Friday, October 2, 2015

A Quick Summary Valuation Guide for Developer Companies‏

Many developer companies have long endured a depressed valuation for a number of years, due to poor market sentiments from the market and tightening of the government policies.
As investors, we know that these developers are currently trading at a significant discount to their book value, a metric which is key to valuing these companies. People used to get interested in these companies since they are trading at a discount to their book value but the market environment over the past few years has forced investors to consider a much higher margin of safety, such that many are looking at deep discounts to their book value.
I have appended a summary table below using key metrics such as P/E, P/BV and Dividend Yield for those who are interested to invest in some of the developers listed. There are some notable key areas which I wanted to highlight below especially to new investors which I think is key to making decisions whether or not to invest.
This metric measures the price to earnings multiple of the company.
It is a direct inverse correlation to the earnings yield and it measures how long the company needs to earn before investors would break even for the price they pay.
It is important to note that the number you see above includes the earnings from fair value gains of the property which the company typically does the revaluation exercise once a year. What this means to investors is the multiple could fluctuate and skew the result from one way to another due to these large revaluation gains/losses that arises from the properties. Since the trend is many developers have recorded fair value gains on their books, it is important to consider if they will take impairments for the same in the future, especially if global outlook is uncertain.
Savy investors would strip out these non-cashflow generating gains and focus on core earnings that trickle down right to the operating cash flow. This should help the investors see the picture clearer and make better decisions and comparisons since what we want from these are cash and not accounting earnings at the end of the day.
This metric is most commonly used to value a developer since they are related to the assets (and gearing) the company owns relative to its equity.
It is important to note that the book value is somewhat different from the revalued net asset value (rnav) because there are some developers who does not opt for the revaluation under IAS 40 when the options were rolled out. An example of such companies are City Developments and Stamford Land. Having said that, most of the developers listed above have opted to go for the IAS 40 so their assets are mostly marked closely to market value, which makes up the rnav that many analysts are talking about.
Dividend Yield (%)
The dividend yield listed above are inclusive of special dividends issued to shareholders, either because they have an exceptionally good year or if they have divested some businesses most likely to their Reits. An example of such companies are City Developments and OUE, both of which owns the Reits arm in CDL-HT and OUE-COMM/OUE-HT.
In this regard, it is important for investors to consider if the special dividends are recurring in nature or if they come from a one-off divestment.
Final Thoughts
Developers are not well known for their high dividend yield simply because their business model requires them to constantly keep cash to further grow the assets of the company.
If you are an investor who prefers income to be distributed back to you, you should be more comfortable with Reits because their business model allow them to distribute most of their earnings back to shareholders in the form of dividends.
This may confused some of the beginner investors because it appears that latter is more attractive but what essentially the developers do is to reinvest the excess earnings back into the business immediately, which can generally be much better if they are able to find a higher IRR business than you do with the dividends reinvested. Of course, the recent market weakness has made the share price of the companies rather volatile but the underlying fundamentals should not change.
For anyone who are interested to invest in developers, please do more research on your own as guided above and treat the appended table as a form of reference and not face value.
What about you? Do you prefer Developers or Reits? Are you a growth or income investor?


  1. FCL looks the Gem here. but it seems the divdiend yield you listed is kind of low.

    1. Ohh, I didn't know they yield anything higher than that. Never really monitor them closely. Could be wrong.

  2. I look at the table, some companies have PE of less than 10. For my evaluation purposes,anything less than 10 is a screaming "BUY".

    1. Hi Vivianne

      PE less than 10 is an attractive one for sure, it just means it's increasing at a 10% growth annually every year.

  3. Purely from a number perspective,

    Fraser, Wingtai and ho bee stands up.

    Maybe the leverage ratio should be included.

    Property counters had depressed valuation for so long, even when they are selling like hot cakes. But property is highly cyclical. Think the peak is just over

    1. Hi SI

      The leverage is a crucial factor but perhaps the investor himself could do some homework if he is really interested in the counters. No spoon feeding definitely :)

      The point about getting these developers is get it way low so that you don't even have to wait for the cycle to pick up to earn a decent returns from your invested capital.

  4. The dividend yield of capitaland for 2015 (E) seems to be high. Possible to enlighten me on the computation? thanks.


    1. Hi CS

      I am not invested in CPL, nor am I monitoring them too closely so I could be wrong here. I just thought they could have a higher payout given their higher earnings this year than last.

  5. Is it right time to do property investment in Singapore?
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  6. Hi B,

    Great information you have shared here! When on the topic of developers, many talk about developers like Frasers amd CapitaLand. So in your opinion, what do you think about Sim Lian Group? Curious about your pov :)

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