Is UOA Ltd a Value Trap? (Part 1 of 3)

Case Study 03-1:  An analysis and valuation of UOA Ltd. This post focuses on the business analysis part.


UOA Ltd is currently trading at AUD 0.63 (as of 30 Jul 2020) per share compared to its NTA of AUD 1.06 (based on 31 Dec 2019). 

The UOA Group has significant assets tied up in properties.  Is the market suggesting that these are going to be impaired?

It this a value trap or is there a buying opportunity?

The Group also has a track record of compounding its shareholders’ value at 18% per annum over the past decade. 

Is the market ignoring these and giving you a fantastic buying opportunity? 

Join me in the 3-parts analysis as I lay out my case on why the market is wrong.  This is not a value trap.  

There is definitely an investment opportunity given the mispricing.  Does it mean that you should go and buy it? Read my Disclaimer.

Part 1 of 3 is presented here

Part 2 of 3 was published on 16 Aug 2020. 

Part 3 of 3 was published on 30 Aug 2020. 


Contents

  • What is so unique about the Group?
  • Has the Group used its funds in the best way?
  • Can you describe the Current Performance as Outstanding?
  • Is there a Rich and Unique History?
    • UOA Development
    • UOA REIT
  • Pulling it all together

 

Valuation Date

30 Jul 2020

Company Name

United Overseas Australia Limited

Dual Listing

Australian Securities Exchange ASX

Singapore Exchange SGX

Stock Exchange

ASX

SGX

Stock Name

United Overseas Australia Limited

UOA

Company’s Code

UOS

EH5

Sector

Real Estate

Real Estate

Listing Date

1988

2008

Financial Year-End

December

Latest Quarterly Results

4th Quarter, 31 Dec 2019

Shareholders’ Equity

AUD 1,575 million (31 Dec 2019)

Corporate Website

https://uoa.com.my/

Table 1: Company Info



Notes: 

1) Monetary values are in Australian Dollars (AUD). For cases where the reported figures were in Malaysian Ringgit (RM), I have converted it to AUD. I used the year-end exchange rate as extracted from Investing.com for the conversion. 

2) In the post
  • UOA Group or the Group refers to all the companies within UOA Ltd. These included those under UOA Development Berhad and UOA REIT. 
  • UOA Dev refers to only those companies within UOA Development Berhad
  • UOA REIT refers to only those companies within UOA Real Estate Investment Trust


Case Notes

I chose the UOA Group for this series of blog post because the Group comprises of 3 listed entities.

We thus have the opportunity to analyze and value the Group using 2 approaches:
  • Overall basis – this looks at the Group as one with several operating segments. Under this approach, we ignore that it has 2 listed subsidiaries
  • Look thru basis – this takes the perspective of a shareholder in UOA Ltd saying that he owns 70 % of UOA Dev and 46 % of UOA REIT.  The value to him is 76 % value of UOA Dev, 46 % of UOA REIT, and 100 % of the balance.  The balance covers whatever business under UOA Ltd that is not under UOA Dev and UOA REIT
The business analysis and valuation under both bases should be the same.  

As there are different details is in the various annual reports, valuations differ.  Furthermore, UOA Dev does not have 12 years’ history as a listed company compared to those of UOA REIT and UOA Ltd.

When it comes to the valuation part of the case study, I will compute the intrinsic value under both bases.

Have fun.



UOA Ltd Annual Report 2019



What is so unique about the Group?

The Group was founded in 1987 by 2 Malaysian engineers Kong Chong Soon and Kong Pak Lim. 

Since then, it has grown to be a property development and investment property Group. 

The Group focuses on the middle to high-end residential and commercial property development. 

Based in Kuala Lumpur, Malaysia the Group’s current operations include 
  • The development and sales of properties, 
  • Receiving rental from self-owned properties (commercial, offices, co-sharing facilities and residential) and 
  • The operation of hotels and associated food and beverage outlets and convention facilities. 

Today, the Group has 3 listed companies with a total direct and indirect interests as shown in Chart 1:
  • United Overseas Australia is listed on ASX and SGX
  • UOA Development Berhad is listed on Bursa Malaysia
  • UOA REIT is listed on Bursa Malaysia (Refer to Note 1) 

UOA Group Structure
Chart 1: UOA Group Structure


The Group’s corporate website stated the following as of 31 December 2018: 
  • Has completed more than RM 14.7 billion (AUD 5.0 billion) gross development value (GDV) of commercial, retail, and residential properties
  • Has a land bank of approximately 100 acres. It can realize more than RM 17 billion (AUD 5.8 billion) of GDV over the next 10 years. (Refer to Note 2) 
  • Has an investment portfolio valued more than RM 3.0 billion (AUD 1.2 billion)

The Group is unique in that it handles all the stages of the property development process.
 
At the same time, the Group has an in-house construction company, Allied Engineering Construction (AEC).  ACE has been the main contractor for all the Group's development projects.

AEC has more than 1 million square feet of facilities and plant yard. Since 2008, AEC has handled projects worth over RM 3 billion (AUD 1 billion).  There are currently some 10 million square feet of on-going development projects.

When looking at the Group performance, note that
  • Group Investment Property portfolio included investment properties under UOA Development and UOA REIT. I estimated that UOA REIT accounted for about 39% of the Investment Property revenue of the Group. 
  • UOA Dev handles the majority of the property development activities as well as the hospitality operations
  • The majority of the UOA Group’s operations are in Malaysia. But, in 2017 the Group ventured into Australia and Vietnam.  I estimated that these non-Malaysian operations accounted for less than 4 % of the Group revenue.
  • ACE financials are not reported in the segment section of the Group’s and UOA Dev’s Annual Reports. 

Has the Group used its funds in the best way?

Senior management has 2 roles – operations and capital allocation.

An analysis of the sources and uses of funds will show how well capital has been allocated. 

The UOA Group has AUD 2.5 billion of capital from shareholders, partners (minority interests), and lenders.  Note that lenders are in various forms from outright loans to lease.
  • About 2/3 of the funds are from shareholders
  • There is not much from lenders

About 83% of these funds are for operations while the non-operating assets (mainly cash) accounted for almost all the balance. 

Looks like an effective allocation.

Items

Ref

AUD million

Shareholders’ Equity

SHF

1,575

Minority Interests

MI

749

Total Debt      

Debt

131

Total Capital Employed (TCE)

 

2,455

 

Items

Ref

AUD million

Net Operating Assets

Net OA

2,040

Net Financial Assets

Net FA

415

Non-Operating Assets

Non-OA

0

Total

 

2455

Table 2: Sources and Uses of Funds (4th Quarter, 31 Dec 2019)

 

UOA Group Sources and Uses of Funds
Chart 2: UOA Group Sources and Uses of Funds


The Group has two major operating segments with the total capital employed as follows:
  • Investment Property accounting for 39 % of the TCE
  • Property Development accounting for 45% of the TCE

I estimated that at the UOA Dev level, the TCE is allocated at the same ratio between Investment Property and Property Development. 

I have not analyzed capital allocation at the UOA Dev and UOA REIT level as their financials are consolidated at the UOA Group/UOA Ltd level.


Can you describe the Current Performance as Outstanding?

I suspect that because of Covid-19, there is a delay in the Group half-yearly results.  So the latest financials are still those on 31 December 2019.

The Group has operations in Malaysia, Singapore, Australia and Vietnam.  These countries had imposed some form of lockdown lasting several months.  As such I do not expect the current year’s performance to be better than that of last year.

But this should not change the fact that the Group revenue and profits have been growing over the past 12 years.   But gross profitability has declined. 

The decline in gross profitability is due to 
  • The large increase in its capital base that is today about 4 times of that 12 years ago. 
  • A decline in the gross profit margin from about 52 % (2008 - 2010) to 42 % (2017 – 2019).

The impact is a decline in the ROE. The table below shows a decline over the past 3 years.  But over a longer timeframe, the ROE averaged 20 % for 2008 – 2010 compared to 8 % for the past 3 years.

UOA Group Performance
Chart 3: UOA Group Performance

Item

 

2017

2018

2019

Revenue

AUD m

327.8

440.5

387.2

PAT

AUD m

175.8

160.2

140.0

Gross Profitability (Note 2)

%

7

7

5

ROE

%

9

7

6

Debt to SHF & MI ratio

 

0.1

0.1

0.1

Table 3: UOA Group Past 3 years Performance


Return on total capital employed (pre-tax basis) are:
  • 3.7 % return for the Investment Property segment 
  • 15.0 % return for the Property Development segment 

The Group Investment Property segment profits are from rental as well as from the revaluation of properties.

Over the past 12 years, the gain from re-valuation accounted for 70% of the Group Investment Property segment profits. It is sizeable. 

While the profits have been growing, it has not kept pace with the growth in the capital employed.

Now is this good or bad?

UOA Group Segment Performance
Chart 4: UOA Group Segment Performance

Note: a) TCE= SHF + MI + Loan where the loan portion was estimated based on the interest expense of each segment. b) The PBT for the Property Development and Investment Property segments excluded associate income, interests, and gains from other investments c) The average revenue and PBT is 12 years’ time-weighted


Is there a Rich and Unique History?

The Group maiden development project began with La Villas in Kuala Lumpur in 1989. 

It then went to develop Desa Bangsar Ria.  The UOA Centre, its first commercial development came next. These laid the roots of the Group business model
  • Developing residential units for sale
  • Developing commercial units partly for sale and partly for long term investments. 
By focussing on the Klang Valley where land is scarce, UOA did not pursue township developments that need thousands of acres of land.  

Rather in its early days, it acquired small plots for once-off residential or commercial projects.  
  • In its first decade of development, the largest plot was about 10 acres
  • In the second decade, the largest plot was about 33 acres for the development of Taman Megah Kepong Baru Phase 1 - 3
  • The largest plot of land that the Group has developed so far is the 50 odd acres for Bangsar South.  This came about after 2 decades of property development track record.  The development of Bangsar South commenced in 2007.
Over the past 12 years, the Group
  • Grew it Property Development revenue by about 2 ½ times
  • Grew its Investment Property revenue by about 1/3

UOA Group Revenue
Chart 5: UOA Group Revenue


Rental revenue will always be much smaller than revenue from sales of properties.  So it is more meaningful to look at segment profits as shown in Chart 6.
  • In certain years eg 2009 and 2016, Investment Property profits are a large part of the Group’s profits.
  • Investment Property's profits are from rental income as well and revaluation surplus. The gain from the revaluation of properties is larger than the rental profits.
UOA Group P&L Components
Chart 6: UOA Group P&L Components


Property development and investments in properties are capital intensive in nature.   But the Group has been able to manage this process by
  • Retaining some of the commercial units.  The sale of properties financed commercial property investments.
  • Subsequently, unlocking some of the assets with the listing of UOA REIT
  • Listing of UOA Dev in 2011

The end result is that the Group has only AUD 131 million of debt (as at the end Dec 2019).  This is low gearing compared to the Group AUD 1.6 billion shareholders’ funds.


UOA Dev

UOA Dev was listed on Bursa Malaysia in 2011.  This was after consolidating the property development, construction and property investment activities.  Note that the consolidation excluded those under UOA REIT of the then UOA Ltd. 

This was merely a continuation of the Group's property development another listed entity. 

UOA Dev currently accounted for almost all UOA Group's Property Development segment revenue.

In the context of Investment Property
  • UOA Dev also accounted for about 58 % the Group Investment Property segment performance
  • Over the past 9 years (since listing), 91 % of the UOA Group re-valuation surplus came from UOA Dev
  • UOA Dev continues to build up its investment property portfolio.  From about RM 407 million (AUD 126 million) in 2012, it grew to RM 1,850 million (AUD 645 million) in 2019. 

What are the key features of UOA Dev (looking from its own business activities)?
  • About 40% of the 2019 TCE is tied up for property development while another 19% is in cash and securities. The balance is for the investment property operations 
  • About 2/3 of the profits are from property development.  The majority of the balance from the investment property operations

Note that the following are not reflected in the revenue of UOA Dev:
  • Earnings from the investment properties and/or those from the hospitality operations
  • About 16% of profits over the past 9 years were from a revaluation of the investment properties
  • About 15% of the property development profits came from the construction division. 

A more informative way is to look at the profit profile as shown in the chart
  • The sales of properties were the biggest contributor.  It accounted for about 63 % of the past 10 years of earning.
  • In certain years eg in 2011 and 2016, the revaluation gain accounted for a big chunk of the profits.

UOA Dev Profit Profile
Chart 7: UOA Dev Profit Profile


UOA REIT

UOA Real Estate Investment Trust (UOA REIT) was listed on Bursa Malaysia on 30 December 2005.

Over the past 9 years (since UOA Dev listing) about 1/3 of the Group's Investment Properties PBT came from UOA REIT.  The balance came from UOA Dev. 

But UOA REIT's Annual Report provided much better information about its activities.  This provides more insights into what drove Investment Property performance. 

The UOB REIT started off with 4 commercial properties that were developed by UOA Ltd.
  • UOA Centre 
  • UOA II 
  • UOA Damansara
  • Wisma UOA Bangsar

Over the years, it had acquired other commercial properties developed by the Group. The REIT had also sold some properties so that by the end of 2019, it owned about 1.3 million sq ft of Net Lettable Areas.  Compare this with 0.8 million when it first started. 

How has the REIT performed? 
  • The revenue has grown from RM 42.1 million (AUD 17.2 million) in 2008 to RM 78.2 million (AUD 27.2 million) in 2019 
  • The PAT was RM 25.2 million (AUD 10.3 million) in 2008 c/w with RM 20.4 million (AUD 7.1 million) in 2019
It has not been a steady growth with a decline over the past 4 years as shown in Chart 8.   

UOA REIT Performance
Chart 8: UOA REIT Performance


What has driven revenue and/or profit growth?
  • It is not occupancy which an average ranging for 85 % to 95 % 
  • It is a party from an increase in net lettable areas as well as an increase in average rents.  Chart 9 shows the components driving the growth.
  • Over the past 12 years, 1/4 of the profits from UOA REIT came from revaluation surplus and/or the sale of properties.  Note that revaluation surplus was not a big part of the total gain. Of course, the revaluation gain does not occur every year but when it does, it is a sizeable chunk of the profits. 
UOA REIT Leasing metrics
Chart 9: UOA REIT Leasing Metrics

Pulling it all together

Property development is not only project-based but also cyclical.  That is why many property developers seek to complement this with some other recurring income activities.

UOA Group has chosen investment properties and hospitality as the recurring income activities. 

I would conclude as follows
  • UOA Dev is the main revenue and profit driver for the Group
  • Only about 43% of the Group AUD 1.13 billion of investment properties are under UOA REIT. The goal of investing in properties is twofold - derive rental income and enjoy revaluation surplus
  • There would be lots of opportunities for the Group to ‘transfer” more properties from UOA Dev to UOA REIT.   This would allow UOA Dev to redeploy capital to project with higher returns.  

Is UOA Group a value trap or is there an investment opportunity?

Value traps are investments that are trading at such low levels and present as buying opportunities for investors but are actually misleading.

The analysis so far has not shown that it is a value trap.  However, it is not definitive.  Join me in Part 2 and 3 as I present more evidence on why UOA Group is not a value trap. 


End of Part of 1of 3

Part 2 was published on Sun 16 Aug 2020

Part 3 was published on Sun 30 Aug 2020



Notes

1) The UOA Ltd 2019 Annual Report stated that it owned 46.31% of UOA REIT. In the UOA REIT Annual Report, UOA Ltd is listed as a substantial shareholder with 76.55 % indirect units. However, the financial statements of UOA REIT are consolidated into UOA Ltd. 

2) In UOA Dev 2019 Annual Report, the List of Properties only had 27 acres of land held for development.




Reading guide
If you are a first-time visitor to this blog, you may not be familiar with some of the concepts that I have used in my analysis and valuation.  I suggest that you check up the Foundations series - Fundamentals 01,  Fundamentals 02, and Fundamentals 03.   I also have a Definitions page in case you are not familiar with the terms I have used. 



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Disclaimer
I am not an investment adviser, security analyst or stockbroker.  The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies.   Investments or strategies mentioned in this website may not be suitable to you and you should have your own independent decision regarding them. 

The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. 

I may have equity interests in some of the companies featured.

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