We were very fortunate this week to be down only 0.30% while the market declined by 3.82%, if the market continues to decline as it has, some excellent buying opportunities will almost certainly present, nicely in time for our June 30 inflows! As per my promise in last week’s blog, I will this week discuss my primary reason for travelling to South East Asia last week. I will also write my first ever post on a stock EGP own, but have no intention of selling.
This post will be lengthy and probably fairly boring to those for whom fundamental valuations are not important (believe it or not, there is such creatures out there!). I suspect, however, most people who read this blog regularly probably consider fundamental valuation of great importance. This will be (I hope) my “The Security I Like Best” (.pdf) moment, and be looked back on in 62 years with hopefully similar regard!
Before I go on to discuss the reason for my visit, I should first cover my oft-mentioned reluctance to disclose our holdings. As I have stated many times, I will generally only disclose our holdings when I sell, usually when I have completed my selling. My reasons for doing this revolve primarily around two ideas. Firstly, there is a possibility (which is increasing as our track-record gets longer & more successful) that disclosing our holdings will create buying competition in stocks we hold (and may well hope to accumulate more of absent said buying competition). Furthermore, because a number of the stocks we hold are quite thinly traded, quite modest buying competition could meaningfully distort prices. This is less of a factor currently when we are managing smallish 7-figure sums of money, but when the day comes (and it will) that we are working with 8 or 9-figure sums, the avoidance of buying competition will be of vital importance to continuing strong results. Secondly, if I tell the world what I own and approximately in what proportions, it is possible that a ‘replica’ portfolio could be constructed – why would someone want me to earn a fee for strong performance managing their assets when they could build a replica and approximate the same performance for free?
I have only ever disclosed two other EGP holdings. Firstly, Mesbon China Nylon (MES) after the completion of a ‘scheme of arrangement’ forced the sale of our holding. Secondly, I mentioned Maxitrans Industries Limited (MXI) after I had meaningfully reduced our holding, we still have a tiny holding (31,000 shares) of MXI, I last disposed of some MXI in March this year at $1.43 for valuation reasons (i.e. at $1.43 they were quite close to my appraised valuation and I had better applications for the capital at those prices), though I have retained a little because I still suspect there is significant potential for growth in intrinsic value and at EGP’s April 2011 purchase price, the grossed up FY2013 yield will be 54.7% (assuming a 4.75c final dividend), which is pretty juicy…
Now having disclosed my general preference for not naming our holdings, I will commence to name one of our largest, most important holdings and the one which I am most sure will still be in our portfolio in 5 years’ time. I can disclose it because from a portfolio management viewpoint, the position is sized correctly presently (I did acquire a little more this week), and although I expect to add proportionally depending on the level of new EGP subscriptions, unless I get unexpectedly large inflows, I don’t expect this information being in the public domain will make that much more difficult (or harm my investors’ interests).
The majority of my travel time last week was spent in Kuala Lumpur, Malaysia. The primary reason for the inclusion of Kuala Lumpur in the itinerary was to attend the Annual General Meetings (AGM’s) of United Overseas Australia Limited (UOS) and its 68% owned subsidiary UOA Development Berhad (UOADB). UOS has been listed on the ASX since 1987, and is a holding of EGP Fund No. 1 Pty Ltd. UOADB was listed in 2011 on Bursa Malaysia, it was formerly the wholly owned development arm of UOS, as mentioned above, since listing, UOS retain about 68% of UOADB. EGP Funds do not directly own shares in UOADB.
On the afternoon of May 27, I met at UOS’ head office with Corporate Affairs Manager Yap Kang Beng, although I got caught in a monsoonal shower and turned up looking like ‘something the cat dragged in’, he could scarcely have been more welcoming and he was generous with his time and knowledgeable, forthright and passionate about the company’s work. He gave me a quite thorough tour of the extremely impressive Bangsar South mega-development, which when you consider the size of the company (i.e. relatively small) has to be seen to be believed. In fact, the quality of fitments and finish of all developments I visited was excellent and in discussions with a few existing UOA customers, the company reputation is excellent.
The UOADB AGM was held on Tuesday May 28. I attended as a guest, so I was not eligible to vote or raise questions, though a number of the things I would have asked were raised by other holders. The company will launch between RM3.5billion and RM3.7billion (RM = Malaysian Ringit) of new projects this year, to give you an idea of the quantum of growth, they launched only RM1.5billion in 2011. There were about 200 shareholders in attendance and the meeting was fairly uneventful.
This brings me to Wednesday May 29, and my attendance at the UOS AGM. I was, as I had suspected I might be, the only non-employee shareholder in attendance. As Mr Chong Soon Kong (Chairman and CEO) was absent (I had, however, met him at the UOADB AGM the day earlier), Alan Winduss the Company Secretary chaired the meeting, and was kind enough after completing the formal business to open the floor to my questions, provided the answers were not of a ‘non-disclosable’ nature. With the rest of the board and a number of other senior executives available, I obviously availed myself of the opportunity. I asked number of questions, taking more than half an hour until I’d exhausted all intended avenues of inquiry. I do not take notes, but some of the more important/interesting questions and the answers (as best I remember them) were as follows:
- With the listing of UOADB, and the commitment from UOS not to operate in property development in Malaysia, what purpose does UOS serve? From memory Alan answered this question and said something along the lines of – Although we are committed to not competing with UOADB, we do look regularly at a number of opportunities at the parent company level and expect that in due course, suitable opportunity/s will come along.
- There is commentary that the Malaysian property market is ‘over-heating’, how do you deal with this risk? This answer came in sections, in part from Pak Lim Kong, in part from Alan Winduss & in part from GM Eugene Lee. The thrust of it is that they focus on the areas where margins are best. They mentioned that condominiums that were not long ago selling for RM170,000 are now selling for over RM500,000. When they were selling at these lower prices, the company focused on developing office space as the margins were better. Now prices are more generous for residential, they have refocused on this area, and they remain very flexible in the types of projects they can operate (they have reversed from circa 70/30 to about 30/70 in the office/residential breakdown). Usually over 70% of the development is pre-sold and in this way, market risk is shared with the buyer. The retained portion is held back by choice as the profits are greater in completed developments.
- Would it be possible to produce a de-consolidated report as it is very hard to get a sense of the assets held at Parent company level? The CFO Ang Kheng Im took the floor here & pointed out that with over 80 levels of sub-consolidation, a de-consolidation would be tricky to the point of being unreadable, but that a note to the future financials which set out the assets held at parent-company level would be made available. The primary assets at the UOS level are cash and some property in Singapore.
- Given the UOS share price has historically trailed the attributable NTA by a fairly wide margin and due to the liquidity issues (i.e. the reluctance of existing holders to sell at current prices), the on-market buy-back is usually fairly unsuccessful in reducing the share count, has the company ever considered an ‘off-market equal-access buyback’ at some intermediate price between current traded price and NTA as a way to get the ASX traded value to more closely reflect a fairer price, and assist ongoing holders to proportionally increase their holdings? Alan again answered this and simply said that it had not been considered but they would discuss the idea at the next board meeting.
- What is the pipeline looking like, for with the current pace of development, replacing the existing land-bank must be a priority? Here it was mentioned the ‘land-bank’ now exceeds 40 hectares (I think 44.5 hectares was mentioned in a subsequent media article). Given the RM10billion+ Bangsar South City development is on less than half this, there is definitely room to grow the 5-7 year, RM15billion+ portfolio as needed. Alan Winduss mentioned what an extraordinary talent Pak Lim Kong was in respect of land acquisition.
The board and senior management were extremely forthcoming and helpful. I truly suspect after spending time talking at length with them that the only reason a lot of helpful information (that would cause the UOS share price to trade nearer to fair value) is not in the public domain is because no-one has ever asked for it. Given something in the order of 90% of stock are held by the CEO, senior management and others associated with the management, they obviously regularly see the data needed to assess the performance of their investment and because they have no intention to sell, they are probably fairly relaxed about the price.
That is a sampling of what I discussed with management, there was a great deal more, but space precludes mention of much else, but being that I’ve named a major holding, it may be helpful to fellow shareholders to consider the ways I think about valuation for UOS.
My preferred valuation technique for most stocks is discounted cash flow (DCF), but that doesn’t really suit UOS, for example for about the first 4 of the last 6 years, UOS has been about cash flow neutral, neither generating nor using cash, but then in the last 2 years, as some investment properties were liquidated, cash has been generated at a phenomenal rate. This is part of the reason the well-rounded analyst will attack the valuation of most companies from several angles.
So instead I will first look at a P/E valuation, this is probably not ideal for this company, but a combination of any valuation technique should leave you with the same result in my estimation (i.e. meaningful undervaluation) or you should move on to another target. You will notice I say ‘about’, ‘around’ or ‘approximately’ a lot in the workings, here I defer to the idea that ‘it is far better to be approximately right than precisely wrong’
At the time of drafting this post (Wednesday 5th June) UOS last traded at 50.5cps. At that price it has a market capitalisation of about AU$566m.
At December 31 2012 (the last balance date) UOS had cash attributable to its owners of approximately AU$200m (this will be much clearer with the next set of accounts when the assets at parent level are broken out in the notes) about AU$80m at parent level and about AU$120m on a ‘look-through’ basis through the listed-holdings. UOADB increased its cash holdings by around RM310m in the first quarter, about AU$70m attributable (at 68% ownership) to UOS at current exchange rates for total cash of about $270m.
AU$126m in borrowings were shown in the same accounts, as this is primarily in the UOAREIT holding (I will talk more about this below) which is 40% UOS owned, I will say about AU$60m of this is attributable on a ‘look-through’ basis to UOS. Based on this, we can declare ‘net-cash’ at the end of Q1 2013 of around $210m. This gives an enterprise valuation of about AU$355m when cash is removed. Based on current shares on issue, this gives a per-share E/V of about 31.7 cents per share (cps). Over the last 5 or 6 years, EPS has averaged about 7.5cps, there have been meaningful ‘revaluation gains’ in these figures which cannot be relied on in future, but I am confident growth in ‘development’ earnings will more than cover any reduction in future ‘revaluation gains’. This 7.5cps figure (n.b. my estimates of UOADB’s 2013 profit – see below – imply a UOS share of that equating to about 8.7cps for 2013 and do not include other profit streams) gives about a 4.2x P/E, which implies an expected sharp and ongoing reduction in future earnings, Benjamin Graham indicated a P/E of around 8.5x was suitable for a company which was expected to neither grow nor shrink their earnings. Often, however, investors will pay more than that, this link indicates analysis showing a P/E between 10.4 and 10.8x can be expected in a ‘zero-growth’ company. If I average the last 3 years EPS (by the way, I use EPS rather than NPAT for conservatism, as the DRP means large quantities of new stock are issued annually for UOS) over the prior 3 years for UOS, I get an annualised rate of nearly 10%. Over 10 years EPS growth has been nearer to 15% per annum (despite meaningful stock issuance through DRP).
I find it very hard (after observing their most excellent operations) to imagine a situation where UOS (through its holdings) will not experience EPS growth in the next few years. But for the sake of conservatism, I will use zero EPS growth as my low valuation. So for the low valuation, with static EPS and a multiple between 8.5 and 10.5x, a ‘low-end’ valuation for UOS is in the 64 – 79c range.
If we consider 10% annual EPS growth to be a realistic possibility (this would imply EPS of around 50.5cps over the next 5 years – this is at the lower end of my expectations), then a multiple somewhere closer to the market average of 14x is probably fairer. At a P/E of 14x the average earnings of 7.5cps over the last 5 years, valuation would be $1.05. If in fact 10% per annum was achieved (from a 7.5cps base), and the 14x multiple held constant, the 2018 price would be around $1.69 (14x a little over 12cps in earnings assuming cash balance was fully depleted).
So using a fairly conservative profit expectation and some undemanding multiples, on a P/E basis, we can conjure a valuation range for UOS of between 65c and $1.05, and this is before I add-back the nearly 20cps of attributable cash presently on the balance sheet. Property developers are nearly always heavily leveraged, but in this case you can take an unleveraged developer (with all the downside risk this removes), with an extraordinary cash levels and comfortably value the company at between 85c and $1.25 when the cash-balance is added in. At these prices your margin-of-safety (MOS) is between (based on Wednesday’s 50.5cps price) 40.6% and 69.6%. At the mid-point valuation ($1.05) MOS is 51.9%. So if you take the mid-point of the above valuations as correct, you are presented of the current possibility of buying $1 for 48.1 cents.
I also like to use a ‘sum of the parts’ valuation for UOS. This is much easier and looks like this:
- Value of Parent entity assets = over AU$100m
- Value of 68% of UOADB at Market = about AU$755m
- Value of 40% of UOAREIT at Market = about AU$85m
In simple terms, the ‘sum of parts’ based on Wednesdays market prices/exchange rates is about AU$940m compared to the market capitalisation of about AU$566m, implying a MOS of 39.8%. The key when using ‘sum of parts’ is to ensure the ‘parts’ you’re ‘summing’ aren’t overvalued.
At parent entity level, the assets are primarily cash. When UOADB was listed, UOS committed (in section 13.1.5 of the IPO documents page 338/339) to not intending to “…carry out any property development or construction activities in Malaysia…” So when I value the company, I assume very little will happen at ‘Parent’ level, although the board hinted at the AGM that they remain ever-vigilant in looking for opportunities at Parent level which will not conflict with the IPO commitment. Based on historical use of capital (cash), I would be more likely to apply a premium than a discount to cash UOS has available. A .pdf of the IPO documentation is available here.
As to the valuation of UOADB, let us look at some basic figures from the last few years:
|
All figures in (RM) |
2010 |
2011 |
2012 |
2013* |
|
Revenue |
375m |
614m |
800m |
1500m |
|
Normalised NPAT** |
102m |
194m |
301m |
429m |
|
Sales |
Circa 700m*** |
848m |
1710m |
3000m |
*Estimates – do not rely on, these are my personal workings
**Historically, nearly 40% of profits have been generated by property revaluations. I have ignored these for two reasons. Firstly, for conservatism & secondly, because of the increase in the pace of development, I suspect they will turn over properties more quickly to ensure cashflow is sufficient for growth needs, thereby reducing the quantum of ‘revaluation gains’.
***Estimate – I am sure I have read this number, but couldn’t find it when writing the post.
Bearing in mind the 2013 column above contains my estimates (although 25.5% of revenue, 27.8% of NPAT & 30.8% of sales are covered by Q1 published results) and the best reports I have seen from analysts suggest about RM1450m in revenue and RM350m in NPAT. Assuming my RM429m estimate of annual (calendar 2013) NPAT is correct; you would be looking at a company that has grown attributable NPAT by 61.4% annually over the last 3 years. UOADB at the time of first draft was trading at RM2.61 per share, giving it a market capitalisation of RM3,317m. If I strip out the RM655m of net cash on the balance sheet, the company is being valued at RM2,662m. This gives a P/E based on 2012 earnings of 8.8x. The rolling 12-month P/E (with Q1 2012 rolled out & Q1 2013 rolled in) is an even less challenging 6.8x. Forward (2013) P/E, using my RM429m NPAT estimate is a very skimpy 6.2x.
The point I would make from the above is that I don’t think a strong case for anything but UOADB being undervalued can be made (i.e. when doing a ‘sum of parts’ valuation, I remain confident it is not over-priced).
To give some perspective, CSL has grown EPS by 14.92% p.a. over the last 5 years and trades at 24.7x earnings. TLS has grown EPS by 3.75% p.a. over the last 5 years and trades at 15.4x earnings. Not property developers you say? How about WDC… Westfield have actually SHRUNK their EPS at the annual rate of 0.75% over the last 5 years and yet trade at 18x earnings. Serial underperformer Lend Lease (LLC) have also SHRUNK their EPS (by 1.25% annually) over the last 5 years and still trade 9.9x earnings. Simple point reinforced is – I do not think UOADB can be represented as anything like overvalued. Looking at peer Malaysian developers will help you draw the same conclusion (important: factor for debt levels). The price it presently trades at should probably be considered (quite deeply) under-valued if anything, but for our purpose, we will assume 5.5x is a fair forward multiple for a company growing earnings at over 50% annually and call UOS’ 68% share at AU$755m ‘fair price’…
UOAREIT is an investment trust. Like almost all REIT’s (that haven’t faced near-death experiences or other challenges), UOAREIT is valued pretty close to its NTA. Underlying NTA (after distributions) has grown by around about 2% per annum and the distribution (dividend) seems pretty steady at about 7 or 8% per annum. Rentals grew by 4.2% in 2012. Based on the yields of similar properties, I believe UOAREIT’s assets are held at conservative valuations, which suits me fine. I would say the UOAREIT holding is probably slightly undervalued, no more than 25%.
UOAREIT is a tiny holding, given the exceptional return on capital UOADB shows, my preference if I am honest would be for the board to IPO or somehow sell/dispose of this holding and apply the capital to the higher return areas, but a 9 or 10% return annually on a small holding is not unsatisfactory.
So my conclusion is based on a ‘sum of parts’ valuation, a reasonable case could be made that there are no overvalued parts and therefore UOS should probably trade meaningfully closer to the approximately 84c valuation the ‘sum of parts’ implies.
This post is getting very lengthy, there are a couple of other valuation techniques I could add in – driving this 3800 word blog post out to 5500 or 6000, you’ll probably be thankful I haven’t. Suffice it to say using either of the above valuations arrives at a conclusion that the 50.5c close on Wednesday this week leaves UOS as mouth-wateringly cheap in my estimation.
I first purchased this stock (on my Wife’s account) at 23c almost 5 years ago, since then we have received dividends and capital returns amounting to about 20c, meaning our effective cost base on those shares is about 3c and our annualised rate of return is nearly 30% per annum. The company was probably slightly more undervalued at that point in time I’d estimate, but the majority of the gains since that purchase have been through increases in intrinsic valuation. When the valuation gap closes (and I’m convinced it eventually will) you’ll get the added kicker of the revaluation accompanying any intrinsic value gains. These are the situations I look for…
For those interested, the UOA website also has a news page, which is updated (fairly infrequently) eventually posting most mentions of the company’s media appearances here.
In closing, I would remind anyone thinking of casting their eye over UOS as an investment to consider that it is a VERY thinly traded stock, extremely patient accumulation is required, I suggest making a bid and waiting for the market to come to you. Furthermore, exiting a position of decent size would need to be done carefully to exact maximum value.
That being said, I make no recommendation, anyone finding themselves in agreement with the writings above should take their time and do their own extensive research. UOS has been deeply undervalued for many a long year (in my estimation) and it is unlikely the undervaluation will disappear quickly – Tony Hansen 07/06/13
|
|
Apr 1st 2011 |
Jan 1st 2013 |
Current Price |
Current Period |
Since Inception |
|
EGP Fund No. 1 |
1.00000 |
1.21730 |
1.36721*1 |
15.05%*2 |
40.05%*2 |
|
35632.05 |
37134.53 |
38561.31 |
3.84% |
8.22% |
EGP Fund No. 1 Pty Ltd. Up by 15.05%, leading the benchmark by 11.21% since January 1st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 40.05%, leading the benchmark by 31.83% all-time (April 1st 2011).
*1 after 31May 2013 dividend of 2.333 cents per share plus 1 cent per share Franking Credit
*2 calculated based on dividends reinvested
