PPHB (8273) - 3 crowns of PPHB in Georgetown World Heritage Site
Capital
allocation is a CEO’s most important job. The objective of capital allocation
is to increase per share value, not
overall growth or size in the long run.
In
previous post (read here), we shared with you a
capital allocation framework that used by Buffett and Munger in Berkshire
Hathaway. Using that framework, we verified that PPHB’s management has made a
commendable call to reinvest all its retained earnings.
In
PPHB, every RM1 reinvestment has generated RM2.07 value. That added value is
realized in the form of free cash flow.
In
this letter, we dig the vein further to identify hidden value in properties that
owned by PPHB.
The most significant property
Based
on its Annual Reports, the most significant property in term of carrying amount
is 2 buildings and 1 land that owned by PPH Plaza – a subsidiary engaged in
property development business.
The
2 buildings are two-storey pre-war heritage buildings bearing postal addresses
Nos. 29 & 31, Lebuh Pantai, 10300 Georgetown, Penang.
The
land is located at No. 7, Pengkalan Weld, 10300 Georgetown, Penang.
These properties
are located approximately 1 kilometre north-west of The Butterworth Ferry
Terminal (Pengkalan Tun Raja Uda) and is about 2 kilometres north-east of
KOMTAR, the urban renewal centre of Penang.
The Land
is approachable directly from Lebuh Pantai and Weld Quay.
These
significant properties sit in the central of UNESCO’s George Town World
Heritage City with
close proximity to well-known heritage buildings such as the OCBC Bank, The
Whiteways Arcade and the Logan Heritage.
Note:
Dark orange refers to UNESCO’s World Heritage City; Light orange denotes to
buffer zone
Right next to these properties of PPHB at Lebuh Pantai and Pengkalan Weld, Asian Global Business Sdn Bhd is building a boutique hotel, private residences, retail units, office buildings, and F&B outlets for The Rice Miller (see their projects here). The private residences are selling for at least RM1,300/sf.
The
immediate surrounding properties comprise mainly of commercial colonial
buildings, pre-war double-storey shophouses in nature.
Collectively,
they are one of the most popular tourism areas in Penang.
Here
are some surrounding attractions:
Street
art
Book value of the properties
PPH
Plaza was incorporate on 12 January 1995.
As
noted in Annual Report 2011, the properties were acquired on 11 Nov 1995 for
RM14.9m.
The
latest revaluation for these properties was done on 23 Dec 2002 and reached
RM21.1m.
To
date, that RM21.1m is still recorded as the book value in the Balance Sheet of
PPHB.
Present value of the properties
To
hypothesize its present value, recent transacted prices of surrounding
properties are used as the reference.
In
2014, the market was asking RM1,005/sf.
Today,
the market is demanding RM1,100/sf.
Although
some surrounding properties presently sell for RM1,300/sf, it is better to be
conservative.
Given
that the PPHB’s properties occupy a total land area of 56,244 sf, their
revaluation may reach approximately between RM56.53m (56,244 sf x RM1,005/sf)
and RMRM61.87m (56,244 sf x RM1,100/sf).
Higher
valuation is possible given that restoration job was constantly done to
maintain the 2 buildings at Lebuh Pantai. The said buildings are also tenanted.
For
example, Phillip Capital Penang is one of its tenants.
What does it mean to shareholders?
In
retrospect, the objective of capital allocation is to increase per share value, not overall growth or
size in the long run.
However,
not all values are visible to shareholders.
In
this case of the 3 properties that owned by PPHB, we have demonstrated that:
Book value: RM21,137,092
(as revalued in 2002)
Value range:
RM56,525,220 to RM61,868,400 (based on present market prices)
Consequently,
as much as RM35.39m–RM40.73m value is hidden in these properties. These
estimates represent 29.25%–33.66% of its RM121m market capitalization.
A
revaluation exercise will increase shareholders’ book value (presently RM1.714)
per share by 18.79%–21.62%.
As
a result, present PPHB stock price is trading just about half of its actual
book value.
Conclusion
Shareholders
are business partners. It is their responsibility to be aware of assets that
they owned.
Graham
and Dodd regard asset value as the most reliable source of valuation.
The
asset value above counters the scepticism with which investors regard present
value calculations of PPHB’s future free cash flows amid the imminence of e-commerce
boom.
As
demonstrated above, PPHB shareholders are protected by a good margin of safety
that derived solely from that 3 properties.
Deeper
margin of safety is offered given that PPHB is (1) the cheapest yet highest
quality stock among its peers, and (2) its growth-driven intrinsic value is
anticipated to worth at least RM1.78 per share.
PPHB (8273) - 3 crowns of PPHB in Georgetown World Heritage Site
http://valueveins.blogspot.my/2017/04/3-crowns-of-pphb-in-georgetown-world.html
