Following the news of OCBC Bank looking to sell its stake in United Engineers Limited last year, the share price of the famous local bank has been on a mighty hot streak. On current bullish form, breaching the $10 per share support level seems inevitable. Will OCBC Bank rock the market with more divestment news?
In my previous article, several readers expressed cynical at my valuation of OCBC shares. Based on the valuation of its equity stake in United Engineers, there is no way OCBC Bank shares would hit the $10 mark. On this, I did not dispute. But market sentiments always play a part in a stock performance. As Warren Buffett often said, price is what you pay but value is what you get. There is often a gap in the intrinsic value of a stock vis-à-vis its market price.
Previously, I have written a few analysis on OCBC Bank shares that I feel are must-read for investors of OCBC. Readers may want to check out and read the following blog posts:
- Will Ezra sink OCBC share price?
- OCBC considering the sale of United Engineers Ltd
- OCBC multi-billion worth of hidden assets
For OCBC Bank, its hidden assets consist mainly of properties and securities worth $6.45 billion in terms of unrealized valuation surplus. This amount is largely unchanged from $6.42 billion from last year.
Investors must note that when we talk about “unrealized valuation surplus”, it is not the same as the prevailing market value of the assets. According to OCBC Bank’s financial report, the unrealized valuation surplus “represents the difference between the carrying values of its properties and investments in quoted subsidiaries and an associate, and the market values of those properties and quoted investments at the respective periods”.
What the above means is that OCBC Bank may potentially possess hundreds of billions worth of hidden assets waiting to be divested. Normally the market value of the properties and equity securities are not published in financial reports because of commercial sensitivities. To this end, the actual market value of the hidden assets of OCBC Bank are unknown to the public. The amount may even be much higher than OCBC’s current market capitalization of $41 billion. How is this possible and just how did OCBC manage to amass such monstrous amount of assets over the decades?
Rated by Bloomberg as one of strongest banks in the world in 2011, OCBC Bank was founded by Lee Kong Chian in 1932. Although the Lee family founded the bank, it was Tan Chin Tuan who helped to build up OCBC Bank and shaped it into a household name in Singapore. For the uninitiated, the late Tan Chin Tuan was the uncle of current Singapore President, Dr Tony Tan, who also used to work in OCBC as Chairman and CEO in the early nineties.
After World War II, OCBC’s asset largely remained intact and Tan Chin Tuan was tasked to rebuild the bank. Back then, Tan was a rising star in politics and because of his political background, he was able to spot investment opportunities for OCBC. In those days, many of the big companies were controlled by the British Empire and when the British force eventually left Singapore, Tan saw the opportunities and invested in many of these companies. By 1966, OCBC had become the largest bank in Singapore.
It was Tan Chin Tuan’s vision that OCBC should invest in various companies to generate various revenue sources while focusing on its core banking operations. Under his leadership, OCBC used to own significant stakes in numerous companies, notably Fraser & Neave, Raffles Hotel, Robinson, Straits Trading, Wearnes and Great Eastern Life. Among the various subsidiaries and associates, Great Eastern Life’s insurance business continues to be a significant growth driver for OCBC, providing 16% of the total profit before tax in 2016.
Whilst Mr Tan’s legacy laid the foundation for OCBC’s investment strategy, it also became a source of major issue as the Monetary Authority of Singapore mandated local banks to divest non-banking assets by 2006. Arising from this policy, OCBC had divested numerous iconic companies held in its stable over the years. Raffles Hotel was sold to Colony Capital in 2005 for $1 billion while Robinson was sold to Lippo Group for $203 million in 2006. The slew of asset sales had reportedly led to an epic battle involving OCBC Bank and The Straits Trading in 2008.
In 2008, there was a bidding war between the Lees and Tans for the control of The Straits Trading, a property and mining company which used to be a subsidiary of OCBC. Tan’s granddaughter, Ms Chew Gek Khim won the battle and successfully wrested back the control of The Straits Trading from OCBC. The corporate battle had seen share price of The Straits Trading surged to record high of $7.50. But shortly after the victory, share price of Straits Trading declined consistently over the past decade and is now trading about 30% below net asset value as at end 2016. It seems that OCBC has the last laugh as the bank went from strength to strength.
In today’s context, OCBC Bank is a totally different animal as compared to yesteryear. Singapore remains a key contributor to its profit, consisting about 50% to profit before tax in 2016. The other half of its profits were derived from its overseas subsidiaries, namely OCBC Wing Hang, OCBC Malaysia and OCBC NISP (Indonesia). Corporate loans continue to be the bread and butter for OCBC, consisting of 39% of its profits before tax in 2016. Because of this, the banking giant has been impacted by the downturn in the oil and gas sector due to its significant corporate loan exposure in this sector.
Full year net profit declined by 11% year-on-year while allowances increased from $0.5 billion to $0.7 billion as a result of the ailing oil and gas sector. FY16 net allowances increased by a whopping 49% in this sector, at $726 million. As events unfold in the oil and gas sector, OCBC attempted to grow business in wealth management and expand overseas market through acquisition of Barclays Wealth Management and Wing Hang Bank.
OCBC’s loan exposure to the oil and gas sector could provide an impetus to accelerate divestment of its complex stable of assets. But then given its history and management style, it is unlikely that the revered bank would sell its pantheon of prized assets cheaply. This is because the bank is still making healthy level of profit, $3 billion to be exact, in 2016. Being in such strong financial position, OCBC is certainly not in a hurry to sell assets for the sake of compliance nor the urgent need to raise capital to support business. Nonetheless, the current weak market condition is finally luring OCBC back into negotiation table.
The potential sale of United Engineers is just one of the many sales by OCBC. On 11 April 2017, OCBC sold 100% equity interests in Banking Computer Services Private Limited (“BCS”) and BCS Information Systems Pte Ltd (“BCSIS”) (collectively “Sale Shares”) to Network for Electronic Transfers (Singapore) Pte Ltd (“NETS”) for an aggregate cash consideration of S$38 million. OCBC Bank has a 33.3% shareholding interest in NETS. OCBC is also selling a ground-floor unit at Sim Lim Tower for $16.19 million. All these assets, which are put up for sale, formed just the tip of the iceberg of OCBC’s sprawling assets.
To conclude, OCBC is not a selling company (yet) but the divestment of its hidden assets could help to propel its share price performance. In spite of the weak financial results, its share price has been on supreme form. I am not vested in this counter but would continue to monitor the situation. Due to the lack of information on the actual market value of its hidden assets, determining the true value of OCBC shares is very tricky.
However, a big clue on the mystery of OCBC share price could be its continuing share buy-backs conducted over the years. On 12 April 2017, OCBC purchased 200,000 of its own shares at $9.66. The cumulative number of shares it purchased is 9.65 million. When a company acquired its own shares, it can only mean one thing – that the shares are deemed undervalued by the management and current share price level does not reflect its true market value.
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