Second, there is no culture of respecting minority shareholder rights. Third, despite its very good reputation, a lot of corporate malfeasance has involved Singaporean companies (Wirecard, 1mbd, Noble Group, recent money laundering cases to name a few). Forth, Singapore is an impressive place, and its economic track record is unmatched, but this success rests on the foundation of what is effectively one-party-rule with few restrictions placed on those who govern and very few checks & balances (western style freedom of speech and press). So far this has worked great, but the amount of damage the wrong leader could do makes you shudder. Fifth, Singapore’s economy is a beneficiary of the disfunction of its neighbours. If Indonesia and Malaysia ever become governed effectively it could be a problem for Singapore
• War: If China and the US went to war the Malacca strait could be a flash point. Probably not helpful to the demand for pleasure crafts

Sentosa Cove Leasehold

Sentosa Cove is held under a leasehold that expires in 2034. It’s a structure that is common in Singapore. The freehold owner is the Sentosa Development Corporation, essentially the government. The big question is what happens on lease expiry. Typically, the Singaporean government is quite good at extracting something close to fair market value at expiry from the leaseholder. In this case, I think there is a good chance that BHU can get away with a favourable deal. First, BHU has been a good operator, and the marina is well liked. To the government having the marina run smoothly is important as Sentosa is a big tourist attraction, and the marina is a draw for wealthy people and events. Switching to another operator for slightly more favourable financial terms seems like an unnecessary risk and for the person overseeing the decision there is probably a fair bit of perceived career risk in switching. Second, having the marina owned by a Singaporean, listed business is probably more desirable for the government than a having it operated by a foreign company or private Singaporean business (boosting the capital markets is a big thing recently). Third, at the last AGM management commented that are in discussion with the government on an early renewal. Given that the management was willing to say that, I think the renewal is quite likely (bringing it up and then not delivering would not be very helpful for credibility) and if BHU indeed renews 9 years before the expiry the terms are likely favourable as well. Were they not, you would probably hold out for a better deal. The minutes of the AGM are public record and accessible on the SGX website. In case of early renewal I expect a large upfront cash payment from BHU to the government.

The Tay family

In 1968, the Tays started out with a small business providing supplies and services to merchant vessels in Singapore under the name SUTL Group (the entity through which the Tays also own their stake in BHU). Over time they used that position to become distributors for alcohol and tobacco products and a few other things in Asia. SUTL is for example the exclusive distributor for British American Tobacco for many countries in Asia. This is not a bad business; the family has done quite well and is active in philanthropy. I don’t know anyone who is close to the family, but for what it is worth, folks knowledgeable in Singapore did not have much negative to say.

That said the family was involved in one controversy a few years back: In 2007, British American Tobacco pulled out of North Korea and sold their stake in the North Korean business to SUTL while BAT continued to provide the cigarettes to SUTL as was legal at the time. However, BAT continued to sell cigarettes through this channel even after it became subsequently illegal due to sanctions taking effect. The US government alleged that SUTL was basically acting as a front for BAT who took all the commercial decision and BAT ended up signing a deferred prosecution last year and paying a $635 MM fine. SUTL was not charged because at the time there were no sanctions on North Korea in Singapore (but came into effect in 2017 when the SUTL North Korea sub stopped operating). To my knowledge SUTL and the Tay family have not been charged with wrongdoing in Singapore, the US or anywhere else. To me this seems par for course in Asia, but everyone should draw their own line in the ethical sand. As an aside not related to BHU, the executive who oversaw Asia for BAT at the time of the wrongdoing was Jack Bowles who became BAT’s CEO in 2019 before this whole thing came to light. To me it is a very, very high probability that he had knowledge of the situation, but naturally he was not charged and was allowed to resign with his comp intact. My compliments to the board of BAT! 

At BHU treatment of minorities seems very fair to me. Disclosure is not bad for the size, the company pays a sizable dividend, related party transactions are not very significant, executive comp is reasonable and they even paid a sizable special dividend a few years back.

Several Tay family members work at the BHU, including Arthur Tay who is CEO of both BHU and SUTL. Arthur is in his late 60s, he is US educated and started out in the finance division of SUTL. Through his family’s association with ships, Arthur became interested in water sports and yachting (he owns two yachts himself including the 116 ft "Hye Seas II") and through this interest he became involved in the development of Sentosa Cove. So BHU is a bit of a pet project.

Valuation

Valuation is a bit tricky to discuss because it all depends on whether the leasehold in Singapore will be renewed and at what price. Let’s first assume it is not renewed, the project pipeline does not work out and the remaining assets in Indonesia and Brooklyn have no value. If earnings stay flat until the renewal in 2034 (probably conservative as the business has a history of price increases which I would expect to continue and the asset in Indonesia opened in 2023 and will become fully operational beginning of next year with some positive contribution) and the company continues its dividend policy of paying out about half of the profits, you would get SGD 0.45 in dividends and the company would retain about SGD 27 MM in earnings bringing cash to SGD 82 MM (probably larger given interest, but let’s not worry about that) or about SGD 1 per share. The non-cash portion of the balance sheet sort of dissolves by itself (most of the liabilities are service obligations owed to customers, most of the assets are PP&E that is depreciated through the income statement). If they packed up shop and liquidated the company, you would end up with an IRR of about 10% meaning if they don’t do something stupid with the cash this should turn out ok.

As noted above, I think there is a reasonable chance that the lease is extended on favourable terms. If for example they extended for 10 to 15 years (i.e. to 2044 or 2049), the market may start seeing this as growing annuity in which case a PE of 7 seems a bit low and the business could rerate, perhaps dramatically. In addition, if one of the growth opportunities ever bore fruit such as the recently announced marina in Thailand there is also bit of additional upside.  

Catalyst

Sentosa Cove renewal 

Earnings growth