UOL - United Overseas Land

[pianist]

Thomson three selling well above expectation, saw from papers today. Well timed just after fed announcement this week. Cool.

[David]

I am still learning so correct me if I interpret wrongly but this is what I understand from their financials.

1. Their NAV is $8.47 vs current price at $6.38 (about 25% discount from their NAV)
2. They generate FCF from their operating activities
3. Dividends have been pretty consistent every year

On the company's operating activities, they are also buying land for future development.
Comparing their 2nd quarter results from last year, they are about $400million up from last year.

about 330 million of that gain is from fair value gains, referring to note 20 of their 2012 annual report, "investment properties are carried at fair values at the end of the reporting period as determined by independent professional valuers. Valuations are made semi-annually based on the properties’ highest-and-best use using Direct Market Comparison Method, Discounted Cash Flow Method or Income Method." This leaves room for a misvaluation, (through the mass of assumptions required to arrive at fair value) hence maybe you should approach this 330 million gain as slightly skeptical.

From another perspective, a fair-value gain of 330million is roughly 10% of their investment, which may seem reasonable but in light of the long-range average of about 7% for residential and industrial properties (http://www.singstat.gov.sg/statistics/vi...perty.html) (contrast this with the actual breakdown of their investments that look a lot more like office/shop with a sprinkle of residential). 10% seems very bullish an assessment of fair value gains.

FCF after capex of 122 mil vs 43.8 mil q-o-q, with FCFE moving from about 54 mil to 209 mil q-o-q. However, differences in FCF was mainly driven by working capital changes. You could interpret this as the underlying business is doing slightly better over last year, while their increase in net debt (FCFE = FCF + net debt - interest, q-o-q its 88 mil in 2013 vs 10 mil in 2012) could suggest more projects in the pipeline in the future. Or being overly skeptical, you could read it as they are trying to show some convincing signs of cash growth.

Regarding dividends of about 115 mil each year (15 cents a share on 770.5 mil shares, excluding minority interest), their wiggle room (dividend cover) was only about 2x in 2012 with regards to FCFE (this excludes their dividend income from investing activities), which in terms of dividend safety, is quite dangerous IMHO. In addition, consistent dividends is a double edge sword, cessation of this dividends would be disastrous to their share price, which would elevate this dividends to a somewhat obligatory position now.

[pianist]

Very well tots. Thank you.
Any view on their acquisition of pan Pac hotel?

[David]

They were brought out at PE of 21x based on EPS of 11.86 cents including fair value gains (PE increases to about 30x on 8 cents EPS excluding fair value gains) for FY 2012. These figures intrinsically indicate very bullish forecasts in terms of revenue and earnings growth while possibly signifying a very strong balance sheet and cash flow statement. However, they have been piling on more and more debt without any new property under construction ( Q2 2013 still has no new properties under construction, meaning a full half year without construction), which isnt congruent with the current valuation. Future prospects may be starkly different but with whats in place and in the past, a 20x-30x PE seems a tad optimistic. a PE of 5-10x (excluding fair value gains) would start to constitute value play (maybe).

In terms of consideration, Panpac's shareholders may have benefitted more from the transaction than UOL's shareholders did/will in the future (not too sure what the total consideration was, but based on the remaining stake acquired and assuming the sort of PE range at which the rest of transactions were undertaken were similar).

However, we have still not seen the type of synergies and efficiencies that this purchase can do for UOL. My opinion would be that it is either an empire building exercise or an intangible building one (in terms of combined brand-name, reliable construction/property company and a mid-level luxury hotel)

BTW a DCF of panpac with 5% permanent growth, constant margins and no expansionary CAPEX (capex = depreciation) yields a enterprise value of 1.2 billion (with 10% WACC).

[kagemusha]

Dividend is the basis for individual investor to partake in the fruit of the business.
If there are no dividend payout, what can an individual investor look forward to? Share price increase?
Share price will never increase if there are no buyer.
No one will buy, as there is no reward. (pay money to buy but no returns)
Therefore, IMHO, dividend payment is not a double edged sword, it is in fact designed in the stock system to function coherently and in fact should be made obligatory, if financially permits, to protect investors.

Imagine what it would be like in a stock market where there are no dividend in one form or the other. Would it still function?

[David]

Dividend is the basis for individual investor to partake in the fruit of the business.
If there are no dividend payout, what can an individual investor look forward to? Share price increase?
Share price will never increase if there are no buyer.
No one will buy, as there is no reward. (pay money to buy but no returns)

Remember as a individual investor you are investing in a stake in the business. If your ticker is unlucky enough to have no volume for a extended period of time, then one of three things WILL happen:

1) Underlying business improves - share price becomes a huge discount to the value of the corporation

2) Underlying business deteriorates - share price becomes a premium to the value of the corporation

3) Underlying business remains flat - share price still shows the relative premium/discount

Realistically, if the stock has extended periods of zero volume, its market capitalization would tend to be low. Now if the market capitalization is low, then you as an individual investor could actually purchase all the outstanding shares in situation (1) and make a handsome profit of paying yourself dividends and obviously from paying "10 cents on the dollar".

However, a more plausible outcome would be just low volume, instead of no volume. Even if a low volume situation, if situation (1) occurs, bargain investors could purchase these shares up to the point it no longer becomes a bargain.

They could then be activist investors and call in a vote to either privatize the corporation at fair value (book/par/intrinsic) or proxy for future dividends etc etc.

Situation (2), well why would you want to pay a premium?
Situation (3), you can conclude that maybe the share price is the fair and intrinsic value.

Therefore, IMHO, dividend payment is not a double edged sword, it is in fact designed in the stock system to function coherently and in fact should be made obligatory, if financially permits, to protect investors.

Imagine what it would be like in a stock market where there are no dividend in one form or the other. Would it still function?

With regards to that, I was referring to cash dividends is a double edged sword. It is a double edged sword because paying a high cash dividend regularly is a good thing. However if you were to lower it, or it does not increase at the rate which investors expect, then the share price will be punished because of investor expectations, hence it is a double edged sword! Its good but it can hurt you greatly if you do not maintain its high level (and its growth rate).

Dividends are returned to investors in one form or another, as mentioned earlier, the pressuring of management to privatize is one way to extract dividends. However, a more generic way to obtain "dividends" is from the share reflecting the intrinsic value of the underlying business. Hence when the business conditions improve, the share price increases.

Remember, IF you can purchase one dollar for 10 cents, why wouldn't you (the royal you as a value investor) keep doing it (which would eventually lead to controlling stakes by like-minded individuals who can raise poignant points at AGMS)?

[pianist]

Singapore, 8 November 2013 – UOL Group today announced a 6% rise in net attributable profit to $93.5 million for the third quarter ended 30 September 2013 (3Q13) from $87.8 million in the corresponding period last year. The increase was due mainly to higher profit margins and higher share of profits from joint venture companies.

[David]

Gross profit rose from 43.27% to 49.76% Y-o-Y mainly due to a shift in revenue composition from property development to the higher margin hotel ownership.

[pianist]

do u know where tom investor presentation will be held?

how cum never send invitation to us?

[pianist]

The Board of Directors of UOL Group Limited (the “Company”) wishes to announce that its 60%-owned subsidiary, Suasana Simfoni Sdn. Bhd. (the “Vendor”), has accepted a conditional offer from an unrelated third party (the “Purchaser”) to purchase (the "Transaction") all its interest in and estate to the property in respect of Lot 20000 (formerly known as Lots 111 & 112), Jalan Conlay, Seksyen 63, Kuala Lumpur, Malaysia (the "Land") for a total cash consideration of RM568,000,000 (the "Consideration").