Thursday, February 25, 2010

Why WBL Corp

BACKGROUND INFORMATION FROM SGXThe Company was incorporated in 1912, under the name CFF Wearne & Co as a public company. However, it traces its history to a family automotive business in the early 1900s.
WBL Corporation Ltd (“Wearnes”) is a dynamic international group with key activities in Technology Manufacturing, Automotive Distribution and Technology Solutions. Management continues to focus on building the Group’s operational and technical expertise to keep Wearnes in the forefront with the leaders in these areas and to build and sustain shareholder value. Today, Wearnes is ranked among the top 75 companies by market capitalisation on the SGX-ST and has revenues of some S$2 billion with operations in over 10 countries.

While the company's main revenue (and profit) drivers are from technology, the company's substantial landbank in China is of keen interest to us. WBL Corp also has various property assets in Singapore, Malaysia and a sand mine in Australia, all of which have potential for future property development. The company generally trades with low liquidity and suffers from a lack of broker coverage, and thus has a higher potential of being an undervalued stock. Is that really the case? Let's examine the company's underlying assets to find out more:

Outstanding Shares
The company issued $158,427,479 worth of convertible bonds back in April 2009 (at $1 par, convertible at $2.29). As of 31 Dec 2009, there remain 37,117,474 shares to be issued to satisfy the convertible issue, which means that there are 281,924,862 fully diluted shares outstanding (including unissued ESOS). This brings market cap to a manageable $1.4 billion (at today's close).

Brief valuation overview
Last reported NAV per share: $3.34 (price-to-book 1.5X)
Fully diluted NAV per share: $2.89 (price-to-book 1.74X)

Of course, NAV is not a good reflection of WBL's underlying value, considering the many assets (including the huge undeveloped landbank) which are carried at book value. However, based on book value alone, valuations are already not demanding.

Chinese property assets
The company's FY2009 (end Sep 2009) annual report lists the various development properties and undeveloped landbank in five cities in China - Shenyang, Chengdu, Chongqing, Suzhou and Shanghai. To be conservative, we have simply assumed that all WBL's development properties in China are undeveloped land, and have looked at recently transacted land prices as a gauge of valuation.

Land Area (sqm)Estimated Price per sqm (RMB)Estimated Valuation (in RMB)
Shenyang, China134,4323000403,297,200
Chengdu, China325,86440001,303,456,000
Chongqing, China51,660130067,157,740
Suzhou, China133,5021300173,552,197
Shanghai, China213,86970001,497,081,600


According to our estimates, the Chinese property assets are worth at least RMB 3.4 billion, or about $706 million. Assuming the stake in Ampwalk (KL) is worth RM550psf, the 2,451 sqm of commercial property adds another $6 million to "development properties" for a total of $712 million. These assets are carried at $258.5 million on the balance sheet (as at 30 Sep 2009).

Listed Equities
WBL Corp owns substantial stakes in three listed companies - Singapore-listed MFS Technology (77%), Nasdaq-listed Multi-Fineline Electronix Inc (58%), and Singapore-listed United Engineers (about 9.2%, classified as available-for-sale non-current financial assets on the balance sheet). As at 25 February 2010, these stakes were collectively worth $614.9 million (based on market value).

Listed Equity investments (as at 25 Feb 2010)
MFS Tech$113,653,800.00
United Engineers$43,858,240


Debt position
Looking at the balance sheet on 31 Dec 2009, WBL's cash and receivables exceed total liabilities by about $75 million.

Other unlisted entities
This consists of all the other major businesses - automotive, construction, the Australian sand mining operations etc. Most of these businesses are profitable but we are not going to attribute any value to them first.

Stock appears undervalued
Based on the market values of the three listed entities and our conservative estimates for the Chinese development properties (including the Ampwalk property in KL), and factoring in net cash of $75 million, we arrive at $1.4 billion, which indicates that we are getting all other businesses (the unlisted entities) for free. Notwithstanding this, the Chinese assets have been valued conservatively (as if they were raw undeveloped land, at slightly lower than market prices), so we are getting the future development potential of the land for free as well. Throw in the long history of the company with a good track record of corporate governance, and we are getting exposure to the lucrative Chinese property market via the guise of an under-researched technology company.

A target price is difficult to derive, but assuming an RNAV of $1.1 billion for the development properties, and another $400 million for the unlisted businesses (according to Kim Eng's estimates), coupled with the $615 million listed equities, we can derive a $7.47 RNAV for WBL Corp.  

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