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Wednesday, November 5, 2014

OUE Ltd - Dissecting Q3 FY14 Results

I opened a position not too long ago for OUE Ltd and have explained my rationale for buying them (See Here).

 
The fundamental reason for my purchase since have remained the same and I just want to quickly go through their recent Q3 results which caught my eye. I will not mention all of the results but only specific details which I deemed as important. If you like to check their complete announcement, you may refer to their website under financial announcement.
 
                                                                     Profit & Loss
 
 
1.) Hospitality Division – This segment revenue dropped marginally by $5.9m from $59.1 million to $53.2 million YoY due to the disposal of their China hotels at the end of 2013. Excluding this, actual revenue has increased $1.6 million YoY. I would not be too worried for this particular segment as the management is on the midst of developing a 10-storey extension building adjacent to Crown Plaza Changi Airport Hotel which is slated to completion in 2015. This will add 243 hotel rooms to the existing 320 rooms they already had. Assuming they have not injected this to OUE-HT by then, this will remain as the main contributions to the earnings of this segment.
 
2.) Property Investment Division – This segment revenue has also dropped versus prior year, but it is mainly because Mandarin Gallery has been injected into OUT-HT which now falls under the Group’s Associates. So this is just a matter of moving the revenue from one segment to another. No loss here. In fact, this segment has seen increased contributions this year from Lippo Plaza (which is part of OUE CT) under their Investment Property division.
 
3.) Property Development Division – This segment continues to see decline in revenue due to poor sales coming in from Twin Peaks development. The income you see there is a result of the revenue recognition based upon percentage completion for sales done couple of years ago (latest I checked was in 2011/2012!!!). Rich people, you may want to contribute to the earnings by buying Twin Peaks.
 
4.) Profit from Associates – This segment has increased almost 3-fold from previous year due to the de-consolidation of OUE-HT, which now falls under the Group’s associates, hence contributing to its earnings. In addition, there is also new contributions from the revamped retail mall coming in from One Raffles Quay, which had been completed since May 14.
 
                                                                    Balance Sheet
 
 
 
1.) Cash & Cash Equivalent – Since early this year, the company has been active in re-deploying it’s massive cash into repaying back its debts ($350m) due this year, as well as utilising another $200m into a mutual fund. Upon checking further, realised that this is a GIC backed fund which has historically returned real return of 3.9% on top of inflation (around 7-8% in nominal terms). Based on their decision to utilise the cash this way, it appears that they are not in the plan to develop or purchase any property development in the near term.
 
2.) Development Property – This has been on a slide due to its only development Twin Peaks which have not been selling well. Based on their estimates, they have recognized an allowance for foreseeable loss of $105 million made on the property each year. Since property sales have not been doing well, they might have to revert to renting the units instead when the project is completed next year.
 
3.) Investment Property – The Investment Property segment increased this year due to the acquisition of Lippo Plaza early this year. Currently, the property is valued at their fair value. There is also a reclassification for Mandarin Gallery which has now moved to Investment in Associates, also valued at their fair value, so no change.
 
*IAS 40 applies to investment property measured initially at cost and subsequently valued at their fair value by recognizing profit/loss on its carrying value (usually valuation is done once per year).
 
4.) Property, Plant and Equipment – PPE is now left with Crowne Plaza Hotel, which is valued at their cost, not fair value. Mandarin Orchard has now been reclassified into Investment in Associates, which is now valued at their fair value, hence recognizing the gain meanwhile. The key here is to ultimately inject Crown Plaza Hotel into OUE HT, so fair value gain can be recognized.
 
*IAS 16 applies to PPE which is measured based on the cost model.
 
Overall, I think fundamentals have remained solid. There are increasing contributions catalyst in the next 2 years coming in from revamped malls at One Raffles Quay, OUE Downtown retail mall and the addition of hotel rooms.
 
There might also be a chance where these hotels are injected into OUE-HT, which will further increased its NAV. The main risk right now is probably from its residential property which is not doing well throughout the industry. At NAV of $4.06, current price represents a P/BV of 0.52, which is almost half its book value!!!
 
Nevertheless, this is solely based on my own analysis and please do your own diligence should you wish to add this counter to your portfolio.

10 comments:

  1. Hi B,
    Seconded your analysis! Again thanks for the effort in sharing. It's so unselfish. Appreciate it.
    Rolf

    ReplyDelete
    Replies
    1. Hi Rolf

      You're very welcome ;)

      Ahh I remembered you entered at a better price than me. I envy.

      Delete
  2. Replies
    1. Hi jalan jalan

      Thanks for your kind words.

      I hope they are helpful to you :)

      Delete
  3. Hi B,

    Just checking with u, I thought developments that have foreign ownership cannot be rented?

    It also can be left vacant for more than 2 years without attracting penalty.

    Thought that was the reason why SC global and some others attempt privatization so that development will be wholely owned by Singaporean and need not fear the penalty

    ReplyDelete
  4. Oh found it:


    If units are not sold within the stipulated two-year period, foreign developers have to fork out pro-rated extension charges based on the proportion of unsold units, of 8 per cent, 16 per cent, and 24 per cent of the property purchase price for the first, second and third extra years respectively.

    -----------


    Even if a developer decides to set up an investment company to buy the units and rent them out, the company could be hit by a 15 per cent ABSD and is restricted by a loan-to-value limit of 20 per cent.

    Source:


    http://www.btinvest.com.sg/dailyfree/unsold-homes-big-drag-developers-coffers-20140607/

    ReplyDelete
    Replies
    1. Thanks sillyinvestor for the extra info :)

      I think they are trying to guestimate their losses on all this charges coming at them sooner or later.

      Maybe they could do a hobee and sell the wholde development to a 3rd party at reduced cost.

      Delete
  5. Thanks for the insightful analysis. Started reading your blog this week when I stumbled upon it when I googled OUE. Myself am vested in OUE too

    Anyway, I remember reading that the consortium for the Korea casino project has placed a deposit of US$10 million for the project and the approval process is estimated to be 8 months (from March 2014 announcement) and targeting to begin construction work early next year 2015 and 1st phase opening in 2018.

    So my thoughts for the $200mil currently in the mutual fund, may be set aside for investment in the casino project.

    Anyway it's my hopeful speculation :-)

    ReplyDelete
    Replies
    1. Hi Nelson

      Thanks for visiting.

      I also remember hearing about the casino rumor but read somewhere that the chairman Riady wants to make money without all those gambling. So I dont think it will materialize now.

      Hopefully theres more news coming out so we will be clearer.

      Delete
  6. Hi B,

    I won't exactly call it a rumor as they announced it officially in March but yes you are correct too as OUE's participation is mainly focus on the hospitality (hotel), convention center, retail and commercial properties... The gambling is probably more of Caesars Entertainment part.

    Hope there's more update soon.

    ReplyDelete

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