ASX code: UOS
Share price: $0.50
Industry: Real Estate
Forecast CY2016 Dividend: 3 cents per share
Forecast CY2017 Dividend: 3.5 cents per share
Reading the annual instalment of Warren Buffett’s letter to shareholders has become the annual imperative for value investors across the world. When you compound per share book value at close to 20 per cent for 50 years, it’s easy to understand why this is so.
While substantially smaller and infinitely more obscure, United Overseas Australia Limited (UOS) is building a similarly enviable record; one that now spans nearly 3 decades. While the significant differences in size and breadth of business activity are obvious, the similarities in terms of net asset growth and total shareholder returns are actually quite remarkable.
The origins of UOS date back to the late 1980s, when the company raised about $3m of capital to list on the Stock Exchange of Perth. Since listing, the operations of UOS have been focused on property development, property investment and property management almost exclusively in the Malaysian market. Over time, UOS has bought and developed land before deciding whether to sell for a profit or hold and lease the asset for rental income.
Without raising too much more capital from shareholders since listing, the initial $3m of shareholders equity has since grown to $986m. Thus growth in book value has exceeded 20 per cent per annum over a time frame of about 28 years. Although UOS has commonly traded at a deep discount to net tangible assets – this discount has averaged some 37 per cent over the past decade – total shareholder returns have been equally as impressive. Assuming the reinvestment of dividends, shareholders have enjoyed a total return of 20.6 per cent per annum since 2005.
Today, the assets of UOS can be broadly divided into three core components. The first two assets are both listed on the Malaysian bourse and include a 68.5 per cent controlling interest in the A$1.1bn UOA Development BHD and a 46.3 per cent holding of the A$230m UOA Real Estate Investment Trust (REIT). Thirdly, the company holds direct assets that primarily comprise cash and investment properties.
In aggregate, after accounting for minorities and all liabilities, this equates to net tangible asset backing of about 80c per share. This compares favourably to the current market price of 50c. Given some property values are held on the books at cost (and are thus arguably undervalued); this further suggests a reasonable margin of safety exists for long term investors.
Having said the above, perceived risks include a low level of liquidity and the fact UOS operations are exclusively focused on a foreign market. That’s even before one considers the universal risks associated with its core business of property development. It’s in such circumstances minority investors need to be aligned with high quality owner managers. If the long term financial results are anything to go by, it appears as though UOS management satisfies this requirement.
At a macroeconomic level, the operations of UOS are broadly leveraged to Malaysian growth. Structural reforms undertaken in the back end of the 20th century focused on trade and financial liberalisation, coupled with a focus on improving infrastructure, have acted to drive long term growth across the Malaysian economy. Annual GDP growth averaged 4.5 per cent for 2015 while unemployment remains sound at just 3.3 per cent.
Therefore, despite experiencing notable blips during both the Asian and Global financial crises, real GDP per capita has grown substantially over the past 40 years. In turn, this has provided a long term economic tailwind of support for the core property development and investment businesses of UOS.
UOS came through the recent reporting period positively, with full year 2015 profit up 36 per cent to a record $118.3m. Operating cash flow was also sound at $128.2m for the full year. This further added to the cash pile of UOS, which declared a final dividend of 2.5 cents per share. We expect the company to deliver at least 3 cents per share of income to shareholders over the coming 12 months, which suggests a yield of about 6 per cent. When coupled with the solid opportunities for longer term capital growth, we believe UOS presents as an interesting prospect for the patient investor.
Adrian Ezquerro is a senior analyst at Clime Asset Management.