Commentary on the Property/Developers crash on Friday, 6-July-2018

My idea of investing is that the thesis should be as simple as possible. If the idea cannot be expressed within the confines of an A5-sized notepad, it is probably too complicated or difficult.

Let's start with APAC Realty (APAC).

The stock price on Thursday (referred from now as "pre-crash") is $0.83. It closed at $0.58 on Friday.

Let's value APAC on earnings; it has a sizable amount of good will in its books, making it unsuitable to be priced on assets.

According to its annual report, the net income of APAC looks something like this:

According to the AR, APAC has 355,197,700 or 355.1977m shares outstanding.
 

355	2014	2015	2016	2017	Average
Net Income (million)	12.2	8.5	15.9	25.9	15.625
Earnings per share	0.034347	0.02393	0.044764	0.072917	0.0439896
PE (based on $0.83)	24.17	34.68	18.54	11.38	18.87
PE (based on $0.58)	16.89	24.24	12.96	7.95	13.18

Hence, based on the bad year (lowest earnings) of 2015, the PE is 24.24 on today's price, and the best year (last), it was 7.95. Clearly the market does not believe future prospects to be warming. The average PE of APAC, based on only 4 years, is 13.18. I wouldn't say that the market has priced the company to "stupid-low" levels.

What can I learn from this episode? First, valuation based on earnings is fraught with danger. Many accounts of insiders in the oil-and-gas industry, who tried to time stock purchases during the last few years, were surprised by the protracted depression of the industry (and oil prices). The property market is a cyclical one.

Second, there is no way one could have accounted for the cooling measures.

Third, do not invest in companies during good times.

It is far safer to invest with companies whose immediate prospects are depressing, but possesses well-fortified balance sheets. One is not an optimist by parking their cash alongside companies with well-heeled futures; it is far better to be a realist than an optimist.


I am not vested in APAC Realty/Propnex.

***

Which bring us to the next company in question, Wheelock Properties (M35 in SGX). I did not come up with this idea-- this idea was brought to me by a senior value investor.


Wheelock fell about 6% during the crash. Let's take a look at its balance sheet during the last quarterly report. The net asset value (NAV) is stated at $2.68 a share, representing a 30 percent discount.

Some points to take note:

• It has 1196.559876m shares, giving Wheelock a market cap of 1.878B or so.
• Equity growth is at a CAGR of 4.3% for the last 10 years.
• A dividend of 71.794m has been paid for every of the last 10 years. It has no problems paying this out of its estimated reserves, or cash hoard, for the foreseeable future.
• At the closing price of $1.57, it represents a dividend yield of close to 3.9%.
• The company has next-to-no debts.
• It has 918.08m of cash. On the non-current assets, it has a further 423m worth of investments for sale. This presents $1.12 worth of liquid assets per share, leaving $0.45 for its properties for sale and rental. 
• Most of their development properties are sold-- the remaining 20 units of Scott Square properties are freehold and currently leased out.

While earnings and cashflow are not on the steady side, a level-headed (Graham's phrase) appraisal suggest that this company is likely a much, much safer investment than others.

I am vested and will add on further weakness.

I will leave you with the beautiful writings of Graham in his book "The Intelligent Investor." As written in chapter 14, "Stock Selection for the Defensive Investor,":

"

...

Nevertheless,  the  future  itself  can  be approached in two different ways, which may be called the way of prediction (or projection) and the way of protection.
....
By  contrast,  those  who  emphasize  protection  are  always  especially  concerned  with  the  price  of  the  issue  at  the  time  of  study. Their main effort is to assure themselves of a substantial margin of indicated  present  value  above  the  market  price—which  margin could  absorb  unfavorable  developments  in  the  future.  Generally speaking, therefore, it is not so necessary for them to be enthusiastic over the company’s long-run prospects as it is to be reasonably confident that the enterprise will get along.

"