Consider this:
1. Property developer with minimal debt;
2. Growing at 20% plus per year for the past decade;
3. Flushed with cash;
4. Rental earning properties in prime areas;
5. Huge runway;
6. Asian market exposure;
7. Buying back shares in chunks;
8. Priced at nearly half NTA;
9. MOS increasing with every decrease in AUD;
10. Steady stream of dividends;
11. Management with demonstrated capability and integrity;
12. 191% rise in NPAT in first quarter alone for major subsidiary.
In effect, a value play with free growth upside.
Disclosure: I own shares in UOS.
Disclaimer: the content of this post is not to be relied on as financial advice. It contains my personal opinion only, plus facts that I cannot verify to be accurate. Do your own research and seek financial advice where appropriate. I have made many mistakes in the past, and will continue to do so in the future.
17 comments:
Interesting stuff.
Have you seen RNY?
No, what's the story?
I'd caution you on this idea -- a popular refrain in the US circa 2005 was that property developers were cheap because they were trading at 1/2 of tangible book. Turns out the inventory was massively over-inflated due to the housing bubble, and that tangible book wasn't so tangible in the end when they actually reached for the assets to turn them into cash.
I'm not sure why you'd want to touch anything Aussie or Asia RE-related today -- resi or commercial, for sale or for rent -- given the overt signs of a bubble in that asset class.
I know, I know, "it can't happen here" and the price action continuing to discredit critics. Google "Warren Buffett FCIC Interview" first, though, before making up your mind.
Thanks for your comment Anon. Would it be okay if you could be more specific on UOS? I am after all a bottom up stock picker.
Hi Peter,
First time commenting - I only found your blog a few months ago. I'm impressed with your blog, and many of your stock picks have been quite good to say the least. It's a welcome surprise to find we've independently come up with similar stocks, eg. FGE, TGA and IMF.
Anyways, I've also been following UOS for a while but never been convinced enough to buy, although it is tempting. I found your analysis on the Motley Fool, but cannot understand how you've managed to come up with a higher NTA than what is on the balance sheet.
Correct me if I am wrong, but why did you back out the assets and liabilities of UOA Development Bhd to come up with a net assets figure for the parent and then add on the market value of UOA REIT? The assets and liabilites of both UOA Development Bhd and UOA REIT are consolidated into the financial results of United Overseas Australia Ltd, so it seems to me that you're double counting by adding on the market value of UOA REIT.
Nevertheless, I agree that UOS does look cheap on an earnings and balance sheet basis, and I like the management, however I'm concerned that there is some kind of permanent discount placed on this business by the market. If you go back over the last 10 years or so, I have never seen UOS trade on a double digit P/E, it's usually in the low single digits. Likewise, UOS consistently trades at a large discount to book value aside from 2007 when the P/B ratio briefly moved above 1. Perhaps this is due to the apparent complexity of the business or simply that it is based in Malaysia.
Your thoughts would be much appreciated,
Chris
P.S I recently started my own blog if you'd like to take a look: http://socksorstocks.blogspot.com.au/
Sure -- helpful for me too actually... I hadn't actually looked at the filings before commenting.
At its core, UOA is just a Malaysian resi / commercial developer, mostly focused on KL. It appears to have listed in Australia in 1987 before the Asian exchanges really got off the ground (HK, SG or KL) in the 90’s.
First off, I have to warn you that being an American who has lived in Singapore for the past ~2 years, I’m extremely uncomfortable with developing country-HQ’d companies that are listed on “developed country” exchanges. These “developing world listed on developed world exchanges” companies have had a truly impressive number of frauds and blow-ups on the Singapore exchange (S-Chips, which are Chinese companies listed on the SGX), US exchanges (how many did John Hempton dig up?), and Canadian exchanges (Sino-Forest and a number of Russian and Eastern European companies).
Also, don’t get me wrong, Malaysia is about as “developed” as you can get for a “developing” country, but the business culture there is completely corrupt. You’ll have to take my word for it [and if you don’t just want to take some anonymous person’s word for it :), read Asian Godfathers by Joe Studwell – he has the situation exactly right. It’s the exact same today as it was 15 years ago].
Secondly, ignoring the fact that it’s almost June 2013 and the 2012 Annual report has yet to be filed, let’s look at the financials in the 1H-2012 Interim Statement. On page 16, we see the breakdown of revenues. I’m going to break it up into “cyclical” and “non-cyclical” pieces:
CYCLICAL
- Property Development = $108m
- Other Revenues = $25m
NON-CYCLICAL
- Rental Revenue = $15m
So almost 90% of revenue is highly pro-cyclical.
I lived in Singapore for ~2 years just recently and traveled extensively to Malaysia. You have to go there to see the kind of Las Vegas-style condo bubble going on there. Explaining this to a person who hasn’t visited KL is like trying to describe the color of the sky to a blind man. It’s driven by a mix of levered-to-the-gills speculators and money launderers, and it will not last.
Next, let’s move onto how these guys are financing their development. On page 10, do you see the “Financial Liabilities” of $125m under the Current Liabilities section? That means they’re using short-term commercial paper lending from local banks to finance the RE development. Unlike assets, the liabilities are rock hard and UOB has to pay them back. The presence of this short-term financial obligations means that UOB can’t just sit on the inventory if the RE market starts getting soft – it HAS to sell its properties to meet the debt repayment terms. 10% off? 20% off? 30% off? Why stop there – nearly EVERY condo developer has the same problem, hence why the leg down tends to be so fierce in these asset classes.
So looking at the P&L on page 9 – the $55m of COGS and $20m of G&A / Marketing / Maintenance / Other Expenses are rock hard. That’s ~$75m of fixed costs. And no matter how crummy the pricing environment gets for those condos, UOA MUST sell the properties to meet said fixed obligations. Suddenly that $226m of inventory, $60m and $496m of investment properties, and $67m of land held for development start looking a lot more squishy.
Finally, let’s not forget the little fact that we’re sharing 40% of the profits with the minority partners (presumably the REIT listed on the KL exchange, I haven’t looked into the details carefully).
My two cents -- this is very hairy and it looks like it's priced to perfection. I'm all for looking at hairy situations, but only when other investors are squealing "ick" and running away.
@ Anon
You certainly brought up valid issues.
Would your view of balance sheet risks and earnings risks change once you have a look at UOADB's first quarter financials ending 31 March 2013?
As for valuation risks, I am looking at UOS listed on the ASX, not UOA listed on the KLSE.
Lastly, I believe UOS management's integrity and capability have been amply demonstrated for the last 2 decades, even though I do agree on the general picture of business practices in SEA.
Studwell's book is a good read.
@Socks or Stocks
I made a mistake pure and simple, because I made an assumption that UOAREIT was not consolidated due to holding below 50%.
The calculations are only slightly different.
You are correct as to historical pricing of UOS. Therefore it is good to see intrinsic value rising by 20% per year, together with a good yield. If a reasonable growth rate is maintained, the price should at least follow the growth trajectory.
/// OUS vs. UOA ///
Understood. I had just looked at the ASX one and I hadn't look at the financials of the KL-listed entity at all. Everything I typed was in reference to the Aussie-listed entity.
Side note -- there's more than one KL-listed entity, right?
(1) The REIT
(2) Another entity similar to the ASX-listed development company (i.e. presumably another corporation that does the development and servicing?)
I also goofed up the initials in my prior post -- I said UOB (which is a Singaporean bank!) when I meant to type UOA.
/// Q1-2013 Financials ///
The only thing that would change my mind is if they radically changed their financing model, which won't happen because of Gresham's Law (replace "money" with "real estate development"... there will be other fools willing to lever up like crazy to build condos & commercial properties if UOA doesn't). If you study investing history, you'll find that the time to buy "financials" (i) is when nobody else wants them and you believe that the equity will survive through the lean times.
At their core, these RE development companies have an asset / liability funding mismatch problem. It works great in an upward trending market but horribly in a downward trending market.
(i) Why include RE developers in with banks, insurance companies, specialty finance companies like mortgage originators, etc. in this grouping? As Warren says, money may be the ultimate commodity, but throwing up wood/brick/concrete to build a house is a close second.
Btw, I learned most of my investing history from studying VIC (Valueinvestorsclub.com… this is Joel Greenblatt’s forum), John Hempton’s blog, Warren Buffett’s letters, Charlie Munger’s Wesco letters, Bill Ackman’s stuff on MBIA, David Einhorn’s stuff on Allied, Conseco, Lehman and interviews with the FCIC, Berkowitz’s OID interview in 1992 re: Wells Fargo, and Michael Burry’s letters and interviews in the Big Short and with the FCIC. There’s some incredible information out there if you use your mind to think through what the “gotchas” were that have roasted (or made rich!) value investors in financials over the last 25 years. It’s not all in one place though, so you have to dig.
/// Management Integrity ///
I have no quibbles with you here, because frankly I know exactly zilch. I have a bunch of baggage in my own mind about bad corporate behavior / fraud in somewhat similar situations, but that's my problem and not yours.
/// Studwell's Book ///
Truly a phenomenal book. It should be required reading for anyone investing in any developing countries, not just Asia. I'm glad you've read it. Btw, I think this type of corruption is true of EVERY nascent country (US in the 1700s/1800s, Australia in the early 1900s, Britain in the 1600s, etc.) -- it has nothing to do with culture, religion, race, etc. and everything to do with rule of law and standards of living for young and (relatively) poorly-funded countries.
Hey Anonymous,
I think you'll find 90%+ of the gearing is in the REIT. There is little to no debt being used to finance the property development. Because they are consolidated statements it's easy to be mislead. But when you look at UOA's statements (the development arm) you find very little debt on their balance sheet and plenty of cash.
The inventory is valued at cost price as far as I know. How were the US property developers inventories' valued? UOS has shown to be conservative in their valuations as the investment properties they've sold have fetched high prices than what valued at on the balance sheet.
The CEO has a 68% ownership of UOS, so he definitely has some skin in the game.
I don't see those fixed costs as you listed as being fixed. Fixed costs are salaries, overheads... what you listed seem to be more variable costs that go up proportionally to the amount of development they do. I am sure UOS could stop building and have enough cash in the bank to sit through several years while continuing to pay all the management salaries.
I think your whole argument is based on them using debt to finance their property development, but it's simply not true in this case. You're looking at the consolidated statements which includes the gearing of the REIT.
I also read that interview with Buffett, most of it seems to be common sense. I think most people here in Australia are very cautious about property now, I know I am. I sold my investment property 18 months ago and took the profits because property looked like a big bubble fueled by negative gearing tax breaks here.
“I think you'll find 90%+ of the gearing is in the REIT. There is little to no debt being used to finance the property development. Because they are consolidated statements it's easy to be mislead. But when you look at UOA's statements (the development arm) you find very little debt on their balance sheet and plenty of cash.”
I won’t do a detailed review of the corporate structure, but I do see their having consolidated the REIT capital structure. While (most of) the debt may be held at the REIT, I would warn you that I saw no information regarding the debt being non-recourse to UOS. So unless you’re confident that this financing is non-recourse, be aware that lenders will be looking for deeper pockets at the Parent level if the property values start looking shaky. Not now, but maybe later… anyway, something to look out for.
-------------------
“The inventory is valued at cost price as far as I know. How were the US property developers inventories' valued? UOS has shown to be conservative in their valuations as the investment properties they've sold have fetched high prices than what valued at on the balance sheet.”
UOS goes by IFRS accounting standards, so property is held on B/S at “fair market value.” What’s fair market value? Take a look at Note 15 in the 2011 Annual report…
***The fair value model is applied to all investment properties. Investment properties are independently revalued, which are performed on an open market basis, which represents the amounts for which the assets could be exchanged between knowledgeable willing buyer and knowledgeable willing seller in an arm’s length transaction at a valuation date. ***
This is where you have to trust the management / independent appraisers. Like I said, I have no opinion about UOS’s properties, I’m just pointing you in the areas of where I’ve seen “gotchas” before in the US. And US GAAP requires lower of cost or market, which obviously didn’t save anybody.
As for the sold properties north of the B/S values, I would just warn you of the phenomenon found in financials / asset managers of “picking your flowers and watering your weeds” – i.e. the sold properties MAY not be representative of the broader portfolio. Read Einhorn’s book on Allied for the dynamic I’m referring to.
“The CEO has a 68% ownership of UOS, so he definitely has some skin in the game.”
This is true. But do you know how many controlling majority shareholders of US homebuilders went down with the ship when the property market burst?
Anyway, it’s a heartening sign, but don’t rest on your laurels because a major shareholder owns a bunch of stock. Do your own diligence, including on those parts where the capital structure may be prone to “bend too much and breaks.”
------------------
“I don't see those fixed costs as you listed as being fixed. Fixed costs are salaries, overheads... what you listed seem to be more variable costs that go up proportionally to the amount of development they do. I am sure UOS could stop building and have enough cash in the bank to sit through several years while continuing to pay all the management salaries.”
The majority of costs are not administrative salaries – they are material & construction costs. So unless Management has the foresight to predict the Malaysian RE market downturn 2-3 years in advance, they’re going to have a whole lot of contractor expenses to fund (it takes 2-3 years to build a major condo or commercial development) while getting less and less profit on the RE they’ve already built and are trying to sell.
If there’s a lesson to be learned from the US RE investment history, it’s that the funding BRIDGES are where many players die a fiery death (because that’s when the lenders pull in their credit to limit further exposure). This applies for homebuilders, mortgage originators, S&L’s, etc.
As for cutting marketing / sales promotions costs – how do you suppose they’re going to “move” properties in a down market? That spend is very close to being rock hard.
------------------
“I also read that interview with Buffett, most of it seems to be common sense. I think most people here in Australia are very cautious about property now, I know I am. I sold my investment property 18 months ago and took the profits because property looked like a big bubble fueled by negative gearing tax breaks here.”
Cool. You’ll find selling “too soon” is the hardest part about being a value investor, but you may have caught the peak. Only time shall tell, I guess.
Anyway, best wishes on the investing front – I don’t want to make it out like I know everything there is to know about UOS (or any property developer, for that matter), I’m just pointing you in the places where there could be some serious blow-up risk. Take it from me, I know from my own personal investing experience.
@Anon: May I say I have a lot of respect for the clarity of your thinking and attention to details. If you don't mind, please drop me an email at john@portfolio14.com to keep in touch.
John, do I get an introducer fee?
I take payment in beers or coffees.
Hi Peter,
Introducer or not, I'm more than happy to buy you a drink or two. But I live in Melbourne. I think you are in Sydney.
Hey Anonymous,
Inventory vs Investment properties are two different things... we're comparing apples and oranges aren't we?
I agree with you on the investment properties, they are valued at fair value. But, the inventory is a different kettle of fish. The development costs are capitalized onto the balance sheet of UOA (the development arm), whereas the parent reports the inventory at the LOWER of cost and fair value. My crude analysis of the parent and subsidiaries shows that the inventory is indeed valued at cost at the parent level.
Good point on the non-recourse funding and I'm not in disagreement that the Malaysia property market is in a bubble Because to be honest I have absolutely no idea whether it is or isn't.
Would you be able to show some evidence or give me some hints as to where I can find information that the Malaysia property market is a bubble? I googled average household income and looked up units in KL, but UOS/UOA seems to target upmarket properties.
Hi Academia Investment,
/// INVENTORY ///
However crude you think your analysis may be, I’m sure your work dissecting the various entities is FAR deeper than mine, which I enthusiastically admit to having done only a cursory amount.
That said, again speaking from my US experience, the lower of cost vs. fair value debate means little when it comes to converting condos into cash while sliding along the downtick portion of a bubble.
Charlie Munger had a great quote about the asset value quotes on the derivatives book that they inherited (and immediately set to liquidating) upon acquiring General RE in 1999:
"Good except when reached for."
The same is true for these condo properties whether they're in finished form (i.e. "investments") or in-process form (i.e. "inventories") -- it is MORE than possible to have negative gross margins on your held at-cost inventory in a declining RE market.
It's like any retailer -- why do retailers liquidate out-of-season or unfashionable clothes for prices below what they paid wholesale? Because it's better to get 60 cents on the dollar than 0 cents on the dollar for "bad stuff" you already invested your money in.
The same is true for condos and commercial RE, especially when you have bills and debts to pay.
/// KL Real Estate ///
Sure on the sources. But I will warn you though that I will now be (deservedly) accused of cherry-picking articles/data that support my view:
http://online.wsj.com/article/SB10001424127887323789704578447080476172420.html
http://www.livingspace.com.my/investor-essentials/are-we-in-a-property-bubble
For every article like the ones above, you'll find 4 others that say, "Nope, no bubble. Nothing to see here."
My only reply would be, "Consider the source." 9 out of 10 will cite the Malaysian Government (more property tax revenue), RE industry analysts (more buyer interest results in more advisory fees), banks (more origination fees), or brokers (more transaction fees).
Instead, the "data" that I put more trust in is my 1st person, purely anecdotal perspective having lived in the region for ~2 years. Though like any good data-driven value investor, you should probably take these anecdotes with a few handfuls – yes, handfuls – of salt without doing your own investigation:
- Mortgages are being offered by local banks at 2-3% ["underpriced financing", check]
- Games being played by speculators to skirt government mandated limits on # and $ amount of mortgages per person ["fraud", check]
- Buyers are overseas investors, largely from Singapore (hoping to get in cheap on "the next RE boom") and Indonesia/China (Singapore just slapped a 10% levy on foreigner purchases of RE, plus Malaysian condos are cheaper than Singapore condos so it opens up to a larger array of buyers) ["hot money", check]
- Condo development pre-sale "cocktail parties" held in Singapore, reminiscent of Las Vegas circa 2005 ["priming the pump", check]
- My landlord, who lives in Penang and owns 2 properties in Malaysia (1 in Penang, 1 in KL) in addition to his Singapore condo, was telling me he was having a hard time selling his Malaysian properties and had put them on the market 8 months prior ["cooling of buying activity", check]
All of the above, btw, is focused SQUARELY on the mid/upper-income condo developments, not lower income developments.
Anyway, like I said, this doesn't make UOA a good short today, but I wouldn't be going long either.
John and Peter, I'd happily take you up on a beer AND coffee next time I'm down under.
I went for my first trip to Oz last October and had a beautiful time. Visited Melbourne, Sydney and Adelaide.
Side note -- everybody there kept asking me, "Why spend 3 days in Adelaide?" I didn't really know how to respond, having so little knowledge of the place. My real answer was, "I had researched the history of News Corp. / Murdoch and saw a beautiful picture of the town," but that sounded borderline crazy. So I just kept saying, "It was on the train stop."
Post a Comment