Today, I made a new entry addition to my portfolio by adding 6,000 shares of UOL at a price of $5.42.
This is a company which I have been interested for quite some time but never really had the chance to add on in recent times. The recent weakness has provided the opportunity for me to do so.
To give a little bit of their background for those who are not familiar with the company, UOL Group Limited is a property company with over 50 years of track record in their industry. Like any conglomerate, the company is operating in many different segment, namely property development, commercial and retail investment, hotel operations, management services, and other investments.
The company is owned by popular leader Wee Cho Yaw, who also owned UOB and another property company UIC. There’s a lot of interesting story going back to 2013 when they streamlined their operations by privatizing Pac Pacific for their hotel operations while UIC, who was owned by UOL 40%, has also privatized its crown jewel commercial properties in Singland.
The below information is an extract summary of their financials over the last 10 years.
A quick glance on the important metrics – revenue, earnings and book value over the past 10 years and you can see a pretty obvious uptrend where the management has done a pretty good job at growing the company to where they are today. Meanwhile, the company has underwent a few headwinds as the economy went through a volatile period, including the GFC and Euro Crisis we had in 2008 and 2011 respectively.
The management has also shaped the direction of the company towards moving into a recurring income play than a pure developer. This is a similar traits which I’ve seen being done to other developers like HK Land and Hobee, both of which I am vested in.
In 2015, the recurring income play from their commercial, retail and hotel operations made up 82% of the underlying earnings. Based on the underlying earnings of $411.6 million in FY15, this came up to $337 million or an earning per share (eps) of 42 cents / share. In terms of valuation, this would translate to a PE of 12.9x based on recurring income alone.
The Return on Equity has been declining in recent years but that’s mostly because the company has been reducing their gearing. The latest gearing ratio in FY2015 is 0.27, which is comparatively low against other developers. The company has completed a new acquisition for the UK property at High Holborn recently, which provides an NPI yield in excess of 5%, so I’m expecting both the gearing and ROE to increase in 2016.
Why Buy UOL?
1.) Recurring Income Strategy
As mentioned above, the recurring income alone will be sufficient to pay out dividends to shareholders and retained the rest for repaying loans and other working capital purpose.
The company is moving into this direction as they have recently completed the UK commercial building so recurring income play should increase accordingly.
2.) Historical Cost Basis – Hotel Operations
The hotel operations assets were held at cost in the book and not being revalued.
Independent valuers are expecting the assets under management to grow by $800 million should they decide to revalue. This translates to about 95 cents / share which can be further added to their book value should they decide to revalue them.
3.) Deep Discount to RNAV
The latest book value after the Q1 FY2016 results were at $9.95. Combining with the above point, the RNAV is expected to be at around $10.90. My entry price at $5.42 represents right about 50% based on their RNAV, which I think is pretty decent.
In terms of historical data, the current discount also represents a -2.2 SD from the average mean. It is a heavily discounted company which is unloved by investors at the moment.
4.) Taking Privatization of UIC
The management has a long term plan of streamlining all their operations under one listed company.
They had previously taken Pan Pacific private in 2013, followed by UIC’s privatization of Singapore Land not long after.
UOL has been buying UIC’s stake from 2013 onwards and has today increased their stake to 44.57%. Together with GKW, they have now hold a combined stake of around 88% in UIC. Effectively, they just need around 2% more before an unconditional offer GO would come in for UIC.
Privatization of UIC would ensure that the company gets to consolidate their balance sheet under one review and they will own a full stake in the crown jewel of their commercial properties.
5.) Novena – Next Cinderella Story
UOL owns quite a bit of properties in Novena area where United Square and Novena Square are under them – both retail and office.
Royal Square is slated to be completed in 2017, which will further boosts Novena as a hub for medical tourism. This will help ensure the rental and asset value of the properties in Novena are kept competitive and rising over time.
You can read the article here
6.) Blue-Chip Company
Getting the company into one of the 30 blue-chip in the STI constituent is not an easy task. If you had asked them 10 years ago, they would be nowhere near the market cap they are now to be able to get into the top 30.
Not that it does matter too much being a blue chip, still being one of the top 30 will get more public scrutiny, analyst attention and move with the overall index when that matters.
1.) Management Execution
The company pays out a fraction of the earnings as dividends and retained a large part of it.
By retaining a large part of the earnings, it is imperative that we have a capable management to run the company so they are able to utilize the money to a better use to grow the company.
Based on their 10 year records, you can see that the management has well apt for running the business in an efficient manner and grow every single segment of it.
2.) Development, Commercial & Retail, Hotel Weakness
Every single segment of their business is under operating pressure as weak economy kicks in. This has been largely reflected in the share price and explains why they are trading so cheap right now.
Even so, the company needs to be careful of competition and supply awareness so they can remain solvent and top of the situation when the up cycle comes back.
Property play is always going to be tricky. They are an unloved sectors neglected for many years and they do not pay dividends well. My goal is to get it low enough such that a small increase would result in double digit returns for me. I think that could be done with this company.
I’m hoping I’m right of course.