Update No. 165 – 31/05/14

I attended the AGM in Kuala Lumpur this week of one of our largest and most important shareholdings. I will fly home tomorrow to make sure your dividend is processed and for those not taking the cash (all of you – thanks for your ongoing belief in me), your new EGP shares issued.

United Overseas Australia (UOS) are a property developer based in Malaysia. I wrote a lengthy piece on the stock after last year’s AGM, detailing how I think/thought about the company in terms of valuation.

Very little has changed over the last 12 months, another bumper year of earnings is behind the company, they earned 9 cents per share after tax, paid 2.5 cents in dividends, the price is up about 4.5 cents, from 50.5c to 55c. So we have had about a 13.9% total return in the period.

Believe it or not, this holding which I described this time last year as probably our best long-term prospects has actually held the fund back somewhat, with the total return on EGP shares being roughly double that generated by the portion tied up in UOS.

Returns rarely come in a straight line and although I won’t repeat the analysis from that post 12 months ago, suffice it to say I think the intrinsic value has grown a little faster than the company’s share price and IV always shows up in the share price (eventually). The primary UOS investment in the Malaysian listed UOADB should have a comparable 2014 to their 2013 result, the smaller investment in UOAREIT will continue to yield about 7.5% with some prospect of minor capital growth. The kicker now is the new venture in Myanmar. It is a tricky country with a difficult recent past, but the prospect is very exciting.

About 25 years ago, UOS had less than $10m in capital when they started off as a developer in Malaysia, they have entered Myanmar with about $80 million in unencumbered cash at the parent company level (ignoring the consolidated cash holdings at the subsidiary levels), the ability of the company to fully exploit the Myanmar opportunity (to an extent they weren’t ever really able to do in Malaysia) is obvious.

By way of comparison of what the opportunity is like, Malaysia had a per capita GDP in 1990 of around US$6,000 (today over US$16,000), GDP per capita in Myanmar is less than US$1,600 today. The population in 1990 Malaysia was about 17.5 million, in Myanmar today it exceeds 60 million. Malaysian urbanisation in 1990 was about 48% (today it’s about 74%), urbanisation in Myanmar is at about 34% today. So the opportunity in Myanmar is enormous, the population is larger, poorer and less urban.

Given the success CS & Jim Kong have had over 25 years in Malaysia, it would be dangerous to bet against them in Myanmar. I am happy to throw our lot in with them, I expect for a very long time.

UOS is not really a ‘moat’ business it should be said. In fact I doubt any developer could claim to be, but UOS has maintained gross and net profit margins that exceed their competitors by around 10%, and they do it all without using leverage, which virtually no other developer can claim. They obviously have some edge, I think it relates mostly to vertical integration, very little of their work is subcontracted, they manage the process completely from end to end, which gives an unrivalled flexibility. They claim to be able to change direction at a pace no-one else can, so if they spot a gap in the market, they can deliver a suitable project to market faster than anyone else. The huge cash holdings are another advantage, in discussions after the AGM, it was mentioned they virtually never go chasing land. Almost always someone or other who has gotten themselves in a pickle and is looking for someone with deep pockets and a willingness to quickly deal.

After the initial capital injection, they have never again required capital from their owners (excepting what they get through the DRP of course). That is also extremely rare of any listed business, least of all a developer. As with a great majority of our investments, we happily put our lot in with a founding executive/s as the dominant shareholder/s.

If the future for UOS were even two thirds as good as the past, you can be sure our results will be good. Don’t be surprised if the results are better than that, they say historic performance is no guarantee of future performance. If the history is long enough, I say that’s probably bunkum – Tony Hansen 31/05/2014

P.S. – Don’t forget the share price will drop by 10c next week (give or take the normal weekly movements). The dividend reinvestment plan shares will be issued at the ex-dividend price of $1.57426, you will all receive your dividend statements via e-mail in the next couple of days.

^{*1 after 31 May 2013 dividend of 3.333 cents per share (including Franking)}

^{*2 calculated based on dividends reinvested}