Sunday, 19 November 2017

Some Hotels Could Be Very Valuable!

When Mandarin Oriental announced that it was carrying out a strategic review for its The Excelsior hotel in Hong Kong, its share price promptly shot up from USD1.27 at the beginning of the year to USD2.81 at its peak in Sep. There was talk that the sale of The Excelsior would have added nearly USD3 to its share price. Mandarin owns a total of 17 hotels through subsidiaries, associates and joint ventures. Imagine how valuable the entire group would be if all its hotels could be valued at similar valuations.

I did not pursue Mandarin, since its share price had already shot up. However, when City Developments announced that it was privatising its hotel subsidiary, Millennium & Copthorne (M&C), I decided to take a closer look at the hotel groups listed on SGX. There could be something valuable about hotels that insiders know but the market does not know.

One of the hotel groups I looked at was Hotel Grand Central. It owns 14 hotels in Singapore,  Malaysia, Australia, New Zealand and China. Grand Central revalues its properties every 3 years. The last revaluation was carried out in 2015. The current value of the freehold land on its books is $221.0M. It also disclosed that if it had used the historical cost model to record the book value of the land (i.e. no revaluation), the book value would only be $42.5M. The market value of the freehold land is actually 5.2 times the book value if there were no revaluations! Some hotels are sitting on very valuable land! It suggests that hotel groups that do not carry out regular revaluations might be worth a lot more than their book values and share prices suggest.

The next hotel group I studied was Stamford Land. It is a property developer focusing on the Australian and NZ markets and owns 7 hotels in Australia and NZ. Unlike Grand Central, Stamford Land does not revalue its properties. The hotels were mostly acquired between 1994 and 2000. The current book value of the hotels is $375.0M. The figure below from JLL shows how hotel sale prices in terms of price per room have risen in Asia and Australia since 2000. From 2000, the price per room in Australia has risen 3 fold from USD100,000 per room to USD300,000 per room.

Fig. 1: Hotel Sale Price Per Room Since 2000

Separately, I managed to search for hotel transactions in Australia which could serve as a reference for the market value of Stamford Land's hotels (see Tourism Australia website). The valuations are shown below. Note that the valuations are just for reference as there could be many factors affecting the valuations of different hotels.

Fig. 2: Valuation of Stamford Land's Hotels Based on Comparison Approach

Based on the hotel transactions, the market value of Stamford Land's hotels could be worth about SGD611.9M. This is 63% above the book value of $375.0M. Adding the "revaluation surplus" back to Stamford Land's equity, the NAV would increase from $0.57 to $0.85.

However, before you get too excited, value stocks need a catalyst in order for the market to recognise their value. The reason why Stamford Land is undervalued is because it has not sold its hotels in the past 20 years. There is no reason to believe why it will sell them now or in the next 20 years and return the money to shareholders. For this reason, I did not buy a lot of it.

A potential catalyst worth tracking is that the CEO role has been handed over from the father to the son. In the Annual Report 2017, the new CEO mentioned about exploring the viability of setting up a REIT. This might unlock shareholder value. But do not bank on it in the immediate term.

In conclusion, hotels are boring business. But they could be very valuable!

Sunday, 12 November 2017

Singapore Savings Bonds – 2 Years On

It has been 2 years since the launch of the Singapore Savings Bonds (SSB) in Oct 2015. How have the SSB interest rates changed in the past 1 year and how have SSB performed compared to the more traditional Singapore government bonds, i.e. Singapore Government Securities (SGS)? The comparison for the 1st year (Oct 2015 to Sep 2016) is discussed in Singapore Savings Bonds – A Year On. This post continues the discussion for the 2nd year (Oct 2016 to Sep 2017).

The most important factor for both SGS and SSB is interest rates. In the 1st year, interest rates went down. However, in the 2nd year, interest rates went up, especially during the Nov to Dec 2016 period which saw US Federal Reserve raising interest rates again in Dec 2016 after a 1-year hiatus. Figs. 1 and 2 below show the 10-year interest rates for the 1st and 2nd year.

Fig. 1: 10-Year Interest Rate for Year 1

Fig. 2: 10-Year Interest Rate for Year 2

For the 2nd year, the highest 10-Year SSB interest rate achieved is 2.44%, for the tranche issued in Feb 2017. This is still lower than the all-time high of 2.78%, for the tranche issued in Nov 2015. The all-time low is 1.75%, for the tranche issued in Sep 2016. The current SSB interest rate is 2.07%.

If you have bought the 1st tranche of SSB in Oct 2015, the interest rate for the 2nd year would have stepped up from 0.96% to 1.09% in Oct 2016. The market price of SSB is a constant $100, as it is capital protected by the government. In comparison, the coupon (i.e. interest rate) for SGS is constant while the market price of SGS varies with prevailing interest rates, rising when interest rates fall, and falling when interest rates rise.

How does this 1st tranche of SSB compare with the corresponding 10-year SGS bond? Figs. 3 and 4 show the price performance of the SSB and 10Y SGS for the 1st and 2nd year.

Fig. 3: Price Performance of 10-Year SGS and SSB for Year 1

Fig. 4: Price Performance of 10-Year SGS and SSB for Year 2

In the 1st year, the 10Y SGS went up in price due to the fall in interest rates, resulting in a capital gain of 6.57%. On top of that, investors in 10Y SGS would have pocketed a coupon of 2.375%, which, based on the purchase price of $98.61 in end Sep 2015, is equivalent to a yield of 2.41%. The total gain for the SGS is 8.98%, compared to 0.96% for the SSB. The table below shows the comparison between SSB and SGS for the 1st year.

Capital appreciation - 6.57%
Yield 0.96% 2.41%
Total 0.96% 8.98%

However, in the 2nd year, interest rates went up, especially during the Nov to Dec 2016 period, resulting in a capital loss of -2.53% for the SGS. The yield for the 2nd year, based on the price of $105.09 in end Sep 2016, is 2.26%. Thus, investors who hold the 10Y SGS for the 2nd year would have a net loss of -0.27%, compared to 1.09% for the SSB. The table below shows the comparison between SSB and SGS for the 2nd year.

Capital appreciation - -2.53%
Yield 1.09% 2.26%
Total 1.09% -0.27%

Thus, when interest rates go up, it is better to hold SSB, as they are capital protected. However, when interest rates go down, it is better to hold SGS, as they can generate capital gains. By juggling between SGS and SSB, you can get the best of both worlds. The contrasting performance of SGS and SSB for the past 2 years shows that the discussion in Getting the Best of Both SSB & SGS is correct.

See related blog posts:

Sunday, 5 November 2017

Do Not Judge A Blogger By Short-Term Price Movements

How do you judge if a blogger is correct? Is it by price movement? That is, if the price moves in the same direction as what the blogger writes, then he is correct. Conversely, if the price moves against him, then he is wrong. This is an easy and convenient way of judging a blogger, but is not necessarily correct. If you are a short-term investor, then short-term price movement can be the yardstick to measure a blogger. But if you are a long-term investor, short-term price movement is the wrong yardstick.

Using last year's Brexit referendum as an analogy, most observers think that Brexit was a bad idea. However, the majority of British voters voted for it. Does it then mean that Brexit is good and most observers are wrong? The fact that the majority of voters voted for Brexit does not change the fact that Brexit is a bad idea. The outcome of a vote does not determine the correctness of an analysis. Coming back to the stock market, Benjamin Graham once said that the stock market is a voting machine in the short run and a weighing machine in the long run. Thus, from this comparison, short-term price movement does not determine if an analysis is correct or not. The correctness of an analysis will only show up in the longer term. 

Last week's Sunday Times carried an interesting article about Jim Rogers that illustrates this point. He shorted the shares of 6 different companies but ended up having his savings completely wiped out as the shares continued to rise. At this point in time, would you say Jim Rogers was correct or wrong? 2 to 3 years later, each of the 6 companies he shorted had gone bankrupt. Thus, if your yardstick is short-term price movement, then he is wrong. However, if your yardstick is economic outcomes, then he is correct.

Hence, if you read my blog posts and the price went in the same direction, it does not mean I am right. Likewise, if the price went in the opposite direction, it also does not mean I am wrong. Short-term price movements determine nothing. Do not judge a blogger by short-term price movements.

See related blog posts: