Many developers due for re-rating?

(File pix) Tan Sri Lim Kim Hong founded I-Berhad which has about 43 per cent of its total assets as non-operating in the form of cash and investment properties under development. Pix by Faiz Anuar

Published in NST Property, October 5, 2018

ARE property companies due for re-rating? There are 98 companies listed on Bursa Malaysia under the Property sector as at September 13 this year. A survey of 93 of them by a local consultancy firm concludes that there are many companies trading at prices below their respective book values.

The survey showed that 87 per cent trade below their respective 2017 financial year end book values.

The price to book value ratio (P/BV) of the companies ranged from 0.02 to 2.84 with an average of 0.61.

“When the companies with prices less than book values include industry leaders such as SP Setia, IOI Properties, UEM Sunrise, Mah Sing and MRCB (Malaysian Resources Corp Bhd), one can wonder whether the negative sentiments have swung too far down and a re-rating is likely.

The firm said with such a high percentage of the companies trading below the book value and considering that 18 out of the 93 companies have negative three years average earnings, the P/BV ratio alone cannot be the only factor to when considering a company’s market returns and re-rating.

The other approach in estimating the intrinsic value of a company is via earning perspective. It thus looked at the earning power value (EPV) of these companies based on the past three years’ average return on equity. It then compared the EPV with the asset value (AV) or book value and the market price and used the results to make the case for re-rating.

It said if a company’s market price is less than both the EPV and AV, there is a case for re-rating.

On the other hand, if the market price is equivalent to both its EPV and AV, the company is fairly valued.

RE-RATING CANDIDATES

The consultancy firm said based on the analysis on the companies it covers whose prices are below their respective book values, the candidates for rerating are UOA Development, Mah Sing, Guocoland, Hua Yang and Titijaya.

“Those companies whose market prices are 20 to 30 per cent below the EPV are potential candidates for re-rating. They would cover MRCB, OSK and SP Setia.”

It said there are some companies — such as Ecoworld and UEM Sunrise (in the Top 10 category) and YNH (in the 75th percentile category) — which have market prices above their respective EPV, thus, the case for re-rating is not so clear-cut.

“MK Land’s market price is equivalent to the EPV and can be considered as appropriately rated. For the rest of the companies, their market prices are below their respective EPV.

“For those EPV

The firm said I-Berhad (EPV

Based on I-Berhad’s 2017 accounts, it has about 43 per cent of its total assets as non-operating, in the form of cash and investment properties under development.

The bulk of the earnings is currently from its property development division that uses about 30 to 40 per cent of its shareholders’ funds.

“Given that the majority of its RM1 billion investment property portfolio will only be coming on stream over the next one to two years, it can be concluded that there is a strong likelihood of increasing its EPV. Thus, its current market price of about half of its book suggests a case of potential re-rating,” said the firm.

BETTER METHODOLOGY

I-Berhad deputy chairman Datuk EuHong Chew said that at the company’s last AGM, its shareholders were informed that the group’s focus was on growing its intrinsic value rather than market price.

“While the market price tends to be sentiment driven, in the long run it will reflect the intrinsic value.

So, we have spent considerable efforts on growing the intrinsic value, such as improving our profitability, ensuring a long-growth runway and being financially prudent,” he told NST Property.

Eu said there are two approaches in estimating the intrinsic value of a property company—an earnings-based approach (using information from the profit and loss statement) and an asset-based approach (using the balance sheet as the primary source).

An example of the former is a valuation based on some multiple of the earnings as used by some analysts, while an example of the latter is the RNAV (Revalued or Revised Net Asset Value) method that is favoured by many analysts.

Eu said in the Malaysian context, the RNAV of a property company is estimated by adding to the net assets the profit that can be generated from projects under development as well as those that can be developed from landbanks. A discount to the RNAV is then applied to arrive at the target price.

“While there is some debate of whether the earnings-based approach or the asset-based approach is the more appropriate one for valuing property companies, one better alternative would be to use both the information when estimating the intrinsic value of a company.

“So, we agree with the analysis of comparing the EPV with the AV as it provides insights into the intrinsic value of the company. In I-Berhad’s case, it is not surprising that the EPV is smaller than the book value as we only started to grow our earnings about five years ago. So, using historical returns to estimate the EPV is sort of understating the potential EPV,” he said.