Saturday, November 15, 2008

Value hunting #5: Wheelock Properties

[Edited 24th Jan - too many mistakes - the values of the developments re-estimated, also take development costs into account. Changes in italics.]

  • Develop and sells high end luxury homes (4-5m price range).
  • Rents retail properties (Wheelock Place, from 2011 onwards: Scotts Square retail).
  • Owns some of SC Hotels, a construction company. I am ignoring this.
Wheelock has 1.2bn shares issued.

1) Business Model

Buy property when cheap, develop, sell when hot. Gotta time the market successfully, Singapore property market is like a yo-yo. Interesting commentary on that. Wheelock did a great job selling property at the peak, now it has to collect its payments - build fast then collect debts. We concentrate on its balance sheet....

2) Revenue recognition

The income statement less relevant as earnings are not recurring - it is just realizing the revenue/income from the past sales. Wheelock recognizes based on (estimated) percentage of total construction costs (07AR, footnote 2.19). However, actual *payment* would be based on URAs standard payment scheme. So their cost/revenue recognition may be ahead of the payments.

Wheelock did not sell any properties under URA's deferred payment scheme.

3) Balance Sheet (as of Sept 08):
  • Abt 8.3c per share cash (100m), taking after subtracting all their debt and tax liabilities.
  • Investment property of 790m (65c per share). This is wheelock place, 99yr tenure from 1990. Last revalued Dec 07. Their operating revenue from this (excl. revaluations) are abt 2c per share (footnote 19 in 07AR). Don't know how the hell this valuation is justified.
  • Development properties, whose costs/revenue are gradually recognized as they are completed. See the notes on revenue recognition above.
  • I've estimated cash per share owing, listed red in the table below.
Table below is for 3Q08 results (30th Sept). Next results should be out mid-Feb.

(the whole table is modified - 24th Jan)

Property Description
and price estimate
% sold and completed (based on URA's payment scheme, not Wheelock's revenue recognition)
% Payment collectedPayments owed
The Cosmopolitan and The Sea View
Both 100 sold.
Both 85% completed in 3Q08 results.
60% (as of Sept 08)
But 25% totaling at least 62m.
was paid in Oct. This is not counted here, and is still included in receivables.
Add 192m (16c/share) to cash.
Ardmore II
118 4 bdrm units. Priced 4.2m-5.5m. So revenue conservatively is 500m.
Assume 200m development costs. Gives 300m.

100% sold.
Building 20+th story. So 30-40% complete by URA's definition.

TOP scheduled 2010.

Assume all 30-40% collected as part of the cash, since the foundations were already finished before 2Q08 (30th Jun)
60-70% awaiting, assumed not recognized so not in receivables. Translates to 180-210m or 15-17.5c per share.
Scotts Square
388 1,2 and 3 bdrm units.

ASP $3,994 psf (3Q08 results, Sect 10).

From floor plan(Apartments-->floor plan): scotts wing has at least 150,000 sq ft, orchard wing 72,000 sq ft, total 222,000 sq ft. So 620m for the 70% sold. Deduct development costs of 168m. So 452m for the 70% sold.

70% sold.

Piling work in progress, so 20% complete.

Expected TOP 2011.
Assume only 20% collected
80% unrecognised, so not in receivables.
Gives 361m (or 30c per share).

At least 30% of the development's units sold to Singaporeans. So up to 40% may be sold to foreigners.
Orchard View
30 4-bdrm units.

No idea what it can sell for.
Expected 2009.
To be launched for sale upon completion, so no URA payment schedule.
Ardmore IIIWait till next property cycle.

4) Conclusion:
  1. After selling The Sea View and The Cosmopolitan, they should have 300m net cash (abt 25c/share). Confirm this in 4Q08 results.
  2. At least 15-17.5/share owing on Ardmore II. Since buyers should have already paid 30-40%, they probably will not walk away.
  3. Biggest risk is the 30c/share owing from Scotts Square. Only 20% payment was collected, and it will not be completed until 2011. Do not know how many of the buyers will walk away, especially if they are foreigners.
  4. Orchard View and Ardmore III. Dont know how to value them.
  5. (80+ yr lease for) Wheelock place, with its 2c/year revenue.
What price would I buy?

5) Another way to play this....

Wheelock's David Larence has been very shrewd in the past buying property when it is cheap. You may wait a few years for him to make another purchase, in anticipation of the property market improving - which would be a catalyst for property counters (Wheelock included) to go up. It would be interesting to look at a graph of Wheelock's share price over the last few property cycles and see if share price appreciation was preceded by their property acquisitions. Alternatively, buy your own property, though the freehold stuff is too expensive for me and the 99yr depreciating-crap is too risky to touch....

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