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Watch for balance sheet liquidity, not just P/NAV

Goola Warden
Goola Warden • 4 min read
Watch for balance sheet liquidity, not just P/NAV
For valuations, look beyond P/NAV to balance sheet liquidity to identify undervalued stocks
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Developers have been sold down — in particular two seemingly blue-chip names, City Developments (CDL) and UOL Group. They aren’t the only ones. Hong Fok is testing two-year lows. Ho Bee Land H13 -

appears poised to break below the confluence of its 100- and 200-day moving averages at $1.81. Its last done price as at June 12 was $1.84.

CDL and Ho Bee have stretched balance sheets. But UOL has a strong balance sheet. Yet, it is being sold down alongside developers with weaker balance sheets.

An analyst has blamed the MSCI GIMI (Global Investable Market Indexes) and the MSCI ACWI (All Country World Indexes) rebalancing for the declines in both CDL and UOL. UOL was removed from the MSCI Singapore Index as at end-February this year. CDL was removed on May 31.

“If I look at UOL, it didn’t bottom out immediately. But UOL has also been weak,” says an analyst.

“I don’t cover the name,” says another analyst, referring to CDL. “I think all developers are under pressure. UOL also reached new lows. CDL may be slow when executing their strategy of fund management and they have been acquiring. So, there is a concern about gearing. In the meantime, their hospitality business profits are weak despite sector statistics going above pre-pandemic levels.”

According to CDL’s 1QFY2024 ended March business updates, it spent $61.3 million on share buybacks on 10.44 million shares, representing 1.15% of issued shares before the buyback.

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Analysts and market watchers thought that CDL was attempting to defend the stock and prevent it from being removed from MSCI GIMI. When that didn’t materialise, the selldown started. For example, BlackRock has sold CDL shares and holds less than 5%, likely in response to CDL’s removal from the index.

CDL’s rapid increase in gearing is another concern. In previous years, CDL would report its gearing ratio based on historical cost accounting. In recent years, the developer has been using mark-to-market fair values for calculating its gearing ratio. As a result, the revaluation surplus in the balance sheet has the effect of raising shareholders’ funds. As at March 31 this year, CDL only reported a gearing ratio based on its mark-to-market fair values for its gearing ratio, which was 63%. According to data provided by Bloomberg, CDL’s gearing based on historical cost accounting is around 103%.

For comparison, CapitaLand Investment’s (CLI) gearing ratio was 0.53 times or 53% as at March 31. CLI’s last reported interest coverage ratio (ICR) for the 12 months ended December 31, 2023, was 3.8 times compared to CDL’s ICR of 1.2 times, which is alarmingly low.

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CDL has said it has sufficient cash to meet its needs: “The group maintains a robust liquidity position comprising cash and available undrawn committed bank facilities totalling $3.7 billion. Our debt expiry profile also remains healthy.”

UOL’s ICR for the 12 months ended December 31, 2023, was 5 times. Its gearing ratio was just 0.24 times (24%), way below CDL’s. And despite this, UOL’s share price is at its lowest level since 2019 and trading at a hefty discount of 0.4 times its net tangible asset value of $13.03.

CDL has provided three different valuations. Its net asset value (NAV) as at Dec 31, 2023, was $10.12 per share, its revalued NAV (RNAV) based on the market value of its investment properties was $17.21, and the RNAV including the revaluation of its hotels works out at $19.46.

Increasingly, it is becoming obvious to market watchers that P/NAV shouldn’t be the only valuation metric for asset-based stocks. Balance sheet liquidity and operating and free cash flows are important. It is clear that CDL’s balance sheet is not as liquid as either UOL’s or CLI’s as the ability to divest and recycle capital appears more efficient at UOL and CLI.

Technically, for CDL, a downside objective was indicated following the break below the thrice-tested $5.60 level, which doesn’t bode well for a positive outlook.



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