Damsels in Distress: Property Developers | Analysis & Opinion

The economic slowdown in Singapore has certainly permeated nearly every sector, but some sectors have been hit harder than others. Property stands out as one such sector, cluttered with counters with pretty much the same attributes:  


- Trading at low valuations, usually under book value

- Low growth prospects reflected in low P/E ratios

- Generally low dividend yields

- Large piles of cash sitting idle

 

Of so many property counters listed locally, I have narrowed down to seven “damsels in distress” to analyse their valuations. They are, in alphabetical order: Capitaland, City Developments, Guocoland, Ho Bee Land, Sinarmas Land, UOL and Wing Tai Holdings.

From this list, I will narrow down further to two “damsels” to perform more rigorous analysis on. As Warren Buffet advocates to be fearful when others are greedy, and to be greedy when others are fearful, now could be the time to take a closer look at some property plays possibly undervalued by the market.

While distressed damsels may look attractive (wink) solely by their low valuations, vigilance and due diligence must be exercised in selecting “the right one”. One must choose the correct stock to invest in, to benefit from this downturn in the industry.

The Backdrop

Property developers are facing tougher operating conditions as the economic climate deteriorates, as demand begins to wane and sales slow down. Compounding the effects of a slowdown in Singapore’s economy are property cooling measures implemented by the government, to prevent a potential property bubble from forming, which has impacted sales volumes and therefore revenues. The slower property sales have caused a supply overhang in the market, putting downward pressure on prices.

More recently, developers have been bidding more aggressively for new parcels of land. Coupled with declining prices, this has effectively reduced their margins, once again putting pressure on profits.

However, more developers are expanding overseas, diversifying their sources of income, thus helping to partially negate the slowdown locally.

Overview

The ideal damsel that we seek should be one that demonstrates sufficient capacity to weather this industry downturn, maintain its profitability throughout this stormy period, as well as emerge ready to capitalize on new opportunities after the storm (rather than being hampered by heavy debts). Most importantly, it has to be undervalued or neglected by the market. 

Hence, besides conventional valuation metrics such as price/earnings ratio or price/book ratio, I shall be taking a closer look at their balance sheets, incorporating ratios such as debt-to-equity ratio, current ratio and quick ratio. This would measure the resilience of each firm in light of the ongoing industry headwinds. 

(I have included links to explanations of each ratio mentioned)

In the following tables, the top two most desirable figures in each category are in blue, with the most desirable figure bolded. Conversely, the two most undesirable figures are in red, the most undesirable bolded similarly. All of the figures stated are obtained from each company’s latest quarterly filings, unless otherwise stated. 

Without further ado, let the contest of the damsels begin!

Beaten Down Valuations

Stock	Last Close	NAV/share	P/B Ratio	EPS	P/E Ratio	Market Cap (M)
Capitaland	$3.01	4.01	0.75	0.252	11.9	12,754
CityDev	$8.40	9.55	0.88	0.836	10.0	7,638
Guocoland	$1.86	2.98	0.62	0.53	3.51	2,064
Ho Bee	$2.08	4.17	0.50	0.364	5.71	1,385
SinarmasLand	$0.45	0.426	1.06	0.0336	13.4	1,915
UOL	$5.66	9.95	0.57	0.487	11.6	4,554
Wing Tai	$1.61	4.05	0.40	0.00915	176	1,246

One glance and we see that nearly every counter, with the exception of SinarmasLand, is trading below book value. The most extreme case of “undervaluation” here is Wing Tai, trading at only 0.4x book value. In order words, every $1 worth of the company can be bought with only 40 cents! Similarly, Ho Bee is trading at only 0.5x book value, the second lowest on this list. On the high end we have CityDev at 0.88x book value, and Sinarmas for 1.06x book value.

Earnings wise, Wing Tai stands out with an incredible 176 times price-to-earnings ratio, implying that investors are paying $176 for each dollar the company made in the past fiscal year! (Even worse still, the trailing P/E number is 204) While most counters trade at around 12 P/E, Guocoland and Ho Bee stand out for having P/E ratios of less than 10.

From this set of numbers alone, Sinarmas looks the most expensive valuations wise and doesn’t appear to be exactly a “damsel in distress”. Wing Tai looks the most heavily discounted relative to its net asset value, but its incredibly high P/E is an indication of poor profitability. The rest of the counters look inexpensive P/B and P/E wise, while Ho Bee stands out with both ratios substantially lower than the others.

Show Me the Money

Stock	Last Close	Cash/share	Price/Cash-per-share	Dividend/share	Dividend Yield
Capitaland	$3.01	$0.997	3.02	0.090	2.99%
CityDev	$8.40	$3.18	2.64	0.08	0.952%
Guocoland	$1.86	$1.00	1.86	0.05	2.69%
Ho Bee	$2.08	$0.116	17.9	0.05	2.40%
SinarmasLand	$0.45	$0.162	2.77	0.00190	0.422%
UOL	$5.66	$0.330	17.2	0.148	2.61%
Wing Tai	$1.61	$1.25	1.29	0.0300	1.86%

Moving on, we examine the cash piles and dividends of each company. Once again Wing Tai stands out from the crowd with a price/cash-per-share ratio of 1.29. With a cash pile of nearly a billion dollars, it constitutes 77% of Wing Tai’s market cap. Considering that its net-asset-value/share is $4.05, and with $1.25 in cash per share, the market is implying that most of its assets come for free (wow!), considering that its last traded price was $1.61. A huge cash pile also functions as a safety net, cushioning the impacts of slow business and enabling the company to tide over this difficult period. 

On the opposite end of the spectrum, Ho Bee and UOL are sitting on the least cash relative to their market values, as most of their value is derived from their property holdings, to be sold or marked as investments.

While low cash is not an issue in itself, it could be a cause for caution should conditions take a turn for the worse, or the downturn is prolonged, lacking a safety net of cash to tide them through (without resorting to excessive borrowing). Conversely, having too much cash on hand could also mean ineffective deployment of capital, translating into lower returns for shareholders. 

While not a primary focus, dividend yield is topped by Capitaland at 3% per annum. This is hardly surprising, given that Capitaland is the largest company ($12.8B market cap) and is the most established. A steady business enables it to pay out consistent and increasing dividends. 

In general, dividends per share should not constitute a large percentage of cash per share. While dividend money is usually funded by cash flow from operations, a company certainly should not be paying out dividends it cannot afford, against its cash cushion, in these difficult times. Not forgetting the fact that debts have to be serviced and repaid as well.

This puts Ho Bee and UOL in the spotlight, as their dividend amounts to about 45% of their respective cash piles. If both businesses ceased to make any money in the coming years, dividends can only be sustained for about two years at the current level before their cash runs out (without borrowing money), without taking into account their debts. In times as such, it is unwise to pay generous dividends simply to prop up the stock price.

Balance Sheets under a Microscope

Stock	Debt-to-equity Ratio	Current Ratio	Quick Ratio
Capitaland	0.653	1.48	0.756
CityDev	0.541	2.75	1.17
Guocoland	1.17	1.38	0.446
Ho Bee	0.500	2.19	0.678
SinarmasLand1	0.120	1.93	0.981
UOL	0.301	1.33	0.365
Wing Tai	0.339	14.8	6.53

¹Based on FY15 results

The stand-out here is no doubt Guocoland, where all 3 figures are in red (a large red flag!). With a debt-to-equity ratio of 1.17, such a high gearing is inadvisable in these difficult times. Its current ratio is no better at 1.38, and its quick ratio at 0.446 is dismal. 

Because quick ratio excludes the properties that are awaiting sale from current assets, comprising only cash and trade receivables, a low quick ratio indicates that the company requires large amounts of sales for it to service its debts (or make ends meet). The ability of such a company to pay its debts depends very much on how much sales it can generate under these challenging conditions. 

Besides Guocoland, the other counters don’t look overly leveraged, with Capitaland coming in second with a debt-to-equity ratio of 0.653. However, its debt position should be manageable as a company of this size and stability can generally borrow at a lower cost than smaller companies, and it should be able to refinance its debts or expand its equity base through a rights issue without too much of a hassle. 

However, it is worth noting that UOL does seem to be in a similar position as Guocoland, having a current ratio of 1.33 and a terrible quick ratio of 0.365. This implies that the company is very reliant on future sales going smoothly as planned, to finance its debt servicing and repayments. A sharp slowdown in sales could put the company in a dangerous predicament. 

On the other hand, the ones having it relatively easy-going on sales are CityDev and Wing Tai, with a relatively lower overall debt load (gearing ratio), as well as sufficient cash to meet debt obligations without being too dependent on future sales.

Narrowing Down

Because of its unfavourable balance sheet, we can pretty much discount Guocoland as an investment right away. It also explains its dirt-cheap P/E ratio of 3.51, with all the unfavourables priced in. That’s six damsels left.

SinarmasLand looks like an interesting proposition, with low gearing, sustainable dividend payouts and ample cash per share. However, this seems to already be priced into the stock, with comparatively lofty valuations (1.06x P/B, 13.4x P/E). It certainly doesn’t seem to be undervalued by the market, and for this reason there are five damsels left.

 UOL looks rather compelling valuations wise, but its cash cushion is not exactly large (only 5.8% of market cap), and it is very reliant on future sales to keep its books in balance (look at its current and quick ratios). Unfortunately, its relatively low debt-to-equity ratio is insufficient to keep it viable for investment. That’s four damsels left.

 

Now is when the elimination process gets hard. 

I’m sorry Wing Tai, but you’re next. Despite the extremely attractive current and quick ratios of 14.8 and 6.53 respectively, and the huge cash pile amassed (close to a billion dollars), the extremely poor earnings performance is the negating factor here. With a P/E of 176, and a more recent trailing P/E of 204, earnings have nearly disappeared entirely at the onset of the downturn. The huge cash pile is also a big question mark, with investors closely watching how the cash will be deployed. Sure, it may emerge from this downturn with plenty of cash to spend on expansion, but until a clearer picture of its immediate future emerges, it is hard to justify Wing Tai as a buy right now. Three damsels left.

Do pardon me if you sense any bias, but I would have to eliminate Ho Bee next. It was a difficult decision to make, choosing between the three. Despite a good showing in the balance sheet department ratios wise, the low amount of cash relative to market cap, as well as costly dividend payouts are the deal breakers here. In the event of a prolonged industry downturn, the paltry cash pile of about $78 million may not suffice in providing a cushion while paying out dividends at the same time. Also, Ho Bee has the second smallest market cap of the seven counters. Its small size makes it more vulnerable to a downturn as its scale of operations is not as diversified. 

At last, we have our final two damsels: Capitaland and City Developments.

It is hardly surprisingly that our two “survivors” are the two largest companies on the list. With a larger scale of operations, especially overseas businesses and expansion, they tend to tide over the downturns better than their smaller counterparts. Generally, larger companies also have a better credit rating (small companies are often unrated), enabling them to borrow more cheaply, as well as undertake rights issues without much of a problem.

The Final Word

After an arduous process of analysis, we have finally narrowed down the seven “damsels in distress” to just two contenders for our investment dollars. However, the information so far is insufficient for us to make an informed investment decision.

Of course, I would like to look at the financial statements of both Capitaland and CityDev in much closer detail, but that would extend this post beyond readable length. (Surely, 99% of readers would fall asleep before they got to the end)

Therefore, I shall do a more thorough analysis of both companies in the following post. Stay tuned!

Just my two cents.