Description

Overview

Stamford Land is a S$390m Singapore listed property owner. The company’s main assets include six hotels in Australia (Sydney, Melbourne, Brisbane, Adelaide), one hotel in Auckland, New Zealand, an office building in Perth, a 60% owned office building in London and two nearly sold out residential developments. The hotels are mostly five-star centrally located properties where Stamford owns the land, building, brand and handles property management. The office buildings are class A properties.

Stamford trades at a 49% discount to its SOTP. We value the hotels based on a peer group of other public hotels that also own the full value chain (land, building, brand and handle their own property management). We value the class A office buildings at fair market value.

Business

Stamford Land reports their business in three main segments: hotel owning and management, property development and property investment.

In the hotel owning and management segment, Stamford owns and operates seven hotels (six in Australia and one in New Zealand). There are five Stamford Plaza hotels (5-star), one Sir Stamford hotel (5-star) and one Stamford Grande hotel (4-star). The hotels are typically ~200-300 rooms. The properties are centrally located and focused on domestic business travelers. Stamford owns the brand, land and building and manages the hotels (except for one hotel with leased land in Brisbane). These hotels were purchased from 1994-2000 from multiple previous owners (Ritz, Sheraton, Regent, etc.) for a total cost of S$372m. The hotels generate S$47.5m in EBITDA and S$36m in EBIT. The hotels are market on the balance sheet at cost less depreciation.  Stamford’s decision to hold the assets at cost creates the opportunity in the investment (more on this later).  

The property investment segment has two primary assets: Dynons Plaza (Perth) and a 60% ownership in an office building located at 8 Finsbury Circus, London. The Perth office building is a 14-story building that was developed in 2010 and was fully leased to Chevron Australia for a ten year term ending in 2020. The lease will not be extended at current rates. The Perth office building is marked on the balance sheet at fair value (S$99.5m). The property is currently generated ~S$12-13m in EBIT a year (depending on AUD to SGD exchange rates), however market rates are below the previous lease rate, hence the S$99m mark on the books. The London office was recently acquired on August 7, 2019. It is a class A commercial office building with a weighted average remaining lease term of 14 years. The purchase price for 100% was £260m. Local media reported the net cap rate was 4%.

The property development segment has no new projects and is selling the final units in the two remaining projects. Macquarie Park Village has sold 670 units and has 39 remaining units left. These units were built under the Urban Activation Precinct. The Stamford Residences only has one unit remaining.

Additionally, there is a central office with a cost of S$14m a year. In FY2019, the property development business contributed S$25m in EBIT. There may be some bonuses within the central office costs that are non-recurring as the property development earnings will be significantly lower in FY20, however, we do not assume any reduction of the central office costs in our valuation.

Management

The Ow family owns 47% of Stamford Land. The father, CK (74), and son, Yew Heng (38), are the Chairman and CEO, respectively.

CK has run the business since the age of 16. CK took over his family’s shipping business (Hai Sun Hup). He expanded the shipping business before allocating money from shipping to hotels in the mid-1990s. He spun off the shipping business to form Singapore Shipping and Stamford Land in 2000. Forbes listed his net worth as $430m in 2015. 

Yew Heng is being groomed for succession. He joined Stamford in 2010 and has served as CEO since 2015.

Buyback

Stamford Land has been buying back shares very aggressively since August 1, 2018. Stamford has bought back 6.6% of shares outstanding and continues to buy shares daily. Stamford has purchased 66% percent of trading volume since the buyback started. Stamford is not a frequent buyer of shares. The company has only bought back shares one other time in the last 25 years. It was in 2005 and the stock tripled over the following two years.

Valuation

The London office building was purchased recently and it is not in the most recent financial statement. Therefore, we make pro-forma assumptions for the valuation.

We value the hotels at 17x EBITDA. We use the segment earnings and allocate all the central costs to this segment. The valuation multiple is based on a peer set of nine other public hotels that own the full value chain. The average valuation for the peer group is 16.9x over the last 20 years and currently 17.9x. The value of the hotels is S$570m ((47.5m – 14m)* 17)).

We value the investment properties at fair market value. The Perth property is worth S$99m and the 60% share of the London property is worth S$265m.

The balance sheet had S$89m of remaining value at the end of the last period. This consists of cash, investments, the few completed units that are yet to be sold (held as inventory), less debt. We assume the balance sheet value is now S$265m lower to fund the London property purchase. Therefore, the balance sheet value is -S$176m

This totals to S$758m of value compared to the market value of S$390m, a 49% discount.

Why is this Undervalued?

We think the opportunity exists because the company does not have sell-side coverage and trades in Singapore but operates in Australia. Additionally dividend investors may have fled the stock after the dividend cut from 3 cents per share to 1 cent per share in 2016 as the company had a levered balance at the time and needed capital for the conversion of one of its Sydney hotels into an apartment development.

Stamford’s accounting provides another potential explanation for the stock’s undervaluation. The hotels were acquired between 1994 and 2000 and are carried at historical cost on the balance sheet and depreciated annually. In contrast, most Asian property companies account for hotels at current fair value as opposed to historical cost. Stamford trades at 0.76x book and book value gives no value to the appreciation of the hotel properties. The properties were purchased for S$372m and are on the balance sheet for ~S$290m. The properties are worth 250-350% more today than the original purchase prices based on property value appreciations in Australia. The hotels bought in 1994 are worth close to 350% more today and the hotels purchased in 2000 are worth close to 250% more. This works out to S$1.5B of hotel value if valued that way.

Catalyst

Buyback