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OCBC’s billion dollars worth of hidden value

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One of the reasons why Singaporean investors love to invest in OCBC shares is because the bank has billion dollars worth of hidden value. Last month, local bank OCBC placed a pair of freehold shophouses on sale for around $20 million. These two conservation shophouses are located at Bukit Pasoh, which is near the Outram MRT Station.

Apparently, OCBC has held the properties for more than 81 years and had refurbished them in 2012. Combined together, the shophouses have a total land area of 2926 sq ft for commercial use. If successful, the sale could help to unlock value for OCBC.

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It should be noted that the two units are not part of the 38 properties that OCBC had put up for sale in April last year. The asset sales were estimated to be worth $150 to 200 million and some of the properties has since been sold. Both the two units at Bukit Pasoh and the 38 units are not mortgagee sales.

Value investors like to invest in companies with hidden value and OCBC is probably one of such companies. In the latest financial results, OCBC revealed $6.64 billion worth of unrealized valuation surplus for its investment properties and equity stakes in subsidiaries. To be specific, valuation surplus represents the difference between the carrying value in these properties and investments in the subsidiaries, and the market values of those properties and investments in the subsidiaries.

Many investors would know that OCBC has a substantial stake in Great Eastern Holding, one of the big four insurers in Singapore. For equity securities, the valuation surplus is $2,734 million, a huge drop from $4,758 million of last year March. The decline in the surplus could be due to the drop in market value of Great Eastern Holding’ share price, thus reflecting the challenging market condition.

But even more amazing is OCBC’s property portfolio which has a valuation surplus of $3,910 million, a decrease from $3,985 million of last year. Like the stock market, the property market in Singapore is also experiencing a slow-down for the past 2 years. Nevertheless, the impact has not been so severe for OCBC’s property portfolio as compared to its equity securities.

Given the size of its huge portfolio, the properties that OCBC has put up for sale are probably just a few drops in the ocean. It is likely that the bank is trying to “test water” and assess the market demand because it can be seen that OCBC is not desperate to sell these units. OCBC has highlighted that the units would be sold only for the right price.

The reason why OCBC is not selling its properties at current market value is because it can afford to wait for sentiments to improve while retaining the assets for rental income. For the latest quarter, OCBC collected $23 million worth of rental, a decrease from $26 million of last year, presumably due to some of the sale of the 38 properties. This is a big sum of money even for a financial institution with its core business in the banking operations.

In my view, it is unlikely that OCBC will trade at the level of $4.14 seen in the Great Financial Crisis in period 2008-09. This is because the banking industry has evolved and moved on from the previous crisis. Notwithstanding this, in the stock market, never say never. Thus, my entry-level for OCBC will be $6.00 and I will exit at $9.50.

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SG Wealth Builder

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