Meng Teck is an author, investor and entrepreneur.
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Before you continue reading,please read & understand the disclaimer carefully,
I am obliged to tell you,as of the time of writing,I am holding shares of this company.
L&G is an investment holding that is comprised of 3 businesses, the property development business,education business and oil palm business. The revenue of the group is mostly contributed by the property development business(~90%) whereas the education business and oil palm business each contribute about 5% to the revenue. Therefore,it is appropriate to say that L&G is a property development business.
In my opinion,the success of property development businesses depend largely on the location of the land that the company has and the management’s ability to evaluate, acquire and to develop these lands into premium housings or office buildings. Therefore, the criteria I’ll be looking for in a property development company to invest in will be, competent management and strong financial position. Other than having a huge size and branding. it is rather difficult to differentiate oneself from its peers in this industry.In this aspect, I do not feel that L&G has a lot of advantages over its peers.
What interests me in this company is its management. The current managing director is Mr.Low Gay Teck. Mr.Low was appointed the Managing director of L&G since 2008 under the influence of Mayland,which is the major shareholder of L&G with 16.94% shares,but prior to that,Mr.Low was the managing director for Mayland. Upon reading through the annual reports and I found that Mr.Low has had 25 years of experience in property development and project management. Interestingly, if you look at the earnings per share of the company, you will realize that the group’s earning has been on a steady growth rate since year 2008 (where Mr.Low took over) and the Return on Equity has also been increasing steadily. A Return on Equity of more than 15% signifies a competent management(The company is having ROE of 17% as of 2013). If we compare the ROE against its peers, this company is doing better. According to an interview with Mr.Low that was published in Nanyang Newspaper, the company’s tremendous improvement over the past five years was mainly contributed by these factors;
1) Emphasizing focus on their core business,Property development.
2) Rallying the enthusiasm of employees
3) Fully utilizing the resources of the company,especially the lands on premium areas.
4) Constant effort to reduce debt
5) Setting a clear long-term vision
6) Restructure of management
If we compare the earnings per share of the company over the past five years, the eps has increased 187% from 2.56 in year 2009 to 7.35 in year 2013 or an annualized growth rate of 23.5% every year! However,if you compare the eps of year 2008 and before it,the company has been making very little money and sometimes even losing money. Don’t you think that an experienced management that is able to turn a company from loss making to profit making with double digit growth rate in just 5 years , knows what they are doing?
Now that we have covered on the management, let us check their financial position, as of 31 December 2013. The company has a cash ratio of 1.60. This means that the company is cash rich. Not only will this company be able to pay off all its liabilities, it is also in a ready position to take on good opportunities that arise thus ,further increasing the shareholder’s wealth. The total liability of the company compared to the asset is in the ratio of 1 : 3.66. This signifies that the company is in a strong financial position. What this means is that we wouldn't have to worry too much about the company when there is crisis or similar problems because the company is likely to thrive in those conditions.
The revenue has been growing at a double digit pace across the years. The revenue grew from only 37 million in 2009 to 216 million in year 2013 which is an increase of 5.8 times or an annualized growth of 42.3%. This kind of growth rate is amazingly high. However,the managing director has said that the growth rate were principally due to the land resources that was purchased at a low price long time ago. In the annual report,it is also said that the current increase in profits and revenue were principally derived from our property division, led by the successful completion of the 8trium,and the two on-going development projects namely The Elements@Ampang and Damansara Foresta. Besides these projects, the company is also involved in a Joint Venture in Melbourne,Australia named Hidden Valley and also a resort building project. The managing director also said that income in the near future will be good due to an amount of unbilled sales (The amount stated by different media contradicts). However, moving forward, the growth rate may not be as high anymore as they have run out of good lands to develop but then again,the management has been actively planning to increase its recurring income through renting activities. The possibility of the company moving towards the direction of becoming something similar to Real Estate Investment Trust (REITs) is not denied by the management. What we can conclude here is that the management is now planning ahead and thinking about creating value for the future which is good sign.
Now that we have covered on the management,financial position and growth prospect of the company, it’s time to see if it is the right price to buy. In an interview with Mr.Low conducted by Nanyang in April, Mr.Low expressed that he thinks the stock is undervalued (when it was trading around 45 cents) and is worth collecting in small amount. How many times have you seen a managing director telling everyone, ‘Buy my company,its UNDERVALUED!”
Through my calculation,the forecast-ed current diluted (due to ICULS) EPS is 10.12. I simply took the 9 months cumulative eps of 7.59(diluted) and multiply it by (4/3). If we take this EPS and compare with the price,we can get a PE(Price/Earning) of 5.63.
This means that there is still room for the stock price to move up even if the eps is constant and not growing. However, as we have covered earlier that the future prospect of the company is positive. Then we have to answer this question of why the PE of the company is so low when the company is doing so well? I believe that the market has not been able to follow the growth rate of the EPS and therefore, the growth in price lags the growth in EPS. More importantly, I think the market is worried about the prospect of property development companies, especially when property prices has reached a peak and sales of properties has started to slow due to cooling measure. In fact, many famous investors including Mr. Koon Yew Yin, founder of IJM, are not optimistic on this industry. (Which is very reasonable) . However, At the price of 57 cents,I believe that the share is still a very good buy. In my opinion the share is worth at least, PE*EPS (8*10.13) = 81.04 cents at a PE of 8.
But given the growth rate,strong financial position and competent management, I believe there should be a premium of at least 20% to buy this share from me in the short term (within 2 years).
Therefore,my short term target price for this share is 97 cents which is a 70% difference from the current share price. In fact, if we were to use the PE/Growth ratio, taking the growth rate at only 16%,the PE should be 16 which means that this share is worth 1.62. But I will just stay conservative and go with the 97 cents.