Insights on UOL Third Quarter Financial Results
One of the most significant item that is presented in UOL’s Third Quarter Results is the other gain recognised of about $527 million resulting from negative goodwill on acquisition of a subsidiary and loss on derecognition of associated and joint venture companies.
The gain arises from a share swap transaction whereby UOL receive 60 million shares in UIC from Haw Par Corporation in exchange for 27.3 million shares in UOL being issued to Haw Par on 31 August 2017.
As a result, UOL’s stake in UIC increase from 44.76% to 48.96%.
- Basis of accounting for UIC by UOL
As a result of the increased in stake in UIC by UOL, UOL account for UIC as a subsidiary when it previously accounted for its stake in UIC as a joint venture or associated company. The transition from joint venture/associated company requires UOL to remeasure its existing stake in UIC and recognise any goodwill (in the case when consideration exceeds net assets acquired) or a negative goodwill (in the case when consideration is below net assets acquired).
Hence, the significant gain recorded arises from the negative goodwill that UOL has accumulated over the years in buying UIC shares (i.e. UOL had a good bargain). The breakdown on the gain is as follows:
- “Bargain assets” are typical RNAV adjustments for property companies
It is not surprising that the negative goodwill arises from PP&E and Development Properties as the basis of measurement on these assets do not require any fair value remeasurement (i.e. this will not be pick up by UOL via equity accounting) unlike investment properties (which most REIT investors will be familiar with)
One of UIC crown jewels will be the Hotels it owned at Marina Square, namely Pan Pacific Singapore, Marina Mandarin Singapore and Mandarin Oriental Singapore. Hence, it is not surprising bulk of the fair value uplift came from PP&E as the basis of accounting for hotels is measured at cost less accumulated depreciation.
UIC and UOL have several joint venture development projects which they undertake together (including Park Eleven in Shanghai and Clement Canopy). Arising from the heightened property price in Shanghai as well as good pricing obtained for Clement Canopy land, it is also not surprising there are fair value uplift as any potential gain on development will only be recognised by UIC when the development is completed in China and progressively as construction is ongoing for development in Singapore.
It makes strategic sense for UOL to consolidate its position in UIC as they share the same business in retail, office, hotels and property development. The fair value uplift recognised and share swap performed between UIC and Haw Par also shed some light on the usually sleepy UIC which has some interesting shareholder tussle history previously. In view of the similarities in business and top management of the 2 companies, I will compare valuation metrics of the 2 companies for benchmarking purpose.
- Potential RNAV adjustments for UIC
Based on the simplified assumption that the fair value uplift accruing on UOL’s share in UIC will accrue fully to UIC as well on its 100% share, the RNAV for UIC is $5.28.
It is trading at 37% discount to the estimated RNAV whilst UOL is trading at 18% discount after taking into account adjustments arising for its investment in UIC. Do note that UOL should also have a fairly sizeable fair value RNAV adjustment arising from hotel and development projects owned by them directly. But from the above, it does seem UIC discount to estimated RNAV is attractive.
- Basis of share swap with Haw Par
As mentioned in earlier part of the post, 60 million of UIC shares was received in exchange of 27.3 million of UOL shares. Hence, on the assumption the share swap is done on an arm’s length basis, the ratio of UOL to UIC shares is about 1: 2.2. That is one UOL share is worth 2.2 UIC shares.
Taking that ratio, the implied UIC share price based on current UOL share price is $4 or about 76% of the estimated RNAV of UIC.
From a valuation perspective, it is safe to say that UIC is trading at a more attractive valuation than UOL considering they share common top management (Wee family), similar businesses and even undertake projects together.
However, before you jump into the bandwagon and plunge your money into UIC, you can probably get some history lesson online on the colourful shareholding history of UIC and also relevant events such as privatisation of Singapore Land (subsidiary of UIC) to have a sense of what might be in store for potential investors.
P.S: CK is vested in UIC