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OUE Limited: An asset play that could be cheaper?

Thursday, September 25, 2014

I have been eyeing OUE Limited since May this year but I haven't bought its stock. What attracted me is the big discount to NAV (NAV/share is $4.04) although its earnings per share is nothing to shout about. In fact, I estimated the PE ratio to be about 30x when I was crunching some numbers.

So, if the NAV is realistic, to me, OUE Limited is an asset play and with asset plays, the question is really whether the value will be unlocked at some point in the future. There is a likelihood that this would happen as OUE Limited hold stakes in OUE H-Trust (43%) and OUE C-REIT (42.5%).



Regular readers know I scribble my research on scrap paper.

A bug bear for OUE Limited now is Twin Peaks. This 99 year leasehold project (from 2010) is a luxury condominium they are developing near Orchard Boulevard in Singapore. They are having a hard time moving unsold units and of the 462 units available, only 20% or so have managed to find buyers.

The condominium is near completion and I think OUE Limited will then have 2 more years to sell all units or face yearly penalties. Already, they have written down the value of Twin Peaks by $105 million in the face of a challenging environment this year.

At an average selling price of about $3,000 psf and a GFA of about 436,000 sq ft (including balconies), I estimate the value of Twin Peaks to be about $1.3 billion, if fully sold. However, I doubt that it is going to happen without a deep price cut if the big discount given by Bukit Sembawang to sell its completed condominium in Cairnhill recently was anything to go by.

To be fair, however, Twin Peaks is just one part of OUE Limited's portfolio. The company owns many commercial properties and if their values are realistic, OUE Limited could turn out to be a very rewarding asset play for investors in time to come when their values are unlocked. When will it happen? Your guess is as good as mine.

Click to enlarge.

Technically, OUE Limited's share price is in a downtrend and it is one that shows no sign of weakening. So, although already trading at a big discount to NAV, I wonder if its share price could sink lower for me to get a dollar for fifty cents.

I wasn't going to blog about OUE Limited until I have initiated a long position, if I do at all. However, reading a blog by Brian Halim gave me a little push to share my thoughts.

Read Brian's blog on OUE Limited: here.

Related posts:
1. OUE H-Trust.
2. OUE C-REIT.

31 comments:

B said...

Hi AK

Regarding the twin peak, they were going to convert those into a service apartment instead for temporary though they will still need to pay for the penalty for going beyond the due date. It is going to be a drag on earnings but I saw this as being a smaller stake than other property developers like hobee whose sentosa development makes up a major asset play.

Twin peaks is not going to be profitable. Their cost is roughly at 1900 psf and breakeven price is somewhere along 2800 psf. Lets just hope the management is divesting their other assets soon into reits and im quite sure they will do that in the next year or two.

AK71 said...

Hi B,

Twin Peaks is definitely a pain for OUE Limited. If they do not sell the remaining units, I estimate that they are possibly looking at close to $100 million in penalty per year. I think it could be better to bite the bullet and offer a big discount to move unsold stock.

Yes, the biggest motivation of buying into OUE Limited now is to hope for the unlocking of value through capital recycling. Like you, I believe that this could happen sometime in the next 18 to 24 months. So, it is a waiting game.

Does OUE Limited pay us enough while we wait? This is another question I asked myself.

B said...

The revamp on the one raffles place and oue downtown shenton way projects are going to be completed next year 2015, so the earnings will in the meantime alleviate the pain of twin peaks.

If they offer a huge discount to twin peaks I will sell all stakes and clothes to buy the physical property itself. 2000 psf should entice me to do it ;)

AK71 said...

$2,000 psf for Twin Peaks? I will join you and buy a unit but I can only afford a 570 sq ft unit. That will set me back by $1.14 million. A fairly good price for that location. ;p

Solace said...

Hi AK,

You have foresight to eye this stock and i agree with B assessment of this stock.

This is because I am a shareholder of OUE for quite sometime. I have long position in this stock when I read the intention of OUE to push out some of the properties as OUE H-trust and OUE C-Reit. I see this as a positive move to unlock value in this stock.

I have receive special dividend from the divestment and own shares of OUE H-Trust as a result 1:6 dividend in specie for OUEHT

From the timeline, you would have guessed that i have brought at a higher price than now. I am not too worried as this this is a structurally sound company. I have accumulated on some weakness as well.

My analysis of this stock goes along as the same line with FCL, FCL has proven rewarding for me and i have optimistic that OUE will also be rewarding in the future.

So come, join me and be shareholders of OUE lol. Let me know when you buy in, i might average down further on weakness

Lastly, they serve good food during AGM! at mandarin hotel lol. Another reason to own the share hahaha

Solace said...

Just FYI, i recall something

I have asked them during the AGM with regards to the size of their debt.

They replied they have good capital management of their debts and they will not go for rights issue to raise cash in the near future

AK71 said...

Hi Solace,

Good food at the AGM? You make me feel like placing a buy order right now. LOL. ;p

On a serious note, the discount to NAV is what attracts me. If I should buy some, it would be from thinking of it as an asset play.

I don't mind waiting for good things to happen and that is what we must do with asset plays. We have to wait.

If I am paid to wait, I am happier but with a dividend yield of just slightly more than 1%, I am slightly uncomfortable.

Although the idea of paying fifty cents for what is worth a dollar is appealing, I might just give in to paying a few cents more than fifty in this case.

Technically, there is some weakness in the price action. So, let's see if I get my wish. ;)

Garfield75 said...

Ak,

Re your last comment, P/B is ard 0.53 now, so have u added? or when u mentioned 50cents to a dollar , u are referring to the revised book value after adjusting for further write down arising from the twin peaks?

AK71 said...

Hi Garfield,

I think that was what Brian said in his blog. At the price of $2.16, that's the price to book he got in at.

As for the NAV/unit, it is $4.04. This is after the write down for Twin Peaks.

Casey said...

Hi Ak,

I think OUE is only attractive as an asset play, it's PE valuation could hardly turn better for the next few years, I guess. Unless it has another divestment gain or it acquires similar yield accretive investment property, which I don't think that is easy. Would the recurring income badly affected by the committed rental support to the reITs? How Capitaland struggled to regain its earning power after so many divestments to Reits.

Unlike the Capitaland, Keppeland, both commercial and residential asset developers could still shine in both asset valuation or PE valuation. Is there any visible future profit growth for OUE other than another divestment?

If I would invest in oUE, I would hope for a takeover or privatization to materialize the perceived gain from asset valuation. I think the goose that laid golden eggs was killed for the divestment gain. Anyway, mr.market could go whatever way he wants, as an investment learner, I would prefer company that show sustainable growing recurring income and project pipeline. It is only my opinions, I could be very wrong...

Your views?

Thanks.
Casey

AK71 said...

Hi Casey,

I am very much in agreement that OUE Limited is an asset play and anyone investing in this company would have to hope for more value to be unlocked along the way.

The NAV/share is so high but the EPS is so low. It suggests that its properties are operating at sub-optimal levels now. Will the numbers improve? I think so.

However, the question is really how much would the numbers improve by? Could the EPS recover (ex-extraordinary items) to hit 10c?

In the meantime, there could be gains as they recycle capital using OUE H-Trust and OUE C-REIT.

Like with all asset plays, one would need patience investing in OUE Limited and some luck.

Of course, we would like to be paid while we wait. So, a DPS of 3c gives us a dividend yield of 1.38% which is marginally better than the promotional 12 months FD rates offered by some banks now? Enough? Might be for some. ;)

Casey said...

Hi AK,

Totally agree with your opinion on the hope of the type of investors that will invest in the stock.

For other income and growth investors like myself, I do think that the sub-optimal level of earning performance could be the cost of the huge divestment gain, and it would last a few years..

In 2Q 2014, gross profit decreased to $36.7 million due mainly to lower revenue and a higher cost of sales. Cost of sales for the current quarter included the recognition of rental expense to OUE Hospitality Trust (“OUE H-TRUST”)...

Hence, EPS improvement could face a draggy issue due to the commitment made... Did I miss any any remarks addressing the way to improve EPS other than unlocking value (another F&N?) in its report? How would we foresee the better EPS without a concrete plan? I think unlocking value is the main hope and a key word if one would invest in the counter, luck is the key catalyst.

Agree?

Thanks.
Casey

Casey said...

Hi AK,
I overlook some details, please ignore my last comments. Many thanks. Casey.

AK71 said...

OUE Limited to invest US$200 mln in Cayman Islands-domiciled Nuvest Real Return Fund.

Source:
http://infopub.sgx.com/FileOpen/Investment_in_Nuvest_Real_Return_Fund.ashx?App=Announcement&FileID=316227

Solace said...

2.07... got reach your target price or not?

haha

AK71 said...

Hi Solace,

The charts hinted that price might decline but I didn't expect it to be so soon. haha... Well, let's see if I could get $1.00 for $0.50.

Stronger support is at $2.00. ;p

ozxinvest said...

Seriously, I think we should stop looking at reits and property counters at least until interest rate normalises (in a few years time?). For me, I would rather buy more ships than more bricks. :P

AK71 said...

Hi ozxinvest,

And which Marine company might you be thinking of? (hint, hint, nudge, nudge, wink, wink) ;p

ozxinvest said...

No lah, not a nice looking ship now, don't want to name it, I don't have so many brothers and sisters to protect me, wait ppl throw stones at me I die jia lat jia lat...er i thought we are on the same ship? :P

AK71 said...

Hi ozxinvest,

What do you mean? I am very slow de. You have to be more direct hor. ;p

Anyway, not the Titanic can liao lor. -.-"

Lazy Kat said...

2.060 now? Going to nibble at 2?

AK71 said...

Hi Kat,

Although I have some concerns regarding their business, the idea of getting a $1 value for a price of 50c is pretty attractive. Of course, another question is whether the valuation is realistic. ;)

PaulC said...

Hi AK,

What do you think about OUE's long-term debt? According to their 2013 annual report, it stands at about 2.4 Bil. Of which 1 Bil of secured bank loan will be expiring in stages between Feb 2015 to Jul 2016. These loans command a interest of between 2 to 2.5% above bank swap rate. The interest covered ratio of the company is only at about 1.1. Do you considered it to be highly leverage for an asset's play and when interest hike comes, bring it to considerable risks? Would love to hear your thoughts :)

PaulC

AK71 said...

Hi Paul,

I referred to OUE Limited's quarterly results in August this year and long term debt has reduced dramatically to about $1.6 b. Finance expense has reduced by almost 33% as a result.

So, based on this alone, interest cover ratio would have improved.

In addition, OUE Limited's ongoing AEIs will see completion in the next couple of years and we should see an increase in revenue in due course, everything else remaining equal.

I don't know how much the interest rates will increase by but I believe moderate increases over the next two years would be easily manageable.

Of course, there is the possibility of further capital recycling via OUE C-REIT and OUE H-Trust. This should lighten the balance sheet further.

Reference:
OUE Financial Results 2Q2014.

Lazy Kat said...

2.02 liao!

AK71 said...

Hi Kat,

It hit a low of $2.01 and my overnight buy order was filled. ;)

AK71 said...


Wheelock Properties (Singapore)
has written down the book value of Scotts Square shopping mall by 17 percent to reflect poor business conditions.

The estimated value of the mall along Scotts Road is now S$260 million, down from the previous estimate of S$312 million, Wheelock said on Tuesday in its earnings statement for the fourth quarter ended Dec 31.

Wheelock also took a write-down of S$75 million for a project in China to reflect uncertain market conditions and the slower pace of developments in the neighbourhood.

As a result, the firm posted a loss of S$103.1 million for quarter, widening from S$91.3 million in the same period a year ago.


Source:
http://www.channelnewsasia.com/news/singapore/wheelock-writes-down/1677722.html

blazingruby60 said...

hi AK
Seems like i am a bearer of not so good news..OUE ltd..
PROPERTY developer OUE's net profit for the first quarter ended March 31, 2015, plunged 91.8 per cent to S$77.2 million, compared to S$945.6 million in the year-ago period, due to the absence of one-off gains from the deconsolidation of OUE Hospitality Trust.
any thoughts..?

AK71 said...

HI blazingruby,

I bought into OUE Limited because it is undervalued. I paid 50c for a dollar and will wait for the value to be unlocked. It will take time.

The earnings are likely to be lumpy even in future because OUE Limited will probably recycle capital by selling their assets partially to the two public listed Trusts they manage.

I believe that there will be positive catalysts in future. If given the opportunity, I will be accumulating on weakness. ;)

blazingruby60 said...

hi AK
Most of my shares seem to be sliding particulary REITS and OUE has taken a tumble to 1.91 do I pick up more ? or cut loss ..its kind of unnerving. sometimes, i wonder whether I should just keep money in the bank since interest rate is going up..;)

AK71 said...

Hi blazingruby,

What we see out there are the prices offered by Mr. Market. We would have to make our own judgement calls as to whether the prices are fair or not. To do this, we must have an idea as the values of the stocks. ;)

As for keeping more money in the banks because interest rates are up, I don't think interest rates are up so much as to make this argument attractive. I keep money in the banks but for different reasons. ;)

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