It was reported by EdgeProp.sg that International Plaza has been put up for collective sale with a price tag of $2.7 billion. Of course, at first glance, the initial beneficiary is likely to be Fuji Xerox Towers, owned by City Developments (CDL), which is being torn down. Even without the benefit of International Plaza’s mouth watering price tag, Fuji Xerox Towers is likely to add as much as $1 billion to CDL’s revalued net asset value when fully developed in 2025.
In general, property stocks trade at large discounts to their net asset values and CDL is no exception, currently trading at 0.74 times its latest reported NAV of $9.22. In our RIght TIming and Financially Savvy columns, we have put forward reasons and theories as to why many property stocks trade at these large discounts to NAV.
One of the stocks in the list of top 20 asset-based stocks trading at discounts to NAV is Hong Fok Corp, which at its current price is trading at just 0.27 times its NAV of $2.95.
A stock’s ROE matching or exceeding the company’s cost of capital could make the difference between an undervalued company based on its P/NAV, or a value trap, so the rationale goes. The usual ROE calculations use net profit measured against shareholders equity. Property companies usually have to hold equity as they are asset-heavy.
Value traps are investments that are trading at such low levels and present themselves as buying opportunities for investors but are actually misleading. For a value trap investment, the low price is often accompanied by extended periods of low multiples as well.
Because the ROE versus cost of capital metric is a generalisation, our Financially Savvy column checked the value trap thesis with growth in earnings and cash flow against price growth. Here, we compared historical fundamentals or value growth against price growth. We broke down the values of a company into four components — revenue, net income, operating cash flow and free cash flow — ordered by increasing importance. It so turns out that Hong Fok comes up short on both the ROE versus cost of capital thesis and the value growth versus price growth thesis.
In 1HFY2021 ended June, Hong Fok announced an 18% y-o-y rise in net profit to $5 million. More interesting though is its positive cash flow, both operating and free cash flow. On the flip side, Hong Fok’s price surge for two days in March goes against the value growth versus price growth analogy, as Hong Fok’s 1H2021 earnings did not rise by the same proportion.
At any rate, Hong Fok owns 44% of a unit at International Plaza. The property’s $2.7 billion reserve price translates to a land rate of about $2,448 psf per plot ratio, according to the marketing agent. Although Hong Fok’s stake in a unit is likely to reap a large profit should International Plaza find a buyer, the amount is unlikely to make much of a dent in the P/NAV metric.
Since Hong Fok’s price surge in March, the stock has declined gradually and is now just above its 200-day moving average at 78.7 cents. Smoothed RSI has shown a positive divergence with price. What is lacking is a breakout by the indicator and volume expansion to show that buying has overcome selling. Still, volume is at an ebb and prices are entrenched in a very narrow range. Both trends suggest that current levels are likely to coincide with a support area with limited downside.
However, Hong Fok’s share price is unlikely to get to its NAV although the discount could be narrowed. Hong Fok may need to monetise some of its assets to narrow this discount. According to its annual report, the developer holds 77 units at Concourse Skyline, which are likely to be divested. As an observation, Hong Fok appears to be very much a family-run company, as evidenced by its board of directors and management.
Photo: The Edge Singapore
