Friday, December 14, 2012

My problem with property stocks

What is fundamental stocks investments? To identify a company which can continue to provide value either in the manner of capital appreciation or in the form of dividend or BOTH.

With that objectives, it is much easier for us to choose and pick the type of stocks we would like to own and hopefully for the foreseeable future, be it medium to long term so that we are able to get ABOVE AVERAGE return with manageable and controllable risk management.

Assuming we invest in a company that is not traded publicly. If we are depending on dividend alone and assuming that stock consistently provides 7.14% dividend yield, we will get back our invested money in 14 years if there are no capital appreciation in the stock and we do not sell the stock.

On the other hand, another stock that is publicly traded and assuming it appreciates 7% every year (and does not pay dividend), we will be getting 100% return from that investment in 10 years.

Take that methodology into our investment, we have to either find that investment which provides consistent return of 7.14% over 14 years or hope for another company which is able to provide capital appreciation of 7% every year so that our return will double in 10 years. It is above average return, but that is a long period of time to hope for that consistency but still we must lookout for that.

So, taking that into consideration, we have to look for companies that can provide that consistency (be it the market condition is bad or good). Trust me, there are times when market can be really undervalued as well as way overvalued for a long period of time. It is always very hard to time market. There are times when we feel that the market is already very cheap and it continues to drop even further for a period.

Now, back to the topic - what are property stocks? Where do they belong in our investment mindframe. A property stock is one which owns tracts of land or landbanks which it can use and will use to build commercial, residential or industrial properties for sale or rent. Usually its assets are long term assets, which it uses to build houses, offices, factories etc. Minus the landbanks, it will no longer be attractive as a property company. Names such as Sunrise, SP Setia, Mah Sing, Sime Properties obviously have other forms of intangible assets in its expertise, quality, landscaping, concepts, brand names etc. But still the core asset is land. A great property company such as SP Setia can turn a piece of land in Klang (tens of kilometres away from prime area) to be worth as much as those much nearer to KL. After that piece of land be it to be built over a short period or longer if it is a big piece is fully built, the developer will need to find a new piece.

Big names will continue to build premium housing with premium pricing. But for how long? Land is finite. Plantation companies, consumer food or rather FMCG, fashion, manufacturing, retailers, money managers as in banks, insurance companies, utilities, rubber gloves etc. can continue to generate and regenerate the same thing / product over and over again. Property companies will face it much harder to consistently do that - which is why SP Setia, Sunrise are already being bought over and there are rumours that Mah Sing is becoming an attractive target.

Why? Reproduction is a problem but they are good developers with strong brand names. They themselves are up (or feel like wanting to be up) for sale after certain very successful projects are over and these players may find it hard to regurgitate the same formula. Look at Sunrise! After Sri Hartamas and Mont Kiara, where? Look at See Hoy Chan. Yes, the See Hoy Chan owner which has kept the company private all these while is very rich but the one which probably continues to print and reprint money for them is One Utama. I do not see them having large projects anymore after Damansara. Remember, we shareholders (most) are minorities. We are not the owners generally speaking.

Seldom a property company can continue to consistently and sustainably be able to produce strong results after strong results. I have yet to come across a strong property company in the 70s or even 80s and they still have very strong sets of results today. The only one I can think of is Sime Property. Sime is still there because of its parent which has unlimited supply of agricultural land (and also help from government). That by itself, defeats the term "continue" in the first paragraph of this article. Most of these property companies like to morph to a IGB (Mid Valley) or See Hoy Chan (One Utama) where income can be more consistent.

I know that there are several readers who asked my opinions on companies such as Hua Yang, MKH (Metro Kajang), Asas Dunia, Hunza, Ivory etc. To be frank, they look attractive to me but I just could not foresee where their directions are in the middle term future - in case either the stock or property market turns to the worse. I however can pretty much foresee where Nestle, DKSH, Amway or Malaysia Airport are sort of heading. Bear in mind, property prices have had an extended run for a period.


shrobin said...

MKH is no more just a property stock. Their new plantation 15,000 thousand hectares will yield significant CPO in 2013. The segmental report on Q4,2012 is showing a big jump in CPO output. Does this confirmed what the company said on "significant contribution for 2013"?

Anonymous said...

In Malaysia there are still room for property stocks to co-exist since we still have plenty of lands. Those who can survive will definitely have their moat in the industry.

CrabGrill said...

Hi Feli,

If you only have RM 100,000.00 cash for investment now and you can only pick one stock and keep it for 5 years. What would you buy at what price?

felicity said...

I am sure there are a lot of opportunities for property stocks. There always are. in fact, if I am given to choose the 1 property stock, I would choose Sime, unfortunately it is more of a conglomerate.
On MKH, I would say, Let's see how far it can go on palm.

shrobin said...

15,000 hectares on average can yield 60,000 tons of CPO per year on tree maturity. Depending on CPO price and production cost, margin should not be too bad if CPO price is at least RM2,500/ton.

felicity said...

I think yield and cost management is still important. But you can see that it is looking at diversifying

felicity said...

On the one stock to hold, I guess I am holding to one of the stocks in my current portfolio.

Newbie said...

What do you think of IJM Land. They seem to have a lot of projects in Penang.

felicity said...

I like IJM but a bit worried over overpricing of properties in Penang. High end development in penang is really speculated in my opinion.

CrabGrill said...

What do you think about POS at RM 3.25? If I am interested in POS, which is the best to choose, the mother share or the warrants?

felicity said...

Read this before you think hard of the Malaysian postal business moving forward.

Postal service is a business that needs change and being fluid as a service provider overtime.

I actually wanted to write about Pos malaysia but thought do not want to write so much negative stuffs.

The reason why Pos Malaysis is doing ok now was due to the price increase as provided by govt about 18 mths go. So much competition coming from e-services as well as other courier services would make Pos Malaysia's future a scary thought.

Bn911 said...

Hi Felicity, airasia is dropping, will u consider averaging down your buying price or vice versa? Thx ya.

felicity said...

Will definitely average down.

Melvin G said...

Hi Feli,
Can you advice on the mflour ?

Thank you so much.

Big Sea said...

The other problems with a lot of property stocks in Malaysia is the poor utilization of assets. Huge amount of land banks are parked there forever. I am not sure if there is a strategic reason for the management team to do so.
You won't know how long you need to wait before the management decide to develop the land to unlock the value.

Unknown said...

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