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"E-book" by AK

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Invested in Guocoland with Mr. Quek Leng Chan.

Thursday, March 30, 2017

I am going to pre-empt a response to this blog and say that although I am known more as an investor for income, I also invest in stocks which are not for the purist income investor.

To my regular readers, this would be quite apparent in many instances. So, by revealing that I bought into Guocoland recently would not surprise them.

Guocoland is a developer with businesses in Singapore, Malaysia, China and Vietnam. They also have some exposure to the U.K. and Australia through a 27% stake in Eco World International, helmed by Mr. Liew Kee Sin who left SP Setia after it was bought out in a hostile takeover in 2014.

Business Times dated 21 Feb 17.

Guocoland recently got my attention because of a series of insider buying by Mr. Quek Leng Chan. Of course, I do not know exactly why he was buying but Peter Lynch said if insiders buy, it is usually because they think they will make money from doing so (i.e. the stock is undervalued).

Doing more research into Guocoland gave me a second and bigger push to become a shareholder. Being a developer, earnings are lumpy. Most assets are development properties meant for sale.

However, Guocoland is going to see an increase in recurring income and a big increase too. This is in the form of Tanjong Pagar Centre in Singapore and Damansara City in Kuala Lumpur. Guocoland is the majority stakeholder in both projects.

Quite possibly, Guocoland is worth more than what its book value of about $3.00 a share suggests. At $1.85, the discount to NAV is about 38% but if my guess is correct and the RNAV is higher, then, the discount is more than 40%.

Do take note that I am no expert in this area and these are just my back of the envelope scribbles. OK, if you must know, I really scribbled on this:
Want to own a piece of prime commercial property in Singapore's CBD? What about Tanjong Pagar Centre at a discount?

This gives me a feeling of deja vu because it is similar to Saizen REIT's past situation. If the sale of certain assets at a premium in China and Malaysia by Guocoland in the recent past were good instances to go by, all the assets they are holding now could be worth more.

I like recurring income.

I like buying good stuff at a big discount.

If Mr. Quek thinks his company stocks are cheap enough for him to buy more at $1.85 a share earlier this year, then, I want in. 

There has been speculation that Guocoland could be taken private because of the big discount to valuation and the very small float. Mr. Quek's stake is almost 70% of the issued shares.

So, to add a bit of speculative flavor:

GuocoLand rated "buy" at target prices of $2.55. UOB notes that GuocoLand is a potential privatisation play due to its stock trading at a deep discount of 45% to its revalued net asset valuation (RNAV). A low public float of 21% and a high majority-sponsor stake of 68% are also contributing factors.

Of course, I don't know if it is going to happen.

Guocoland, like my investments in OUEWing Tai and PREH, is more of an asset play with no guarantee that value will be unlocked soon. 

So, I have sized my investment in a way that will make patience more affordable.

What does this mean?

If we are invested in an undervalued business and we are waiting for its value to be realized, it requires patience but we must be able to afford patience.

In general, we would be able to afford patience if 

1. We are not investing with borrowed funds.

2. We are not investing with funds we need in the near future for other purposes.

3. We are not investing an amount of money that might make us lose sleep at night.

Now that I have gotten that reminder out of the way, did I mention that Guocoland has a rather predictable 5c dividend per share every year too?

I like being paid while I wait.

Finally, another word of caution. I did a lot more research into Guocoland than what I am sharing here. 

Knowing what I know, I decided that I want Guocoland in my portfolio. You should do your own research too.


Solace said...

Hi AK,

I was also looking at property counters, in addition to my stake in OUE and PREH.

Earlier, in the year i brought into hongkong land as it was too trading at good valuation, at about $6.6 USD.

I did take a look at guccoland, not enough funds to put too much property counter. hahaha

AK71 said...

Hi Solace,

I was alerted to HK Land by a friend but I have an irrational aversion towards counters listed in a foreign currency. -.-"

Kevin said...

Hi AK,

Mr Quek buying back from open market plus currently trading below 200DMA means what ah? :P

By the way, any love for UOB-Kay Hian or you prefer tangible assets to intangible assets? ;)

AK71 said...

Hi Kevin,

I very stupid one hor. Don't ask me cheem cheem questions like these. -.-"

I will leave the commenting on UOB Kay Hian to someone else. I lazy. ;p

Boon Song said...

your "envelope" cost $5 a week leh.
i am surprised you actually bought it. What do you like about the magazine?

AK71 said...

Hi BS,

Oh, I assure you, it is free of charge. ;)

Kevin said...

Hi AK,

Your plan is to wait till Guocoland's value being realized and then take profit to buy Wallich Residence's one and only super penthouse right? ;P

I just watched the video link on this blog post. Time to pay Tanjong Pagar Centre a visit to have a look. ;)

AK71 said...

Hi Kevin,

A small investment like mine? Probably enough to buy a toilet in one of the units. -.-"

I am lucky to have friends who work in the vicinity and they are very impressed by TPC. Maybe, one day, lazy AK will go take a look too. ;p

gagmewithaspoon said...

it is very impressive but besides the lunch crowd, it is rather quiet. 100am mall is still holding up well even after TPC was opened. I think TPC needs to have more attractions to draw in the shopping crowd.

AK71 said...

Hi Gag,

I think it might be a mistake to look at the shopping space in TPC as a mall in the conventional sense. TPC is an integrated development. So, the mall is more a convenience for the office crowd, the hotel guests and the residents. It might be another ARC or MBLM. Of course, if TPC does much better, I am not going to complain. ;)

EK said...

Hi AK,

Thanks for sharing the insights. I'm new to property developing company. With regards to the properties you have posted, damansara,TPC etc, does guoco has the ownership of the full properties and they rent out the spaces for rental gain? Or do they always develop properties and sell off the entire assets for capital gain? I'm sort of confused by this business model and whether to evaluate based on p/e or based on NAV. Could you kindly share your opinion?

AK71 said...

Hi EK,

Developers can hold development properties for sale and also investment properties for income. Guocoland's strategy is to increase the latter. TPC is going to be a big recurring income generator for them. :)

Using PE ratio to value developers is usually tricky because earnings are lumpy. NAV gives us an idea as to the actual value but because the earnings are lumpy, developers usually trade at a discount to NAV as there is less income visibility. However, if there is significant recurring income thrown in, we might see trading closer to NAV. ;)

You might also want to see my blogs on OUE and Wing Tai. Do a search using the search box at the top of my blog. Happy reading! :)

EK said...

Awesome.. thanks for your words. I now have a clearer idea! Have weekend!

AK71 said...

Hi EK,

I anyhow talk to myself de. Happy weekend! ;)

AK71 said...

Hi AK, thks for sharing on guocoland!
Just wondering if u hv a concern with the high debt level? Understandable property counters may have higher debt but guocoland's debt seems higher than the rest? How should we look at it?

When we look at debt, we should also look at cash flow. Debt is more manageable now even thought it is still elevated because cash flow is strengthened. 😉

Mich said...

Hi AK,

would like to know where to get hold of the list of "insider" purchase that you scribbled on. Is it a webpage or magazine? Thanks.

AK71 said...

Hi Mich,

I got that from "The EDGE", a weekly publication. :)

hangloose said...

Given recent Government's ruling on properties, do you think Guocoland will be affected? Could the drop in share price showing this impact?

AK71 said...

Hi hangloose,

Which ruling are you referring to?

Nick said...

The group will see a smaller percentage contribution from Singapore as contributions from China and the UK step up...

With development margins in Singapore being compressed, the group is looking to build a bigger portfolio of recurring-income assets.

"The business is no longer the same as in the old days when you can hold the land for many years and the property appreciates in value," Mr Choong explained. "Today, with the more competitive market and lower margins, speed and execution are very critical." BT 3 Apr 2017

hangloose said...

Hi AK,

This news: Property developers in Singapore are faced with a difficult decision, to discount unsold luxury homes or pay penalties for failure to meet government-mandated sales deadlines, after the government closed a tax loophole that enabled them to offload residential units in bulk to institutional investors and wealthy individuals.

AK71 said...

Hi Nick,

Being an investor for income, I like the strategy. :)

AK71 said...

Hi hangloose,

"...residential property developers are concerned about the impact that an impending move to plug a stamp duty loophole may have on bulk sales, but GuocoLand is likely to escape the brunt of it. As at end-February, 300 of the 381 units have been sold. Under Singapore's Qualifying Certificate (QC) rules for foreign housing developers, GuocoLand has to sell the balance units by June 15 to avert paying punitive extension charges to the government."

In an earlier blog, I said OUE Limited is much bigger than Twin Peaks. Well, Guocoland is much bigger than Leedon Residence. ;)

AK71 said...

· With development margins expected to be under pressure in Singapore, management will be hoping to increase contributions from recurring income streams. This currently only accounts for 2% of group profits

· However, with the expected completion of their 80% owned S$3.2m mixed used development Tanjong Pagar Centre this year, it will help the group increase its exposure to recurring income streams from fiscal 2018. The office and retail components are about 90% committed already. The 181 units residential component is expected to be launched sometime this year and 16 caveats have already been lodged at about S$3,000 psf;

· In Malaysia, its flagship mix used integrated development project (consisting of a hotel) Damasara City which is also expected to be ready by fiscal 2018 is also expected to help bolster its recurring income stream

Lim & Tan

Kevin said...

Higher sales lift Q3 profit at GuocoLand. :) :) :)


AK71 said...

Hi Kevin,

Thanks for sharing the good news. More of the same, please. ;)

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