Thursday, July 19, 2018

Wheelock Privatization Shows Why Deep Value Investing Is So Difficult To Execute For Perfection

After a few days of trading halt, there's finally news that Wheelock Properties will be privatized.

Wheelock Properties have been a deep value asset play for a very long time especially for investors who buy based on the premise of a net cash position, their relative valuation to the one listed in HK and waiting for a privatization offer.

The Offer Price values the company at $2.10 per share, which represents a premium of over 20.7% over the last transacted price of $1.74 per share on the 13th Jul.

While this seems like a no-brainer win for most people, one has to look over their real long term return over the last 10 years after recovery from the GFC.



In fact, if we look at the offer price of $2.10, that actually only presents 0.78x of the Price-to-NAV which is way lower than the intrinsic value of the company itself.

Of course, the company tried to present it nicely by relating them to the historical Price-to-NAV trading multiples which is typically between 0.65x to 0.71x but that doesn't change the fact that as minority shareholders, you are being disadvantaged when it comes to takeover play.

If we compute the long term return for Wheelock for the past 10 years since the recovery from the GFC, your return today inclusive of dividend would be only around 4.35%. That is not attractive at all in my opinion and even that, a large percentage of that is due to dividends that they pay out (~3.2%).



We can see similar pattern in the past on privatization cases which most of the offer price are lower than their intrinsic value.

Singapore Land is one particularly the case that I recall which caused quite a bit of news in the market due to their "low" offer - only 11.2% premium to the last traded price but way below their intrinsic value to the NAV.

This usually happens when there are stronghold ownership (e.g family owned) who already owns majority of the shareholding.

Does Deep Value Investing Works For You?

In this particular case, the deep value investing clearly lies in the assets they owned.

When you pay 50 cents for a dollar worth, people tend to call it deep value investing and downside risk is more protected.

But over the long term, it may not necessarily play out well based on different circumstances and to simply buy based on their discount to the assets (even if it is tangible assets) can be detrimental to your portfolio.

It is almost you are market timing when these assets will get fully valued and most of the times it might not be the case from the example we see above.

Some of these returns over the long run can be very poor and you are better off putting your money in a Singapore Savings Bond. After all, the idea to having invested in equity is to get that risk premium over a risk free investment and that clearly doesn't play out in this case.

Deep Value Investing can of course take in other forms too besides assets such as the free cash flow and other things, but again, for as long as the company does not use it for either dividends or growing the company, then as investors we are at risk we will be screwed the longer "no one knows when that" day is.

Thanks for reading.

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16 comments:

  1. Yeah, I did a post myself about this so tell me about it. These low ball offers are such an annoyance -_-. Thankfully this is just a small part of my basket of SG real estate stocks. I'm also lucky because I only bought in last year so my returns are decent.

    Mr.C @SippingCoconuts

    ReplyDelete
    Replies
    1. Hi Mr C.

      You did well!!! The share price keeps on rising and if you bought it last year, then this is a massive windfall for you.

      Delete
  2. Greed over equality in business world. When is money enough for a person? Maybe, not even all the world has. Greed had no boundary. That is why property companies refuse to monetise their properties n share the proceeds with minority shareholders.

    ReplyDelete
    Replies
    1. Hi Jamesbond

      I have a suspect that this happens predominantly in the SGX listed companies as shareholders revolt are a lot stronger in other markets.

      Delete

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  8. Hi B ,

    One thing which we lack is activist investors. But like you said, deep value investing might be difficult when there is a majority family/fund stake.

    Often times we are left to wonder if its a value trap when we get a Wheelock case where the stock stalemated in value for the past 10 years. Worse if it gets privatized during a recessionary period when share price is down.

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