On April 15, 2016, Business Times (BT) published an article entitled “GuocoLand attractive candidate for privatisation”, the author described GuocoLand Group as an undervalued company with its huge asset portfolio of close to $3.7 billion on a net basis, and a book value of $3 per share. The author concluded by indicating that there could be a possibility that its principal shareholder, Mr. Quek Leng Chan might step in with an offer of around $2.50 per share as estimated by the BT author.
However, we think that potential investors might want to also get a second opinion through using discounted cash flow (DCF) analysis, given the latest run-up in shares from the $1.80 per share as the BT author had noted on the day when the story was published to around $1.94 recently on April 18. We think that the GuocoLand’s stock price might have gotten ahead of itself, as our DCF analysis shows a value of close to $1.89 per share. This might suggest a potential overvaluation of the stock price at current levels.
Brief description of GuocoLand Limited
GuocoLand Limited is an investment holding group specialising in the development, investment and management of various properties. The company has presence in several countries including Singapore, China, Malaysia, and Vietnam. The company develops residential, hospitality, commercial, retail and integrated properties. It also operates and manages hotels and resorts. GuocoLand Limited was incorporated in 1976 and is headquartered in Singapore.
GuocoLand stock might have gotten ahead too fast
We attempt to value GuocoLand based on discounted free cash flows (DCF) method. We recognise that there are many valuation techniques available, but we chose the DCF method for its strength in recognising the value of an operating entity is based on the net present value of its overall free cash flows.
A table depicting our model’s assumptions is as follows:
Our assumptions to the DCF model:
- We assume a rate of growth of 2% each year for financial years 2016 to 2020, and a terminal growth rate of 0% from 2021 onwards.
- Our levered beta estimate of 0.75 is based on reference obtained from the website of CNBC Business News, and a local corporate tax rate of 17%.
- Our weighted average cost of capital (WACC) estimate is 4.3% with a debt-to-equity structure of close to 2:1. Our cost of equity of around 8.3%, and cost of debt of around 2.2%. The cost of debt of 2.2% is about 50 basis points (bps) from the average interest rate of 1.7% assigned for its long and short-term interest bearing debt in FY2014 according to the FY2015 annual report ending June 30 last year.
Our valuation estimate for GuocoLand Group
Based on the table above, we derived a valuation estimate of around $1.89 per share for GuocoLand Group. We think that investors could be disappointed by the lack of clarity of the part of management to eventually acquire the firm, and subsequently sell out their stakes. Although the BT author in the April 15 story noted that Mr. Quek had earlier offered to pay HK$8.25 billion, or HK$88 in cash per share to acquire Hong Kong-listed Guoco Group Ltd in December 2013, there is no guarantee that management will privatise GuocoLand Group in Singapore under similar circumstances. Investors are advised to seek caution and analyse all the factors before taking any actions.
How are the peers performing as compared to GuocoLand
A total of 10 comparable companies were picked from the Stockfacts platform in SGX website. GuocoLand Group’s 2.909 times historical price earnings (P/E) ratio is one of the lowest as compared to its peers. The top two companies in the list that have the highest historic P/E ratios include Wheelock Properties (Singapore) Limited (46.439 times), and Perennial Real Estate Holdings Limited with a historic P/E ratio of around 34.703 times.
GuocoLand Group’s historic debt-to-equity ratio is around 13.326 times. Based on the table above, it suggests that GuocoLand Group has capital structure that is relatively highly levered, but is quite comparable to a majority of its peers. The company in the list of property developers that has the lowest historic debt-to-equity ratio is Sinarmas Land Limited (3.036 times).
We are of opinion that investors should not chase after a stock simply by a single news story. We acknowledge that our DCF estimate of $1.89 per share for GuocoLand Group Singapore is just one of the many valuation techniques out there. Other valuation techniques include the book value per share, and the revalued net asset value (RNAV) which measures the mark-to-market true value of the properties developers hold might come up with different valuation estimates. We hope that investors could also be made aware of other valuation estimates such as the use DCF analysis on top of the estimates provided in the April 15 BT article.
Disclaimer: I, Tay Hock Meng, personally own two lots (200 shares) of GuocoLand Group Limited in Singapore.