When we boil investing down to its simplest, it’s actually not difficult to comprehend. As investors, we simply want to buy shares that are trading at a discount to what their businesses are truly worth. The problem comes though, when we have to define what “truly worth” means. For some investors, it’s simply the idea of investing in shares that are selling at prices lower than what their assets, after deducting all liabilities, are worth. Some would go a step further, and back out a company’s intangible assets to arrive at its tangible book value. In everyday parlance, it could…
When we boil investing down to its simplest, it’s actually not difficult to comprehend. As investors, we simply want to buy shares that are trading at a discount to what their businesses are truly worth.
The problem comes though, when we have to define what “truly worth” means. For some investors, it’s simply the idea of investing in shares that are selling at prices lower than what their assets, after deducting all liabilities, are worth. Some would go a step further, and back out a company’s intangible assets to arrive at its tangible book value. In everyday parlance, it could be thought of as the ‘leftover’ value a company’s physical assets have after it theoretically pays down all of its liabilities.
In particular, the idea of using tangible book value as a measure of cheapness can be appropriate for real estate-related shares. In light of that, I decided to run a screen for locally-listed property counters that happen to be trading at significant discounts to their tangible book value. Here are four that happened to filter through, among others:
1. Hongkong Land Holdings (SGX: H78) is a property investment, management, and development outfit with a focus on Asia. It has some 800,000 square metres of prime office and retail space across Asia, particularly in Singapore and Hong Kong. Based on its latest financials, it has some US$11.41 in tangible book value per share. At its current share price of US$6.41, that’s a discount of 44%.
2. CapitaLand (SGX: C31) is “one of Asia’s largest real estate companies”. Through its many wholly- or partially-owned subsidiaries, it’s hard to miss the handiwork of CapitaLand in its core markets of China and Singapore. For instance, CapitaMalls Asia, which is two-thirds owned by CapitaLand, has a portfolio of some 62 and 20 retail malls in China and Singapore respectively. CapitaLand’s worth some S$2.79 apiece now, with a tangible book value per share that’s 31% higher at S$3.66.
3. Overseas Union Enterprise (SGX: LJ3), or “OUE” for short, has a portfolio of a number of prime real estate. For instance, in Singapore, it counts the 5-star Marina Mandarin Singapore hotel under its banner alongside the Crowne Plaza Changi Airport Hotel, among others. It’s also responsible for the Meritus Pelangi Beach Resort & Spa in Langkawi, Malaysia that boasts of “modern 5-star conveniences”. With a tangible book value per share of S$3.13 and a share price of S$2.78, that’s a significant difference there between those two figures.
4. Fortune REIT (SGX: F25U) is a real estate investment trust that’s managed by ARA Asset Management. It owns a portfolio of 17 retail malls and properties across Hong Kong. Interestingly, annual distributions at the REIT have been growing consecutively over the past four years, from HK$0.244 per unit in 2009 to HK$0.36 per unit in 2013. The REIT’s trading at a price of HK$5.84 now, and that’s 43% lower than its tangible book value of HK$10.26 per unit.
Foolish Bottom Line
Those four shares can be considered to be trading at bargain prices on the basis of having share prices that are lower than their tangible book value. But at the same time, there’re also other important considerations investors have to think of to ascertain whether those shares are truly bargains. Investors have to consider if the value of those assets recorded on their balance sheets are accurate reflections of their true worth (i.e. are the value of the properties stated on their balance sheets calculated using overly-optimistic Pollyanna-ish assumptions?), and at the same time, have a rough gauge on the future trajectory of the value of those assets.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.