MacarthurCook Property Securities Fund (ASX: MPS, SGX: AOP)

Well, there was a smoking gun after all. To quote my last article on MPS: 

There is always the chance a capital raising could be undertaken: this can be a great way to kill value in the short term. But I don't see it happening given debt is almost paid off. Unless of course the intention is to load up and buy more property. 

And a capital raising is exactly what has happened and value has been killed in the short term. The purported main use of the funds will be invested in an existing property investment. What I obviously got wrong is my call that I didn't see it happening. I sincerely apologise. 

The capital raising is via a non-renounceable rights offer on a 11 for 20 basis for 6c each. Based on the previous closing price of 8c, the theoretical ex-rights price is 7.3c so with yesterdays closing price of 6.6c we've seen wealth torched in the short term. This happens so often!  

Here is the proposed use of funds: 

From what I can see, here are the pros and cons of the capital raising:

Some Pros

1. Expanding the number of shares by 55% should increase liquidity. Professional investors hate illiquidity. A more liquid, visible stock should allow it to trade closer to its fundamental worth.   

2. If there are no more smoking guns, the stock could advance closer to NTA. Raising $11.92m at 6c dilutes NTA and removing the costs of the entitlement offer and the legal fee expenses and assuming the property values are the same as last reported, I estimate the revised NTA to be 10.7c - 11c (down from 13.6c). 

Case-in-point: a re-rating occured last year following a capital raising at 3.5c. The stock doubled afterwards.  

3. Recommencement of distributions. This been mentioned a few times and again in the capital raising documentation: when debt is paid down, distributions may recommence. In a yield hungry market, the potential for re-rating would be high. The yield at current prices (6.6c) could easily be 9-10% p.a. 

4. A buy-back may now occur. (but surely not likely?) 

5. Potential risk may be lower: even though the NTA is watered down, it is watered down with cash. 1c cash = 1c cash. The same can't be said for property valuations. 

Some Cons 

1. The potential % upside is not as great as it was (as the NTA has been diluted down)

2. Raising money to invest such a relatively large amount in another fund managed by AIMS/MacarthurCook ($6.5m of the $11.92m) could be perceived as dubious. 

3. It flags there may be other skeletons in the closet. 

4. My main beef: MPS is raising enough capital to cover the entire funds required to recapitalise the AIMS Property Fund. Why? Do the other AIMS Property Fund investors not have the money or do not intend on putting more money in? Or does MPS think spare funds will be available and can/need to be used for other sources.  

The AIMS Property Fund comprises just 2% of the investments in MPS. There must be a case for just letting the St Kilda property go (held in the AIMS Property Fund) or simply for that fund to sort out it's own problems and not tap MPS investors. I'm not sure I care if I lose the 2% investment. AIMS/MacarthurCook haven't spelled out why exactly investors should fork over so much money for someone else's problem. 

Regardless - it's not impressive.

This isn't an exhaustive list. I wouldn't be worried if the raising was a one-off. But it's not the first time and I worry about what other crap is buried in the underlying investment portfolio. 

I am digging into this further.  

Kristian 

Disclosure: own MPS