A reader emailed me some weeks back asking if I had taken a look at UOL Group Limited (SGX: U14) – he pointed out that the company had a strong balance sheet, a low P/E ratio and ROE above 10%. UOL is also one of Asia’s largest property companies with a 50-year track record. So I decided to take his suggestion on-board and have a look at the company.
As a real estate investment and development corporation, UOL is an asset-heavy company. Like I wrote in my previous article, The Many Models of Investing: Asset Plays, we need to focus on three areas when analysing an asset play:
- Financials. Quantifying the company’s assets and their worth. In my book, there are only three forms of assets that have a tangible value to them – marketable securities, real estate and cash. Other forms of assets are hard to quantify and value (e.g. plant & machinery)
- Management. If there are indeed assets of value in the company, is the management willing to unlock the asset value for shareholders?
- Valuation. Calculate if the company’s stock is significantly undervalued compared to our adaptation of net asset value (NAV) mentioned above
Using this model of analysis, let’s examine UOL Group.
A Brief Background on UOL Group’s Business Model
UOL Group Limited is a property company with a 50-year track record in the industry. The company is in property development and investment, hotel operations, management services and investments in securities.
UOL is owned by Singapore’s 4th richest man, Wee Cho Yaw, whose father was the founder of Singapore’s largest bank by market capitalization – United Overseas Bank (SGX: U11). Dr Wee also owns another property company in United Industrial Corp Limited (UIC) (SGX: U06).
As a property developer, UOL developed residential properties such as Spottiswoode Residences, Katong Regency, Duchess Residences, One Amber and Newton Suites. The company also has investments in commercial property like United Square, Novena Square, Odeon Towers, Faber House, United Square Shopping Mall, The Plaza and OneKM.
UOL has 31 hotels in Asia, Oceania and North America in its portfolio. Pan Pacific and ParkRoyal are hotel brands under UOL.
Let’s have a look at UOL’s assets and determine their value. As I mentioned earlier, I only count three types of assets – marketable securities, real estate and cash. So I picked out this list of assets from UOL’s latest balance sheet (1Q2014):
- Marketable securities
43.67% stake in United Industrial Corp Limited: $2,018.3 million
Available for sale financial assets: $852.8 million
- Real estate
Development properties: $776.8 million
Investment properties: $3,823.6 million
- Cash and bank balance: $433.4 million
The key to investing in an asset play is to find management who is willing to unlock asset value for shareholders. In UOL’s case however, I think it is unlikely that will happen.
UOL’s chairman, Dr Wee, is also the owner of UIC which recently bought over and privatised Singapore Land at $9.40/share. In my opinion, the offer was too low from the perspective of Singapore Land shareholders; the offer price was a 28% discount to book value (even though it was an 11% premium to Singapore Land’s last traded price of $8.45).
Based on these actions, my take is that UOL’s management is probably not the sort to fully unlock asset value for shareholders.
Based on the assets we listed down earlier, UOL’s asset value is $7,904.9 million. UOL’s total liabilities is $3,032.2 million.
Hence, the company’s intrinsic value based on NAV is:
$7904.9 million – $3032.2 million = $4,872.7 million
And UOL’s intrinsic value per share is:
$4,872.7 million ÷ 771.199 million shares = $6.32
At this time of writing (25 Jun 2014), UOL’s current share price is $6.50.
Based on our conservative valuation, UOL’s intrinsic value is $6.32 per share while its current share price is $6.50 per share which is slightly overvalued.
Along with its management behaviour and a below average dividend yield of 2.2%, I would consider taking a look at something similar like REITs instead of UOL at this moment.
Does that mean UOL is a bad investment to avoid? No.
Every investment is a good investment – at the right price.
UOL is obviously a reputable company with an established track record and I would personally relook it if it meets two conditions:
- Its share trades at 20% below my conservative calculation of its intrinsic value
- It gives me a dividend yield of 6% or more
At that point, UOL would pique my interest and be a stock I might possibly invest in.
The way you did the valuation is very interesting. Do you have any course that I can sign up for?
Thank you for your interest! We don’t have any courses at the moment but we’ll definitely let you know when we have one.
In the meantime, if you’re interested in learning more, you can check out our book Value Investing in Growth Companies on Amazon or our Quickstart Guide to Investing which is suitable for beginners 🙂
I quite like the way you evaluate a company which is straight forward and make sense. In terms of your calculation of the intrinsic value, can I say the main difference (against the intrinsic value calculation from Value Investing guru : Warren Buffett) is not taking into account of the future growth? I find that your calculation is easier to understand and more objective i.e. less assumption.
Thanks for sharing…
When calculating intrinsic value, you have to first decide the type of business model the company you’re analyzing is in.
In the case of UOL, I classified it as an asset play. For asset plays, I tend to be more conservative in my valuation and do not take into account for any future growth. I invest only when the stock price falls significantly below NAV while netting a good dividend yield.
But if I’m analyzing a company with a business model that generates highly predictable earnings, I would use discounted cash flow (or earnings) with a conservative growth projection to calculate the intrinsic value.
Always remember to protect your downside and don’t be too overly optimistic with growth projections. Like the saying: “Protect the downside and the upside will take care of itself.” So always be conservative with your valuations.
Thanks for the detailed explanation. Much appreciated… 😉
You’re most welcome. Thanks for dropping by and leaving your comments! 🙂
I am just curious, most of the time when we look at the balance sheet of companies, the amount of marketable securities are not that obvious. How can/should we figure out the amount of marketable securities a company holds?
You can find marketable securities under the balance sheet but it might be termed sometimes as investments. If you need to dig deeper, you can look at the footnotes to find out the amount of marketable securities a company has.