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Is DBS undervalued and has City Developments bottomed out?

The Edge Singapore
The Edge Singapore 8/12/2021 04:21 PM GMT+08  • 3 min read
Is DBS undervalued and has City Developments bottomed out?
DBS may list its digital business Remit, says CEO. CDL looks undervalued compared to NAV and revalued NAV
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When measured against Sea, DBS Group Holdings looks undervalued. Conventionally, DBS’s share price more or less reflects its valuation. At a price of $31.28, its annualised dividend yield is around 4.2%; its price to earnings ratio around 10.9 times, and its P/NAV 1.48 times. But should DBS be valued more like a digital bank? Or like Sea? Sea has yet to turn in a net profit and a positive ebitda but its market cap of US$155 billion ($210 billion) is more than twice that of DBS, which is around $80 billion.

Analysts are noticing this. In reply to a question on the value of DBS’s revenue generating digital assets, group CEO Piyush Gupta said during a results briefing on Aug 5: “We have got fantastic digital revenue generating businesses but your models don’t pick it up. One of the things we are considering is unbundling some of these activities from the mothership. And if there is private equity interest in these activities, they will start getting covered by your tech colleagues. Let me give you an example. We have a product called Remit, which is like Wise. We do instant transfers to 60 countries around the world. Our total volume of business is meaningful, let’s say 15–20% of Wise based on what I last saw. But our profitability is massive, $60 million–$70 million to the bottom line. If I could unbundle the business, there is no reason in my mind why it should not get a valuation of anything of $5 billion–$10 billion. It’s hidden inside DBS. If I could spin it out into a separate entity, and then get some SoftBank kind of investor, maybe somebody starts valuing the business. And it is not the only one. We have got a whole slew of businesses where we think we have the capacity to spin out at some stage. It’s something we are going to be looking at over the next year or two.”

So there we have it. The next restructuring could come from DBS. Its digital business could add another $20 billion, pushing DBS to $100 billion. Perhaps that is why DBS broke out of the psychological $30 level post results.

City Developments (CDL) was pummelled by investors early in the week of Aug 10–13 when its price went as low as $6.60, and this may just be low enough. Although the developer made a net loss in 1HFY2021, its P/NAV is at 0.72 times. Pre-Covid CDL used to trade at NAV or a premium to NAV because unlike most developers, CDL used historical cost accounting, holding its properties at cost. If these properties are revalued, CDL’s P/NAV would be 0.47 times. If the revaluation surpluses of the hotels are added in, then CDL is trading at a discount of 60% to its revalued NAV. Add to this hefty discount the positive divergences between smoothed RSI and price and it is about time CDL got off its bottom.

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