Wednesday, March 02, 2011
Could Haw Par stock be a ten dollar note available for sale at $6? Book value as at end 2010 is roughly $9.8 while stock is selling at $6. For seasoned investor, we know the pitfall just by simply investing based on discount to book value, no matter how huge the gap is. Let's start valuing instead by dissecting Haw Par. There are basically two parts to Haw Par core business: 1) Operating businesses including property rental and sale of healthcare consumer products (mainly Tiger Balm's line of products); 2) Equity investments.
Market value of Haw Par = 197.9m shares x $6 = $1187.4m
The company owns 4% of UOB (62.88m shares), 41.4288m shares of UOL, 67.558m shares of UIC and 277.9m shares of Hua Han biopharmaceutical which is listed on HKSE.
Market value of listed equities
1) UOB - 62.88m shares x $18.3 = $1150.7m
2) UOL - 41.4288m x $4.5 = $186.4m
3) UIC - 67.558 x $2.8 = $189.2m
4) Hua Han - 277.9m x HK$2.4 = HK$667m or SG$109m
Total market value of listed equities = $1635.4m
Based on this, the business is already discounted at a rate of 27%.
Not cheap enough? Here's some more icing - the company owns no debt except tax both current and deferred but for deferred, it probably isn't payable till its investment properties are sold but those are held for rental yield; then, it holds another $110m of cash. Add on this cash, the business is selling at a discount of 32%.
In fact, the whole of Haw Par just selling at slightly above the value of UOB shares that the company owns. So, as in investor, at $6, you simply pays for the UOB stake, and are getting the rest - UOB, UIC, Hua Han, cash in bank & investment properties + the tiger balm business which generates $79m in sales yearly - for free.
Another method of valuation I use is based on earnings of both the operating business and the proportional share of earnings of its equity investments.
1) Operating business - Operating earnings excluding dividend from investments come up to about $36.5m. At a tax rate of 17%, net profit = $30.3m.
2) Proportion share of earnings from equity investments:
a) UOB - EPS $1.6 x 62.88m shares = $100.6m
b) UOL - EPS $0.55 x 41.4288m = $22.8m
c) UIC - EPS $0.172 x 67.558 = $11.6m
d) Hua Han - EPS HK$0.146 x 277.9m = HK$40.6m or SG$6.6m
*UOL and UIC eps are excluding fair value gain/loss on investment properties.
Total earnings from operating business + earnings from equity investments on a look-through basis = $141.6m
On this basis, at $6 a pop, PE is less than 9.
Other considerations? Surely, there are. Are the equities that the company holds really valuable or undervalued for the matter? To be sure, it looks reasonable for the most parts, in particular, UOB - priced roughly 11x earnings.
What's the prospect of UOB? As long as Singapore and the region grows, UOB will grows too as assets in the region grows. Banks is simply just the money grid that helps to allocate and distribute capital from those who have them but don't need them to those that need them but don't have them. Not long ago, Singapore government hope to increase the nation average salary by 30% on a real term in 10 years time or something. This looks like one factor that looks favorable for banks to grow its asset base. Total assets was $214b at end 2010. ROA of 1.2% will produce $1.65 in eps. In 2001, UOB total assets was $114b. In 1992, was $28b. Part of it was due to merger like with OUB and most part to organic growth.
Need further proof? Here are some. Singapore GDP measured at current price was $84.7b and $304b in 1992 and 2010, respectively. A growth of 259%. UOB share price grew from $4.5 to $18.3 in the same period. A growth of 300%. Almost mirroring the country rate of growth.