UOS is a company that has a very long and successful history of developing properties in Malaysia. Nonetheless, for some unknown reasons, the market in Australia so far has refused to value it appropriately, resulting in an almost permanent discount to its NTA.
This phenomenon gives us an opportunity to take advantage of this particular market inefficiency.
Instead of the usual way of trying to value UOS' assets and comparing it to its current valuation, I'm going to do a scenario analysis evaluating the effects of various NTA growth rates and various end period NTA discount level to come up with a range of investment results that I can expect.
I will assume that UOS is going to continue to use DRP and rate of the dilution will be about 5% per annum. There is no reason to expect that this completely unnecessary policy will change any time soon. To avoid dilution, in my analysis, I will participate in the DRP.
N0 = number of shares now
Nt = number of shares t years from now.
Nt = N0 * (1 + 5%)^t
For example, if I start with 1000 share, 10 years from now, if I continue to participate in every single DRP, I will end up with:
N10 = N0 * (1 + 5%)^10 = 1000 * (1+ 5%)^10 = 1628 shares
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The second part of the valuation is relating to the NTA itself. We now need to assume what compound growth rate the NTA is going to grow at for the next 10 years.
If we assume 10% per annum, then the formula will be:
NTA2016 = $0.86.
NTA2026 = NTA2016 * (1 + 10%)^10 = 0.86 * (1 + 10%)^10 = $2.23
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The third part of the valuation is calculating the value of our investment 10 years from now, taking into account:
- the growth in the number of shares that we hold after participating in DRP
- the growth in NTA over 10 years
- the discount / premium that will apply to UOS' NTA 10 years from now
If we assume that 10 years from now, the market still values UOS at a discount and the discount rate is still around 30%, then:
Our original investment in 2016 of:
1,000 shares at $0.635 (current share price) = $635
will grow to:
1,628 shares x NTA2026 x (1 - NTA-discount-in-2026) = 1628 x $2.23 x (1 - 30%) = $2,543
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We can then work out what compound growth rate we will have achieved if our investment grows from $635 to $2,543 in 10 years. Without going into the details of how to work this out mathematically, the answer is 14.8%
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Having gone through one example, I will now present my first table:
Assumption:
- Number of shares grows by 5% per annum due to DRP
- Starting number of shares is 1
- Current share price is $0.635
- Current NTA is $0.86
- Length of investment is 10 years
|
Column 1 |
Column 2 |
Column 3 |
Column 4 |
Column 5 |
Column 6 |
| 1 |
NTA Discount |
0% |
10% |
20% |
30% |
40% |
| 2 |
Growth Rate of NTA |
|
|
|
|
|
| 3 |
0% |
1.4008 |
1.2608 |
1.1207 |
0.9806 |
0.8405 |
| 4 |
5% |
2.2818 |
2.0537 |
1.8255 |
1.5973 |
1.3691 |
| 5 |
10% |
3.6334 |
3.2701 |
2.9068 |
2.5434 |
2.1801 |
| 6 |
15% |
5.6672 |
5.1005 |
4.5338 |
3.9671 |
3.4003 |
Based on the above assumptions, looking at the table we can work out that:
- If we start with 1 share worth $0.635 at the end of 2016, 10 years from now, if NTA grows at 5% and the discount at the end of the 10 years period is 40%, then our investment will be worth $1.3691
- If we start with 1 share worth $0.635 at the end of 2016, 10 years from now, if NTA grows at 10% and the discount at the end of the 10 years period is 20%, then our investment will be worth $2.9068
---
The second table is basically the same as table 1, except that it present the compound growth rate that we will have achieved under various scenarios
|
Column 1 |
Column 2 |
Column 3 |
Column 4 |
Column 5 |
Column 6 |
| 1 |
NTA Discount |
0% |
10% |
20% |
30% |
40% |
| 2 |
Growth Rate of NTA |
|
|
|
|
|
| 3 |
0% |
8.20% |
7.00% |
5.80% |
4.40% |
2.80% |
| 4 |
5% |
13.60% |
12.40% |
11.10% |
9.60% |
7.90% |
| 5 |
10% |
19.00% |
17.80% |
16.40% |
14.80% |
13.10% |
| 6 |
15% |
24.40% |
23.10% |
21.70% |
20.10% |
18.20% |
Based on the above assumptions, looking at the table we can work out that:
- If NTA grows at 5% and the discount at the end of the 10 years period is 40%, then our investment will have grown at a compound rate of 7.90% per annum
- If NTA grows at 10% and the discount at the end of the 10 years period is 20%, then our investment will have grown at a compound rate of 16.40% per annum
---
The purpose of this little exercise is to see the ranges of likely investment returns that we will get by investing in UOS now.
In my opinion, a pessimistic scenario is something like:
No growth in NTA, and NTA discount stays at 30% 10 years from now.
Under this scenario, our investment will still have grown at a compound rate of 4.4% per annum.
On the other hand, a realistic scenario is something like:
5% growth in NTA, and NTA discount shrinks to 20% 10 years from now.
Under this scenario, our investment will have grown at a compound rate of 11.1% per annum.
---
In the current low interest rate environment, I will be quite happy to achieve a compound growth rate of 11.1% per annum. Anything above this will be treated as a nice and unexpected bonus.
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This is the way I look at my investment in UOS. Instead of trying to work out what development projects they are currently working on and so on, I try to look at the bigger picture and base my investment decisions on management's track record of delivering consistent and superior results.
Please note that if the future is markedly different from the past's superior results, then the above analysis will be completely useless and wrong and you guys can throw it in the bin!
I hope this helps, if there is anything wrong, please do let me know.
(20min delay)
