City Developments repurchased $21.4 million in shares in two months… is it worth a look now?

In my last article, I shared that share buybacks are a great way for companies to (indirectly) return money to shareholders, and boost shareholder value. Share buybacks could also be a signal that the management thinks the company’s shares are undervalued.

Knowing this, investors usually take heed when a company repurchases a large number of shares over a short period of time. As in the case of City Developments Limited (CDL):

Source: SGX

As you can see from the table above, CDL repurchased a total of 2.4 million of its own shares — worth $21.4 million — over a period of just two months from August to October this year. Outside of this, CDL hasn’t made a share buyback all year. Quite clearly, the management has sent a fairly strong signal to investors with its recent share buybacks.

Are CDL shares undervalued right now?

However, I also highlighted in my previous article that share buybacks should only be done when the company’s shares are undervalued, because using shareholder money to buy overpriced stock destroys shareholder value.

So are CDL shares undervalued right now?

To gauge this, we’ll take a look at CDL’s price-to-book (P/B) ratio. The P/B ratio measures a company’s share price against its book value per share. For example, if the company’s share price is $1.50 and its book value per share is $1.00, then its P/B ratio is 1.5.

The reason we use the P/B ratio to value CDL is because most of its value is tied up in its assets, which consist mainly of property. And asset values for property are unlikely to fluctuate drastically; you hardly see property prices rise or fall by more than 10-15% within a year. Hence, CDL’s book value is a relatively stable measure to use.

Right now, CDL’s share price as at 19 December 2018 is $8.21. Its book value per share as at 30 September 2018 is $11.20 — which gives CDL a P/B ratio of 0.73. This essentially means you’re only paying 73 cents for every dollar of CDL’s book value.

A P/B ratio below 1.0 technically means a stock is undervalued. However, certain companies consistently trade below their book value for years. (For example, Suntec REIT has typically traded around 0.7 to 0.9 times its book value over the last 10 years.) So even if the P/B ratio is below 1.0, it doesn’t actually mean a stock is cheap when compared to the historical average.

So what about CDL? Does it historically trade below or above its book value? Let’s have a look:

The chart above shows CDL’s price-to-book (P/B) ratio over the last 10 years. As you can see, it ranges from as low as 0.7 to as high as 2.0. However, its 10-year P/B average is 1.25 – the black line in the middle.

We also did some quick number-crunching to calculate the standard deviation of CDL’s P/B ratio over the last 10 years, which works out to 0.30. This means CDL’s P/B ratio typically ranges ±0.30 from its average of 1.25 – between 0.95 (green line) and 1.55 (red line).

Right now, CDL’s price-to-book is 0.73, which is even below its -1 standard deviation P/B of 0.95. In other words, CDL looks especially cheap when you compare its current P/B against its historical range. (And even if you don’t get all this standard deviation nonsense, it’s pretty obvious CDL looks cheap just by eyeballing its P/B chart right now.)

The management started buying back shares at $9.51 — and continued to buy more as the share price fell. What this means is that the management thinks that CDL shares were already undervalued at $9.51, which was stated by the CEO himself:

“There is deep value in our shares and we have confidence in CDL’s strong fundamentals and future growth potential. We have repositioned our business for the next lap, with a focus on growth, enhancement and transformation. — Sherman Kwek, CDL Group CEO

Overall, the average price for the 2.4 million shares the company repurchased is $8.94. So you’re getting an even better price than the company if you were to invest in CDL right now.

Risks

As attractive as CDL’s valuation is right now, it’s important to understand the company and its risks before doing anything.

One reason why CDL’s share price has come down so hard recently is because of the new property cooling measures the Singapore government introduced in July this year. If you look at CDL’s price chart below, you notice that the share price actually fell from $11.21 to $9.46 on 6 July 2018 – a drop of 15.6% in one day — and has fallen further since:

Moving forward, industry experts believe the local property market to ‘standstill’ next year and private housing supply to surge in 2019. It will take some time for the market to stabilise and absorb the new supply before we can expect any turnaround to happen.

Economists also expect GDP growth in Singapore to slow down in 2019, while the US-China trade war continues to hang over global trade and activity. In a nutshell, the indicators don’t point to a robust economy or property market anytime soon.

The fifth perspective

Aggressive share buybacks are usually a strong signal that the management thinks its company’s shares are undervalued. But be sure to check the stock’s historical valuation before assuming that.

In the case of CDL, it certainly looks undervalued right now based on historical figures and the management has given a positive signal with its series of share buy backs from August to October.

However, a low valuation alone isn’t a reason to invest. It’s important to understand the Singapore property cycle and the business of CDL, along with its risks, before making a decision to do anything.

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