Property is a favourite of many investors, and sometimes the ASX presents some compelling opportunities. Let's take a look at two.
United Overseas Investment (ASX: UOS)
Although listed on the ASX in 1987, United Overseas Investment is headquartered in Kuala Lumpur where the bulk of business operations are carried out.
Demographics in the broad Asian region are divergent. Over the next decade Japan, Korea, China and Thailand will see working age population shrink. Conversely, the Philippines, Malaysia, Indonesia and Singapore will see the percentage of working age people expand. This factor alone will help underpin GDP and income growth in these countries over the longer term.
Although some export-related problems are developing, the Malaysian economy remains robust and the shift to 'first world' style consumption patterns (including housing) is becoming apparent.
United Overseas is well placed to profit from this shift; as growth in consumption parallels growth in demand for upscale housing. Positives include:
- Management has majority holding and a 25-year record
- Accounts comply with IFRS (International Financing Reporting Standards)
- Has demonstrated sustained growth over 25 years
- Developments, land holdings & rental properties all in prime areas
- Effective discount to net tangible assets
- Consistent unfranked dividend growth
- Expects 25%+ growth in profit 2013 year (December end)
Negatives include:
- Risks of a property bubble developing in Malaysia
- Although the parent company and the development arm have low gearing, the minority owned, Malaysian-listed REIT is substantially geared
- Despite being listed in Australia for 25 years, it has very low recognition with investors
In summary, United Overseas provides exposure to one of the better SE Asia economies and their developments are all in prestigious locations. The high rise residential apartments are usually situated in extensive gardens, and some of them have very individual features – for example, one has a five-story-high treetop boardwalk leading to a yoga platform! Quirks such as these add to the appeal for buyers.
At an expected 2013 (December year-end) price earnings of 5.5 and an unfranked dividend yield of 7.3%, United Overseas Investment is substantially undervalued.
Sunland Group (ASX: SDG)
Although not on the same scale, Sunland Group can be seen as a local equivalent of United Overseas. Developments are upmarket and individual, location is premier and its reputation as a quality builder is respected.
On price earnings of 21 and a 2.5% dividend, the 2013 figures look awfully plain, however, much constructive work has been done over the last three years to strengthen the balance sheet and position the company for the next growth cycle in housing construction. In addition, a substantial share buyback program has been underway and net tangible assets per share are now $1.93. Debt to equity ratio is 4%.
The current development pipeline has an end value of $1.4 billion and the company is in a strong financial position to deal with the delivery of current projects and replenish the portfolio for future operations.
Foolish takeaway
Property development is highly cyclical and sensitive to the sense of economic wellbeing. Given this, investors are advised to exercise caution when selecting potential investments. United Overseas is involved in a range of development activities, from commercial to residential; whilst Sunland's focus is residential. Both companies have reputations as innovative and stylish developers and both have well structured balance sheets. At present, United Overseas (52c) is at a very compelling discount to intrinsic value and earnings prospects while Sunland ($1.60) is financially poised to take significant advantage of any sustained upturn in premier housing and unit markets.
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Motley Fool contributor Peter Andersen owns shares in United Overseas Investment.
