Tea with Mike: UOB KayHian Holdings.

Getting a sense of a fair price to pay: UOB KayHian Holdings as a case study.

I was screening for companies with decent yield and growth for the past 5 to 10 years, using a Google screener, and I decided to do some in depth study of UOB KayHian.

UOB KayHian pays out about 50% of earnings as dividends for almost a decade. In the earlier years, the payout was more than 50%. So there is certainty of payment, and it has been profitable for the past 12 years, and last year was actually the weakest year in a decade.

I use the spreadsheet to churn out important numbers such as revenue, NP, margins etc for the various markets, such as Singapore, Hong Kong, Thailand. I wanted sustainability of dividend income. So, I want to know what income I can expect going forward and I gave myself a few scenarios:

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At its peak, net profits is almost 3 times of what it is in 2012, if you take the average of $100 million over 12 years, it is still higher than 2012.

1H2013 results has already recovered, its 1H EPS of about 8 cents, is already almost as high as full year EPS of about 9 cents in 2012. Assume full year EPS to be 16 cents, they will pay out about 8 cents, giving a yield of 4.8%. That is my best case scenario.

If you take the average of 12 years, EPS is about 13 cents, so payout will 6.5 cents, giving a yield of 3.9%. This is my conservative scenario.

Although Singapore contribution is in decline, it is generally in line with SGX trading income revenue, which reflect the prevailing market conditions and not loss of competiveness. The “other” and Thailand operations have been bucking the trend and is contributing more despite market weakness, this could be due to its expansion bearing fruits.

Next,

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I want to get a sense of market valuation of the counter throughout the years, so I use the highest price, lowest price and average price of each year to calculate the corresponding yield and PE.

If I take away the super exceptional year of 2007, the average lowest yield is 5% and average highest yield is 9%, and the average lowest and highest PE is 10 and 17 respectively.

If I take conservative EPS of 13 cents, and DPS of 6.5 cents. I would like a yield of 6% and a PE as close to 10 as possible, and what would that price be?

To give a yield of 6% based on EPS 13 cents, price will be about $1.09 and PE 8.4.

If I am content with PE 10, I need the price to be $1.3.

To give a yield of 6% based on EPS 16 cents, $1.33. And a PE of 10 at EPS 16 cents will be $1.6.

Now, I know I will not touch this company at price above $1.6, unless I believe the next few years will see EPS growing to its peak soon. But there were not many years in which the company had above average results. So, most probably I will only start buying at $1.6 and below.

Other considerations like market share, gearing level and positive average FCF are also looked at, they are not significant enough to offer a further discount or premium.

I do like its profit resilience and rather undemanding valuation as compared to SGX and GK Goh, but given the amount of competition and my estimated calculation of only 10% Singapore Market share, I would not allow myself to pay a premium above $1.6.
 

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2. STE's story: Investment strategy.
3. When to BUY, HOLD or SELL?
4. Interview with Matthew Seah: Value Investing.

UOB Asset Management: Lost money and still losing.

Many years ago, I bought into a few unit trusts. I recently received reports from two which I have been a unit holder of since their inceptions:

Lost and still losing money. I would have been better off managing my own money.

Related posts:
1. Nobody cares about our money more than we do.
2. Tea with Solace: Common Sense Investing.
3. Is investing in stocks suitable for you?