Developers usually trade at significant discounts to their net asset values. This is often attributed to the illiquidity of their balance sheets. The top 15 developers by market capitalisation (see Table 1) have a net debt position with two exceptions. Listed companies trade at their book values based on how easily they can turn assets into cash.
In July this year, UOL Group announced the proposed sale of its Parkroyal Kitchener Hotel for $525 million. “The excess of the proceeds over the book value … is approximately $449,073,000,” the UOL announcement says. This may be why UOL’s share price this year has fallen the least, compared with GuocoLand (–4.4%), Frasers Property (–15%) and Hongkong Land (–23.7%). These three stocks appear to be undervalued compared to developers based on TES’s valuation approach.
We filtered 15 Singapore Exchange (SGX)-listed real estate companies above $400 million in market cap for valuation. Table 1 summarises these 15 companies through market valuation ratios, balance sheet strength indicators and analysts’ sentiment.
Additionally, we have individually valued these 15 companies using the price versus value growth method, as illustrated in Table 2. Companies whose value growth is consistently higher than their price growth are likely to be undervalued, while companies whose price growth is higher than their value growth, despite having attractive valuation multiples, may indicate a value trap.
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For a stock to be fairly valued, the growth in value for one-year, three-year, five-year and 10-year and the average values in each period should be similar to the growth of stock price in each valuation period.
The adjusted value for a company comprises its revenue, net income, operating cash flow and free cash flow, with a 10%, 20%, 30% and 40% weighting, respectively. This figure is then adjusted for consistency throughout the 10-year assessment period and the number of positive net income and cash flow years.
Investment-worthy
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Real estate companies that appear undervalued in Tables 1 and 2 are likely to be investment-worthy, as illustrated in Table 3, where each of the 15 companies is assigned an overall score and valuation category. From the table, GuocoLand and Frasers Property are strongly undervalued and could be investment-worthy stocks for investors.
We have a couple of caveats. Note that Frasers Property is 88% held by TCC Group and Thai Beverage. Hence, its liquidity is very low. In 2021, Frasers Property had a 37-for100 rights issue priced at $1.18 per new share.
The Guoco Group and Quek Leng Chan own over 70% of GuocoLand. In 2010, when analysts and market watchers expected the major shareholders to take GuocoLand private, it announced a renounceable rights issue of 1-for-3 at $1.80 per share. The then share price was $2.14. GuocoLand’s last traded price was $1.54.
Hongkong Land, being the largest company in the list, also seems to be undervalued. Conversely, Wing Tai appears to be overvalued, although it must be noted that these are mainly based on quantitative ratios, and investors are advised to use both qualitative and quantitative methods for filtering and assessing stocks.
GuocoLand scored the highest, with almost all indicators showing that it is undervalued with a strong balance sheet. For its market valuation, the price-to-cash flow ratio of 3.7 times was well below the average of around 11 times, indicating that it is a relatively attractive pick-up compared to its peers.
Financial safety-wise, the company’s current ratio of 2.9 times indicates strong liquidity, with a decent cash ratio of 0.5 times. Although its net debt to equity appears to be one of the highest among the companies in the table, its interest cover of almost three times is acceptable.
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In terms of analyst sentiments, the outlook is optimistic. For our price-to-value growth analysis, GuocoLand’s adjusted value growth surpassed its price growth for each of the five assessment periods, indicating that it is likely to be undervalued.
Strongly undervalued
Frasers Property was the other company strongly undervalued from the tables. Its price-toc-ash flow ratio of 1.91 times makes it relatively cheaper than the peer average of around 11 times. The company’s current ratio of 1.4 times indicates good liquidity, with a decent cash ratio of 0.5 times.
Like GuocoLand, although its net debt to equity is almost 70%, the interest coverage ratio of 3 times implies that solvency is not a pressing issue for the company to address. Analyst sentiments-wise, it is mostly positive. Our price-to-value growth analysis indicates that Frasers Property is likely to be undervalued, as its price growth was substantially lesser than its adjusted value growth for all five assessment periods.
Hongkong Land, the largest company in the list, appears to be undervalued, with most of its indicators reflecting that it is undervalued. Market valuation-wise, its priceto-cash flow ratio of almost 7 times indicates that it is trading cheaper than the peer average of 11 times.
The company’s balance sheet is decent, with a current ratio of 1.9 times, indicating strong liquidity and an adequate cash ratio of 0.5 times. The interest cover is acceptable at 1.3 times, and solvency is less of a concern given the company’s low % net debt to equity of 18%.
The analyst sentiment for the company is mixed but mostly positive. For our price-to-value growth analysis, Hongkong Land’s adjusted value growth was higher than its price growth for most periods, reflecting that the company’s potential undervaluation is probable.
Disclaimer: This article is for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. This article does not take into account the investor’s financial situation, investment objectives, investment horizon, risk profile, risk tolerance and preferences. Any personal investments should be done at the investor’s own discretion and/ or after consulting licensed investment professionals, at their own risk.
