Thursday, July 27, 2017

Recent Action - Guocoland

I am writing this down as a short thought before I forget on some of the points that I had in my head. As I'm currently still overseas, I'm unable to produce the excel spreadsheet I had with me back home, hence I'll just pen them down into words for now.

I've been slowly building my next core foundation moving into the year of 2018. This year return has done fairly well for me hence I have started trimming down some of those companies which I thought valuation was rich and move into building large position onto companies which I thought had better valuation. Most of these stocks are either ignored or largely avoided for now, so it gives me a good chance to accumulate them.

Guocoland returns have been rather poor based on my memory so this was one of my consideration when I purchased the stock. Still, with market going further up its getting harder to find companies with attractive valuation but I though Guocoland was one of them.


I went to accumulate 55,000 shares of Guocoland today at a range of between $1.89 to $1.91. This goes straight into my top 3 position in terms of size.

I'll go straight into why I think they are worth a shot to buy.

1.) This is the developer year of reckoning. If we look at the big brothers UOL, Capitaland and CDL, they have all gained respectably well this year and are getting momentum to becoming the leaders of the market together with banks.

For Guocoland, they have been largely ignored because they have a much lower public float so there are not much liquidity in the market. They have also not participated in the developers rally so far, so I'm hoping the laggard will follow.

2.) The spread against net asset value for developers are tightening due to the rally. This was somrwhat around 45% just back 6 months ago and now it was spreading closer. Guocoland is still currently trading at 38% discount to its net asset value and probably much bigger if we revalue their investment properties.

3.) Speaking of investment properties, TPC has been completed and Guoco Tower has commenced leasing. The company has this huge integrated development of 890,000 sqft of commercial, 100,000 sqft of retail, 222 rooms of Sofitel hospitality and 181 units of residential. Based on URA, the net cost after tender and development was arrived at $1,100 sqft, which happens to also be what they have on their book.

With commercial valuation rising (taking cct as reference), hospitality bottoming out (taking cdlht as reference) and residential demand (taking sales of Martin Modern phase 1 sold out) picking up, we could be looking at a really solid revaluation gain should they choose to do so. This will add up to become their rnav.

4.) They've also build up in terms of recurring income now that they have this integrated development to normalize the volatility of their earnings instead of having to depend on just residential sales.

If we work backwards by using $9 sqft on commercial (taking grade A cct as reference), $15 sqft on retail (taking grade A mall cmt as reference), $350 per room based on occupancy level of 95%, 95% and 80% respectively, then take the ownership of 80%, we could be looking at about $72m in recurring income per year. This translates to about 6.5 cents earnings per share. They usually pay out 5 cents dividends in a year, so thats just for reference.

5.) Residential has been picking up based on the sold out of their luxury Martin Bower phase 1 at about $2000 psf. Their net development cost + land is at $1800 psf, so they stand to gain $500 psf x 450 units once all the phases have been sold out. Knowing demand is picking up, they may also up the sales in other phases as they roll out one by one. P.S: Thanks to friends who managed to inform me.

6.) Share of associates Eco in Malaysia and Tower Reit has also picked up in sales and performance so we'll be looking at them contributing about $50m per year. Not a big amount to deal with but good to know they are also on trajectory upwards demand.

7.) Debts are picking up but inventories are rising as well. I believe in terms of replacement cost they are lower and they want to start picking up and launching more development in this cycle they've been waiting for a long time.

Overall, I'm pretty happy with the potential pick up in all segments that we are seeing from Guocoland division.

I am also not as worried with the downside because I believe they've got to a point where they are relatively cheap. The only thing I'm a bit concerned is if the business performance would translate into higher share price and taking the number of years this could turn out to be a long hold before value is unlocked.


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