SINGAPORE (Oct 22): Investors looking for companies with the ability to pay higher dividends need look no further than Stamford Land Corp, the company that was the subject of shareholder activism over the past 2½ months, which included shareholder Mano Sabnani questioning a low dividend payout.
During the market’s bloodbath last week (Oct 9 to 11), Stamford Land’s share price remained remarkably stable because of its share buyback programme. On July 27, during an extraordinary general meeting, shareholders of Stamford Land voted overwhelmingly in favour of the share buyback programme, which enables the company to buy up to 10% of Stamford Land shares between July 27 and the date of its next annual general meeting.
If fully implemented, the share buyback programme will cost the company $42.91 million. According to the share buyback circular, the company will not buy back shares during the one month immediately preceding the announcement of its full-year financial statements, and two weeks preceding the results of the first three quarters.
In Insider Moves in Issue 849, we had pointed out that the 10% mandate translates into 86.4 million shares. According to a July 12 shareholders’ circular, executive chairman Ow Chio Kiat and the parties acting in concert with him own a total of 392.44 million shares, or 45.4% of the company. If all shares allowed under the mandate are bought and cancelled, the company’s share base would be reduced to about 777.7 million shares. Ow and his concert parties would see their stake raised to 50.46%, assuming they do not buy more shares. Shareholders who voted in favour of the share buyback programme waived their right to a takeover offer by Ow and his family. As at Oct 12, Stamford Land’s issued shares stood at 851.81 million, down from 864.09 million at the start of the share buyback programme.
Financials looking increasingly healthy
By all accounts, Stamford Land is in a plum position for a developer. For the first time in almost a decade, the company is in a modest net cash position (see Table 1). As at June 30, it recorded net cash of $28.2 million, the first time it has been in a net cash position since 2010.
For its 1QFY2019 ended June 30, Stamford Land’s net profit was $17.03 million, up 53.6% y-o-y. The company also recorded free cash flow of $78 million in its latest quarter.
For FY2018 ended March 31, it reported net profit of $56.39 million and free cash flow of $208.92 million (see Table 1). According to the company’s latest financial statement, revenue and operating profit were higher, owing to the 111 units that were “settled” (sold and handed over) in Macquarie Park Village in 1QFY2018 compared with just 38 units in the same period a year ago.
For FY2018 and 1QFY2019, property development accounted for more than 60% of operating profit. Looking ahead, earnings contribution from Macquarie Park Village in Sydney could continue for two to three more quarters before it tapers off. In its FY2018 annual report, the company stated that the bulk of its profits was attributed to the sale of 361 units out of a total of 712 units in Macquarie Park Village. The remaining 177 units will be settled in the coming financial years, the statement adds.
Over the past three years, Stamford Land redeveloped a property in Sydney, a former hotel, and renamed it Macquarie Park Village, which comprises seven towers. The 712 units are made up of 700 apartment units and 12 commercial units, including the additional 60 units in Melbourne Tower, which was completed in April this year and is being sold progressively.
Although the Australian residential market is plagued with stories of foreign buyers pulling out of sales and purchase agreements, Stamford Land says: “We have seen minimal settlement default [for] 535 units. While the Australian market has seen higher settlement default in recent times, we have been mitigating this risk through continuous update of the construction progress and informing purchasers to obtain their financing early.” The company adds that the Stamford brand is known in Australia and its properties are sold at reasonable prices.
Stamford Land also owns a couple of investment properties. The main property is a Grade-A, 14-storey building called Dynons Plaza in Perth. It was completed in 2010 and rented out to Chevron Australia until 2020. For FY2018, Stamford Land recorded an impairment loss of $12 million on the property, blaming the impairment on the depressed Perth market and the shorter lease term remaining.
Interestingly, the oil and gas sector is experiencing a tentative recovery, which should benefit Perth. For instance, Chevron Australia is proceeding with Stage 2 of the Gorgon project to produce liquefied natural gas and expanding its investment in Gorgon, the world’s largest offshore gas field, off Australia’s northwest coast. LNG is a bridging fuel between fossil fields and renewables.
On Oct 3, The West Australian reported that Chevron Australia lodged a development application for a 30-storey office tower at the corner of The Esplanade and Barrack Street. According to Australian press reports, the new Chevron tower is likely to be completed only in 2022. That could mean that Chevron has to extend its lease in Dynons Plaza to 2022.
Sizeable, undervalued hotel portfolio
Other than property development, Stamford Land is mainly a hotel owner-operator (see Table 2 for the hotel portfolio). The hotels are held at historical cost less depreciation, and are part of the company’s PPE (property, plant and equipment) in the balance sheet. As at June 30, fixed assets stood at $349 million. The rate of depreciation is around $4 million a year. Operating profit (which includes depreciation) in 1QFY2019 for the hotels was $17.77 million, or $19 million excluding depreciation. Based on a capitalisation rate of 7%, the valuation of the hotel portfolio would be more than $1 billion.
Taking a more conservative stance (see Table 2), the hotel portfolio would be valued at more than A$700 million ($686.6 million). As at June 30, the company’s net asset value was $536.5 million, or 62 cents a share. If the shares in issue remain at 864.09 million, the revalued NAV would be around $1.
The company is unlikely to divest its hotels in the near term, however, as it is focused on the share buyback programme. In 2008, Stamford Land did receive an unsolicited offer of A$850 million for the hotel portfolio.
At any rate, the tourism sector in Australia continues to grow. According to the Australian Bureau of Statistics, international visitors to Australia for the 12 months to July 31, 2018 rose 5.9% to 9.1 million.
Still, Stamford Land’s management strikes a very conservative note in its annual report about the outlook. “The improved financial results for this financial year was mainly attributed to the property development segment and such improved results are not sustainable, owing to their one-off nature,” says Ow Yew Heng, CEO of Stamford Land and son of executive chairman Ow. The elder Ow, who is also Singapore’s ambassador to Italy, sold a waterfront property house in Sydney for A$67 million, according to the Australian press.
The younger Ow says property development projects take years to produce earnings and the company’s next major project is likely to be some time away. Meanwhile, the National Australia Bank has cut its outlook for the residential sector, and estimates that home prices in Sydney and Melbourne will fall 10% and 8%, from peak to trough, respectively.
No stated dividend policy
Stamford Land does not have a clear dividend policy (see chart). “Although we do not have a fixed dividend policy, we always aim to maintain a dividend payout that will be sustainable in the long term and at the same time allow us to take advantage of any business opportunities that may arise,” the younger Ow said in a statement.
As the shares outstanding shrink, and if the company fails to find investment opportunities, it just may pay a little more in dividends. After all, in addition to being in net cash, with free cash flow and growing net profit (see Table 1), Stamford Land had retained earnings of $411.3 million as at June 30.
The best time to buy the stock could be when the share buyback stops for whatever reason, and prices fall. The low this year was 47 cents. At its current price, dividend yield is about 2%, but it could easily double to 4%. A dividend of two cents would cost the company just an additional $8.5 million, as the number of shares in issue has fallen. For FY2018, Stamford Land paid $8.64 million in dividends. A dividend yield of 4% would be a reasonable price for investors.
While the stock is deeply undervalued, minority shareholders should note that the discount between share price and NAV, and between share price and RNAV are unlikely to narrow. This is because of the company’s policy of depreciating its hotels.
