Property exposure of local banks

Further to The kind of FT turned citizen that S’pore needs, I tot I’ll share this so that someone overseas can KPKB about our banks very, very large exposure to the local property sector.

DBS estimates that approximately 44%-50% of Singapore banks’ loan books are exposed to Singapore properties via residential mortgages and via lending to REITs or other private vehicles may be captured under “financial institutions, investment and holding companies”

https://www.theedgesingapore.com/capital/brokers-calls/dbs-explains-what-higher-interest-rates-spell-banks-and-developers-cdl-uol

As the PM’s Mrs made me $ (Tempting fate but thanks again Ho Ching), and I’m not one of those PAP running dogs from our constructive, nation-building media who turn on the PAP like hyenas and jackals once they no longer get paid (Another running dog turned self-appointed tribune of the HDB plebs ), I’ll just keep quiet and look at my bank statement.

I also got exposure to UOB and UOL (via Haw Par: Haw Par: Rediscovered yet again) and Reits.

I’ve never voted for the PAP. But to quote the FT minister, “I’m invested in S’pore”and that is the way I show my appreciation of what the PAP does to keep me in prosperity.

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DBS bullish on KepLand and UOL

We believe stocks are currently priced for a slowdown but not a recession. Our strategy would be to adopt a stock picking strategy in the property sector. Within the office segment, office landlords are trading in excess of -1 standard deviation to historical RNAV discount while S-Reits are trading at less than 1 SD to the long-term yield.

We believe office stocks have more than priced in the muted outlook and valuations appear attractive currently. While we have widened target price (TP) discounts and lowered TP for landlords given the higher risks going forward, upside to our TP remains significant.

Our top picks remains Keppel Land and UOL. Keppel Land is currently trading at 46 per cent discount to RNAV of $5.57 and offers 40 per cent upside to our lowered TP of $4.18.

We remain positive on UOL, thanks to its multiple growth engines that spans commercial, residential as well as hospitality. Our TP of $4.96, based on a wider 20 per cent discount, offers 9 per cent upside. We have lowered our call on Singland to Hold due to its large 75 to 80 per cent exposure to the office sector.

Haw Par: Rediscovered yet again

So another investor and blogger discovered last yr that Haw Par is undervalued and blogged abt it recently. Welcome to the Haw Par Tan Kuku club brudder.

If you read the latest annual report, you will know that Cundill and Eagle Investments are substantial shareholders. Both are value investors. Cundill has held the shares for over 10 yrs. Yes, the valuation gap has existed for at least that long.

I bot the shares more than 10 yrs ago and the gap has has narrowed, widened, going round and round. Some brokers recommend buying it when the gap is historically wide and selling it when the gap narrows.

But I don’t mind holding onto the shares. I looked at it, and still do, as buying into a listed investment trust that invests in the Wees’ financial empire (UOB, UOL and UIC). The operating businesses I get for almost free, and the dividends are decent. True there is a big gap between the share price and valuation but so what? No such thing as a free lunch.

And who knows? If the Wees’ empire is broken up, the valuation gap closes.

Another way for the gap to narrow, is if one or more of the operating businesses hits a winner, and the market recognises the value of the business or businesses. Actually 20 over yrs ago, people bot Haw Par because of its operating businesses.

My 2009 post https://atans1.wordpress.com/2009/12/11/hidden-tiger/

Property: What weed are these people smoking?

I am amazed that any broker can call the Singapore real estate sector “Overweight”. But RBS did it on 16 August 2011

The valuation gap between developer stocks and physical properties widened over the past eight months. We expect it to narrow as home sales remain robust. Strong household and developer balance sheets should support prices and cooling measures may prove ineffective in quelling real demand. We upgrade our view on the sector to ‘overweight’ from ‘neutral’.

Developer stocks’ premium to NAV narrowed to just 4 per cent from 33 per cent in January, despite robust primary home sales of 11,197 units (up 13 per cent year on year) in the first seven months of 2011 and a 4.3 per cent half-on-half increase in home prices in H1 2011. The sector also underperformed the STI by 11 percentage points in the last eight months. Policy risks seem as low now in view of heightened global uncertainty. We think any policies to cool the market would prove ineffective as we believe there is virtually no speculation now. We expect mass-market homes to continue to be undersupplied in 2012 to 2013.

Growth in total stock averages 2.3 per cent a year from 2011-12, below the long-term average of 3 per cent, while occupancy rate is at 98 per cent. Hence, we expect the healthy churn of mass properties to persist. We stress-tested the household balance sheet and found that a 30 per cent drop in home prices would bring the debt-to-asset ratio to 18.6 per cent, slightly higher than the long-term average of 18 per cent but below the high of 21 per cent in the 1997 and 2001 booms.

Gearing of larger developers is low at 34 per cent vs 41 per cent during the pre-crisis level of 2008 while that of smaller players halved to 103 per cent. Given their low land bank, developers will not cut prices even if there is a recession, in our view.

RBS expects the economy to grow 6 per cent in 2010 and 5 per cent in 2012. We expect an equilibrium in the office sector, in the light of higher visibility of supply and likely slower demand. Hence, we moderate our office rental growth assumptions to 5 per cent in both 2011 and 2012.

Overall, retail rents may soften in view of an oversupply but quality malls owned by seasoned operators should continue to do well. We like hotels on a structural growth story in Singapore tourism. Capital values of commercial assets should also hold up in view of persistently low rates.

We are most positive on City Developments, which we believe could benefit from a lifting of policy risks and continued strength in the residential market. Hence, we upgrade the stock from a ‘hold’ to ‘buy’, for its large exposure to the residential sector which accounts for 39 per cent of its RNAV.

We maintain our ‘buy’ ratings on Keppel Land, OUE and UOL as these commercial stocks look undervalued, trading at 30 to 50 per cent discount to RNAV. We maintain our ‘hold’ rating on CapitaLand as we believe that the stock may lag in stock price performance in view of its complex shareholding structure.

Hidden Tiger?

Haw Par historically trades at a big discount to its assets and businesses. The discount has got even bigger. Its 4% stake in UOB is now worth more than Haw Par’s market capitalisation — by about 4%.

UOB closed yesterday at S$19.84. This works out to S$6.05 a Haw Par share. Haw Par closed at S$5.83.

And Haw Par has a rat-bag of businesses and assets  ranging from healthcare products (‘Tiger Balm’), oceanriums, an aquarium (there seems to be some legal trouble here),  properties, and 5.2% of UOL (an SGX-listed property company where the UOB Wees have a controlling interest (29.13); like in Haw Par (30.6%). OK rat-bag is unfail,  its businesses are usually profitable, and the assets have value.

So at the these prices of Haw Par and UOB, one gets UOB shares at a 4% discount if one buys Haw Par shares. And the other businesses and assets are thrown in for “free”.

And who knows, one day the  value of Haw Par’s UOB shares; and its other assets, and businesses may be unlocked. Two long-term value investors have been around for years: MacKenzie Cundill Investment Management has 11.67% and Arnhold and S.Bleichroeder has 14.74%.

Meantime, we long-term investors get decent dividends: present yield is 4%.