Saturday, March 7, 2015

Finding Gems Amongst The Junks

I remember when I was younger, it was so cool to follow the latest trends, gossips, gadgets and the many more that people and news were reporting all over. Even when you were walking beside a group of hunks in school you'll look somewhat better in person. 

The opposite is also true. When you mix around a group of friends that are generally unpopular, you get lesser attention from the public, but that's also probably the time when you can build a greater relationship and find out more about each person's personality.

The topic for today's article is on finding gems amongst the junks in the stock market. With the stock markets reaching high and higher, and valuations somewhat overstretched for some industries, we should continue to look for undervalued companies that have been beaten down badly in the past few years. Commodities, O&G and Properties are some of those industries that have been out of favor in recent years, due to their respective problems they are facing.

In this article, I will be discussing some of the individual companies in the properties sector that presents somewhat an undervalued proposition. I will skip an in-depth analysis at this point in time and will present my thoughts should I decide to buy them. Should you be interested in the companies mentioned, you are of course encouraged to conduct your own due diligence before buying.

The New Threshold For Properties Sector

We often hear about legendary investors talking about buying stocks with a margin of safety. Paying 50 cents for a dollar deal seems like a very good deal because it presents a margin of safety during liquidation period and downside is somewhat more limited, caveat applies.

However, in recent times, the pessimism surrounding the property markets is so bad that paying 50 cents for a dollar (price to book at 0.5) does not look sufficiently probable to buying with a margin of safety. Take a look at the appended table below on the various properties counter in the different regions and you can see that almost everything everywhere is trading at a massive discount. 

In other words, the new threshold to look for beaten down properties sectors has been raised to another level to be more selective. This is of course just my personal threshold level in relation to the poor sector performance in the next few years in view of the higher supply and increasing interest rate. But it's always better to be safe than sorry, taking a more conservative outlook than anything.

What To Look Out For

After reviewing the above "new" threshold of the company's book value*, it is also prudent to take note of the following business fundamentals below to ensure that we know what we are in for after buying the company. These are what I would be taking a close look on before deciding what to buy:

*Since we are talking about properties sector in general, we assume the book value consists of mostly their development and investment properties.

1.) Fair Value Gains/Loss Accounting Treatment

I've talked about this in the past and will just quickly brief on it again.

This is more of general accounting stuff that many investors do not pay attention to but for those vested in property industries had better known this accounting treatment, at least on the surface level.

Many companies had in recent times favored and adopted the accounting treatment of IFS 40 to report their investment properties at their fair value. This is the very reason why you see many property companies recording record gains and NAV sometime in 2013.

This is going to be very important because with the recent pressure of a higher supply and credit tightening, many had predicted the price for the properties sector to decline. If that's the case, the company would have to adjust for the impairment loss of the fair value which they had previously recognized as gains. In other words, there could be possibility that the company would record a loss and a decline in the book value should that happen. A vested investor should be able to understand the underlying risk impacting their investment.

A good recent example of this is Lafe Corporation, whose main properties development they had on their books is for the Residences @ Emerald Hill at District 9 Somerset (Woolalala ^^ ). Because of the recent pressure on the luxury segments, the properties had declined much in value and the company had to adjust for impairment that resulted in the net loss for the year. The book value had to decline because of the net loss as well.

2.) Extension Fees on Proportion of Unsold Units

This is another factor which I realized many investors are caught unaware.

In general, the rule states that foreign developers will have to pay extension fees to the Singapore Land Authority based on the proportion of unsold units if those units are not sold within the stipulated two year period from the date of the TOP. Extension charges are paid based on the proportion of unsold units at  8%, 16% and 24% of the property purchase price for the first, second and third extra years respectively.

Many companies, including Capitaland, Keppel Land, Wheelock, Wing Tai, Bukit Sembawang, OUE, CDL and Lafe have been a victim of this and it's interesting to note on the extension fees they have been paying and we now understand why they would rather absorb the ABSD fees or throw the sink for you rather than having to pay these fees and still have to find buyers after that.

3.) Privatization Play

There has been many privatization rumors surrounding those undervalued companies given the many recent example we have. Understanding and monitoring the intention of the business owner could be key to increasing the probability of a privatization.

For example, we know that the boss of Ho Bee has been scooping up the shares in recent times, increasing its stake to around 72.5% now, but it could perhaps be because of some other intentions, for example building up diversified office play or the company's qualification criteria that allowed them not to pay the extension fees, might be a turnaround factor for considering this as a privatization play.

In any case, do continue to look around for clues.

Final Thoughts

The book value is a very important indicator for the properties sector and we should not be ignoring that. However, as mentioned above, a few factors surrounding the property market may have an important role in determining the future book value of the company.

My strategy is to reach out to companies which is undervalued relative to the "new" threshold I talked about earlier while constantly monitoring the important factors that does not impact the Earnings too much. As long as the earnings does not turn negative, the book value is only going to increase over time and that should be the turning points I am looking out for. This is called paying a good amount for the liquidation value and getting the business for free.

Another strategy is to pick ahead of the property bottoming, at least in the local markets. Some companies have been beaten down massively to almost lower than 70% book value (P/BV < 0.3) so picking out the bottom could be another on the cards I am looking out for.

What about you? Does any of the property companies interest you to become vested?


  1. Before CNY, karang guni men may find gems amongst the junks.

    When is CNY coming to the stock market?

    1. Hi Uncle CW

      We know CNY comes in once a year but this karang guni may have to wait for quite a while before he can become a karang guni tycoon :)

  2. Hi B,

    Nice article. I am looking at smaller developers who are trying to build a bigger base for recurring income, for being a developer to a hybrid of landlord and developer. Beside Ho Bee, I am also looking at low Keng huat. I am bidding for 60 cents when it is 65 cents. Guessed I already missed the boat

    1. Hi SI

      Ho Bee is currently in my watchlist. I will try to see if I can catch them at below $2, in addition to the dividends of 5 cents to be paid in May.

      LKH price may be a little too high for my liking. I hv not gone through their business in full throttle but thats the general impression I get.

    2. I have Ho Bee and Wing Tai in my portfolio. Didn't managed to buy more when they were hovering around $1.9+ and $1.6+ as I was busy with SCI ... Both bounced back due to the privatisation hype caused by KepCorp and KepLand ... But price soften recently, hope opportunity to buy will come soon? ;)

    3. Hi Boonchin

      I was also distracted by something else when their prices went to that low. I am keeping a close look on them.

      Maybe I can get some nice value in them real soon :)

  3. the reso on the table is really too small...uncle cannot see properly

    1. Hi Uncle

      Sorry for that.

      You may want to download the table by CIMB on one of their consolidated property record recently. Let me know if you need them and I can easily emailed it to you.

  4. The valuations already look quite attractive at these prices, but if the property market continues lower, I think we can see even better bargains!

    Am I horrible person? I always find myself hoping for more blood on the streets :(

    1. Hi GMGH

      The valuations for property stocks do indeed look already pretty good at the moment, and there are a lot of stock buyback at this price. I'm watching out some of their earnings though and some does provide a really good margin of safety there with a few recurring income.

      Definitely going to hunt them down during these few months while the market still at the toppish.

  5. B,

    Thank you very much for this article - I learned a thing or two. Very well put together. You might want to make the table bigger though, as it's really hard to read.

    The property market is extremely overvalued in Belgium, so there aren't any bargains to be found.


    1. Hi NMW

      Ahh, it appears that it's the same over here in Singapore.

      The property market had just gone some corrections and the deevlopers are having it really hard to survive these days. It's also where value starts to appear :)

  6. Nice article B. I've managed to buy some OUE at $2.02 last year. Personally I think some HK property stocks and REITs are very interesting now.

    1. Hi Anonymous

      If I remember correctly, that's one of the lowest OUE went through in the past 52 weeks. That's a really good margin of safety there. I'll certainly be eyeing more property stocks these days because of the value they provide ;)

  7. Hi B,

    Thanks for the article, it does help a newbie like me to have a better understanding.

    In addition, it would be great that if you can send a copy of the chart to me. Have tried to googled but no luck. Many thanks in advance!

    This is my email add:

  8. Singapore stocks are not worth investing. At least at the moment.
    Mostly overvalues or junk stocks with absolutely no business fundamentals.

    SG Wealth Builder

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