Is GuocoLand Limited a Good Investment?

Speak about local property firms and the likes of Capitaland Limited, City Development Limited, and Frasers Property Limited come to mind. These are major real estate players which own many prominent shopping malls and office buildings scattered across town. 

There are other lesser-known but equally established property companies in Singapore worth looking at as well. GuocoLand Limited (SGX: F17) is one such company.  

We will take a closer look at GuocoLand’s business profile, earnings, balance sheet strength, and growth prospects in this article.  

Business Overview 

GuocoLand has been listed on Singapore Exchange since 1978. Its principal business activities are developing properties for sale, holding real estate as investment properties, operating hotels, and managing real estate assets. The group’s portfolio comprises residential, hospitality, retail, and integrated developments worth $10 billion across Singapore, Malaysia, China, and Vietnam. 

In Singapore, GuocoLand owns Guoco Tower, a major integrated development that is also Singapore’s tallest building. Guoco Tower recently made the news for its sale of a Wallich Residence penthouse to British Billionaire James Dyson for a cool $73.8 million. The group is also developing another major mixed-use asset called Guoco Midtown at Beach Road. 

Wallich Residence. Source: Google.com

The group is developing two mixed-use projects in Shanghai and Chongqing, China. Guoco Changfeng City is located at Changfeng, Putuo District, one of Shanghai’s growing decentralised office sub-market. As for the Chongqing 18 Steps project, it is part of the rejuvenation of Shibati heritage neighbourhood which offers a good view of the Yangtze River. 

GuocoLand owns five hotels with approximately 1,600 rooms under the established brands of Sofitel and Thistle. 

In the financial year ending in June 2019, Singapore contributes 77% of total revenue. Malaysia was the second-largest market with 12% of revenue. 

Latest Financials 

In the half-year ended Dec-2019, revenue and gross profit grew more than 80% to $572 million and $178 million. Profit before tax rose 1.5 times to $87 million. This was mainly due to progressive revenue from sales of Martin Modern, the group’s luxury condominium project at River Valley. 

The group incurred higher loans of about $726 million for the acquisition of a new residential site at Tan Quee Lan Street. As a result, gearing as measured by net debt over total equity increased to 0.96 times. 

Cash from operating activities decreased to negative $851 million. 

Profitability Trend

GuocoLand’s revenue had ranged between $1.06 billion to $1.16 billion in the past five years, except for 2019 when it dropped slightly to $927 million. The group’s revenue is largely driven by performance in the Singapore market which shows a similar movement. 

Profit before tax fluctuated between low $300 million to high $700 million. This gives GuocoLand a profit margin between 33% and 72.9%. 

Source: GuocoLand FY2019 Annual Report

Balance Sheet Strength

GuocoLand’s net debt had been increasing from $2.4 billion to $3.66 billion in the past four years as the group built more aggressively to ramp up its project launches.

Since 2016, its gearing ratio ranged from 0.73 to 0.86.

Source: GuocoLand FY2019 Annual Report

Noticeably, GuocoLand’s net asset value per share had been steadily increasing since 2015. Based on the 2019 net asset value of $3.45, the group is currently trading at a significant discount of 62% to its book value. 

Source: GuocoLand FY2019 Annual Report

Cash Flow Trend

GuocoLand’s net operating cash flow shows a patchy track record. It went as high as half a billion in 2016 and stood at negative $868 million in the twelve-month ended Dec 2019. This is due to the nature of property sales that brings in lumpy cash flow. 

Source: Shareinvestor.com

Major Shareholders

GuocoLand’s substantial shareholders are related to the Quek/Kwek family, one of Asia’s richest, since it can trace its roots back to the Hong Leong Group founded by Kwek Hong Png. 

Quek Leng Chan, one of Malaysia’s richest tycoons, is the largest substantial shareholder with a 69% stake according to the 2019 annual report.  

Strengths and Opportunities

I noticed that GuocoLand differentiates itself from other property firms by focusing on integrated developments. Examples include the Guoco Tower and Guoco Midtown in Singapore, and the Chongqing 18 Steps. These are prominent projects with strong urban rejuvenation elements that strengthen GuocoLand’s branding considerably. Units in these projects command a premium pricing above other developments, thus giving GuocoLand a stronger margin. 

While not a business strength per se, GuocoLand’s low share price relative to net asset value makes the shares attractive to value hunters. Besides, there had been insider purchases by Quek Leng Chan and various Hong Leong-related entities in recent years. Coupled with a decent yield of 5.3% based on 7 cents dividend in 2019, the group could potentially be privatised. 

Weaknesses and Threats

Major property players have sufficient scale and business diversity to monetise their investment properties through private property funds or REITs vehicles. This is one main factor that allows the likes of Capitaland and Frasers Property to recycle their capital and grow aggressively. Guocol

and does not have such a luxury and has to rely on the more traditional path of buying land, developing properties, and selling them off to expand.

Conclusion

As of writing, GuocoLand’s share price has dropped substantially to $1.30 per share, in-line with the broad market. 

To value investors who like to buy any shares at 50 cents for a dollar, GuocoLand might seem like a suitable investment. Its dividend yield is decent too. 

However, it is seldom a wise move to invest in a company solely based on the share price discount to its book value. As there could be other unknown negatives, much deeper research is required. 

There is no ads to display, Please add some