Is OCBC shares worth $50? Maybe even more. Recently OCBC made waves when it announced the offload of its 33.5% shares in United Engineers (UE) to a consortium led by Yanlord Group and Perennial Real Estate Holdings. The block sale consisted of shares held under OCBC, Great Eastern Holdings and the founding Lee Family. News of the deal propelled OCBC share price to a 5-year high and triggered a mandatory takeover offer for the rest of United Engineers shares.
The United Engineers Deal
The offer price for the UE deal was $2.60 and represented a price-to-book value of about 0.88. The fact that OCBC sold its stake in UE at a price below book value reflected the poor market sentiments. After all, United Engineers is still making healthy profits and is not considered a distressed asset at all. For the record, UE made a profit of $7.1 million in 1Q2017, a decline of 25% from last year. Hence, in my point of view, the block shares sale should have fetched higher price.
For OCBC, the deal would unlock value for shareholders and made business sense as property development is not OCBC’s core business. The sale is worth an estimated $550 million and is a windfall for OCBC. The bank cost per UE share should be about $1.60.
On the other hand, minority shareholders of UE would be very unhappy that the takeover price is at such underwhelming level and personally, I would be very surprised if the consortium can successfully acquire all the remaining shares. Regardless the outcome, the low-ball offer only serves to vindicate that the big boys always win in the stock market. Those retail shareholders who bought United Engineers shares at $3.40 a few years ago would be staring at substantial losses if the takeover deal is successful.
The divestment of United Engineers is long overdue as Monetary Authority of Singapore (MAS) had mandated local banks to dispose non-core assets by 2006. It has been more than a decade past the compliance deadline but local banks like OCBC and UOB are still holding to various non-core assets like property firms. However, onerous property cooling measure like the Qualifying Certificate (QC) rule could be the straw that broke the camel’s back.
OCBC is more motivated to sell United Engineers because of the frightening fees payable under the Qualifying Certificate (QC) rules that are applicable to “foreign companies”. Technical, property firms that are listed in the stock market are considered “foreign companies” because they would have minority shareholders who are not Singapore citizens.
Qualifying Certificate Rule
Under the QC rule, affected property firms are required to obtain the Temporary Occupation Permit or Certificate of Statutory Completion within 5 years from the date of issue of the QC or the collective sale order. They are also required to dispose of all the residential units within 2 years from the date of issue of the Temporary Occupation Permit or Certificate of Statutory Completion, whichever is earlier. Failure to comply with these two laws would risk forfeit of Banker’s Guarantee of 10% of purchase price of land.
Of course, affected property firms can choose to apply for extension of QC rule but the extension fees are not cheap too. The extension charge payable for an extension of time to complete the housing development is – 8% of the purchase price of the land for the first year extension, 16% for the second year of extension and 24% for the third and subsequent years. The extension charge payable for an extension of time to dispose units in the development is – 8% of the purchase price of the land for the first year extension, 16% for the second year of extension and 24% for the third and subsequent years. The number of unsold units will be taken into consideration when computing the charge.
To avoid paying such hefty fees, many listed property firms had chosen the privatization route. However, in UE’s takeover deal, the new substantial shareholder has indicated that they intend to continue the listing status of UE. It is going to be interesting to see how UE is going to manage compliance of QC rule going forward.
To put things into perspective, United Engineers is not OCBC’s crown jewel, hence the bank has no qualms in selling the property firm, even if it meant selling at prices below the book value. In fact, under MAS’ pressure, OCBC has divested numerous hidden assets. Raffles Hotel was sold to Colony Capital in 2005 for $1 billion while Robinson was sold to Lippo Group for $203 million in 2006.
Many investors underestimated the true value of OCBC shares because most of them overlooked the hidden assets in OCBC. In the latest financial report, it was indicated that OCBC’s “unrealized valuation surplus” was $7.2 billion, an increase from $6.6 billion year-on-year. Valuation surplus refers not to the market values nor the carrying values of the assets.
According to OCBC’s financial report “unrealised valuation surplus largely represents the difference between the carrying values of its properties, its investments in quoted subsidiaries and an associate, the investment in Hong Kong Life, and the market values of properties and those equity securities at the respective periods. The carrying values of subsidiaries, associate and Hong Kong Life on the balance sheet are measured at cost plus post-acquisition reserves, while those of properties are measured at cost less accumulated depreciation, and impairment, if any.”
This means that OCBC could be sitting on hundreds of billions worth of assets and most of them are probably non-core assets waiting to be divested at the right opportunities. The divestment of United Engineers was just the tip of the iceberg. Determining the estimated amount of hidden assets is very tricky because OCBC do not publish such sensitive data. However, from the financial reports, it could be gleaned that the majority of OCBC’s hidden assets consisted of properties and equity securities.
In March 2017, OCBC Wing Hang divested its stake in Hong Kong Life to First Origin International Limited for $426 million. OCBC then reinvested the proceeds from the divestment to acquire National Australia Bank’s (NAB) private wealth business in Singapore and Hong Kong in May 2017. The purchase consideration was at around the book value, or net asset value, of the business at the time of completion.
The acquired National Australia Bank’s business comprised a mortgage portfolio amounting to about US$1.7 billion (S$2.39 billion) worth of mainly residential mortgage loans, and a deposit portfolio made up of about US$3.05 billion (S$4.28 billion) worth of deposits of a mix of currencies. The business serves a total of about 11,000 customers across the two markets, primarily from the affluent segment. The addition of US$1.7 billion (S$2.39 billion) of mortgage loans will increase the overall size of OCBC Bank’s mortgage portfolio by about 4 per cent, based on its mortgage loans book of S$60 billion as at end March 2017.
Is OCBC shares undervalued?
The recent acquisitions and divestment activities of OCBC should be seen as portfolio adjustments to realign strategic businesses. Currently trading at Price/Book Value of 1.228 and P/E ratio of 13.1, OCBC shares is not considered overvalued. In fact, the market has overlooked its hidden assets and that is probably why the share price has been laggard for such long time. Determining the true value of OCBC shares is tricky because the venerable bank does not publish the actual size of its hidden assets.
However, one big clue on whether OCBC shares is undervalued can be deduced from its shares buy-back activities. The bank has been buying back its own shares aggressively for the past few months from $9 to $10.60 level. As of 23 July 2017, OCBC has amassed 8.2 million of its shares through open market acquisition. When a company is buying back its shares, it could only mean one thing – the management deems the shares undervalued by the market. While I do not think that OCBC is worth $50, the current shares is likely to be worth much more than its trading price.
As the saying goes, value is what you get and price is what you pay. Investors should determine the entry-level before investing in this counter. Till then, enjoy the ride.
Read my other articles on OCBC:
- OCBC Bank to rock the market with multi-billion hidden assets?
- Will EZRA sink OCBC share price?
- OCBC considering sale of United Engineers Ltd
- Is it a good time to invest in OCBC shares?
- OCBC Wing Hang Bank
Subscribe to Blog via Email
SG Wealth Builder