United Overseas Australia Limited (ASX: UOS), our largest position rose nearly 7% in September. We would like to think our explanation of the investment merits of the business since inception in last month’s letter was responsible, but we know it was not.
In fact a young analyst at InvestSmart wrote an article (you will need to sign-up for their free-trial to read the piece) recommending their readers buy the stock up to a limit price of 70c. The readership duly complied and the stock closed the month at 69c.
I have sung the praises of CS and Jim Kong repeatedly over the more than 7 years I’ve run the fund and for the more than 10 years I’ve owned UOS shares. I will give a small example of why they are the best in the business, but it is an important lesson in why I think the stock is so deeply undervalued.
Our company (UOS) holds 46.3% of the stock of UOAREIT, a Real Estate Investment Trust that was spun out of in 2006. The REIT holds about $244m of net assets, so these assets comprise about $113m of the $1,369m of assets we own a share of by owning UOS.
The REIT houses 6 of the older commercial assets UOS built, aged between 10 and 23 years. There is one asset in particular in that group that has proven to be a difficult one, known as Wisma UOA Pantai. Over the past 2 years, the occupancy in that building has declined from 88% to 51% (the other 5 assets have occupancy levels between 80-96% at the last reporting – averaging around 90%).
The asset was carried in the December 31st 2017 report at a valuation of $29.98m.
At the June 30 2018 report, Note 9 of the accounts carried the following words:
“The amounts presented in the statement of Financial Position under non-current assets held for sale relate to a controlled entity had, on 8 June 2018 entered into a Sale and Purchase Agreement in respect of the disposal of a commercial building, Wisma UOA Pantai for a consideration of $39.7m. The disposal had been completed on 25 July 2018.”
They sold the most troublesome asset in the REIT for 32.4% premium to the latest carrying value. This is immaterial in terms of the UOS valuation. It causes a mere $4.5m increase to UOS’s earning this year, in the context of circa $100m of earnings and $1.37b of net assets, it’s only a modest matter. But we think it’s emblematic of the extraordinary conservativeness of the UOS accounts.
In our view, there are a number of similarly undervalued assets. One obvious example is the Vertical Towers A and B at the Bangsar South mega development. These towers are held on the UOS balance sheet for a combined valuation of $222.8m (in part because one of the towers is held in PP&E at cost because a number of the floors are used by the business for their operations).
We estimate the pair could be disposed for at least $450m if the Kong’s were inclined to sell them (holders of UOS own 69.6% of those buildings. A $4.5m gain may not be material, but the $158m gain attributable to UOS owners implied by those estimates most assuredly is). The Vertical Towers are just two assets that speak for just over 1/10th of the assets the business presently holds.
We think the stock is a gift at current prices. That of course doesn’t mean it goes up, the market is a fickle mistress, but it makes us fairly confident about our largest position in coming years.
Unless it was for portfolio management reasons (investor redemptions or if the position became too large), we would not sell unless the holding exceeded the NTA, which would require a rise of more than 40% from current levels.
This excellent article was written by Tony Hansen, Founder and Chief Investment Officer at EGP Capital. You can subscribe to Tony’s letters by clicking here and visiting his blog.
Tony Hansen on The Australian Investors Podcast
Disclaimer: EGP Capital Pty Ltd is the holder of AFSL #499193. This article has been prepared without taking into account your personal objectives, financial situations or needs. It should not be considered as financial advice. You should consider seeking your own independent financial advice before making any financial or investment decisions
