StockPick

Note :

1. 15-Feb-05 : Adding in data for Q305 Results
2. 13-Nov-05 : Added in data for Q206 Results
3. 16-Aug-05 : Added in data for Q106 Results

Background

Metro, at $0.515 is trading at a 37.8% discount to NAV ($0.828) and has a large cash hoard. Trading volume is usually low and the share price is bound within $0.45-$0.50 although it'll spike up once a while with heavy volume, esp. aro' Mid and Full Year Reporting time when investors expects Metro to declare a special dividend (due to large cash hoard).

This study will examine the following,

1. Is Metro undervalued ?
2. Will Metro return its large cash hoard to shareholders ?

This study will be continuously updated as and when data is available.

Financial Data

All the data in this case study are extracted fm the Metro 2005 Annual Report. Some of the figures in the fllwg table are extracted fm the periodical "Shares Investment",

Issued Shares = 630,776,676 @ $0.20 Par

Note (1) : Bonus Issue 1-for-5 on 22-Aug-02 ;
Note (2) : 2004 (Mar04 is Financial Year End) has extraordinary gains fm Ngee Ann City
Note (3) : S$86.72M (~$0.1375 cash/share) to be realised fm disposal of Junior Bonds n Pref Shares

Q206 Results

Summary

• Revenue $42.266Mil +2.04% ; Gross Profit $5.65Mil +38.04%
• Operating Profit after Tax $120.188Mil +2109.74% (Exceptional Item $119.16Mil)
• Segment Profit : Property $1.611Mil ; Retail $1.103Mil
• Forex Gain $0.95Mil ; Interest $1.848Mil ; Dividend $5.115Mil+$1.137Mil
• NAV 101.2cts (up fm 100.3cts)

Review

• Group turnover for the second financial quarter to 30 September 2005 rose to $42.3 million from $41.4 million previously, as rental income from Metro City grew.
• The disposal of the junior bonds and preference shares of Orchard Square Capital Assets Ltd ("OSCAL") in August 2005, resulted in the exceptional gains of $118 million and accounted for most of the increase in profit before tax from $7.0 million to $121.9 million. The exceptional gain of $118 million, includes the realisation of $100.2 million, being the balance of prior years’ revaluation surpluses relating to the Group’s 27% interest in Ngee Ann City.
• Higher rental income from Metro City accounted for the improvement in the property division’s revenue for the quarter from $7.1 million to $7.8 million. The impact of this improvement and higher dividend income from unquoted investments was offset by provisions for performance bonuses of $6.6 million, included under general and administrative expenses, arising from the higher profit before tax due to the exceptional gains. Excluding these provisions, the property segment’s operating results for the current financial quarter would have been $8.2 million against the $1.6 million recorded.
• Although lower promotional activities in the quarter resulted in flat sales for the retail division, the consequential lower costs of discounts meant margins improved. The retail division’s operating profit therefore rose from $0.3 million to $1.1 million for the financial quarter.
• With the sale of the junior bonds and preference shares of OSCAL, the carrying value of Associated companies fell from $154.2 million as at 30 June 2005 to $82.7 million as at 30 September 2005. The proceeds received of $86.7 million from the disposal, accounted for the increase in cash and bank balances from $191.7 million to $269.9 million as at 30 September 2005. Investments (non-current assets) also rose $13.6 million with the disbursement of shareholders loans in connection with the investment in Hualing International Commerce and Trade Plaza. There were no other material factors that affected the cashflow, working capital, assets and liabilities of the Group during the current financial quarter reported on.

Going Forward

• The Group’s properties are expected to continue to report incremental improvements in performance in the next financial quarter. It will also continue to reflect steady growth in the flow of income arising from other investments. This will assist to offset the impact of the cessation of interest income from the disposal of the junior bonds of OSCAL.
• With the more positive outlook for the Singapore economy, consumer spending during the upcoming festive shopping season is likely to improve.

Q106 Results

Summary

• Revenue $49,226Mil +11.57% ; Gross Profit $5.328Mil +11.6%
• Operating Profit after Tax $11.884Mil +144.53%
• Segment Profit : Property $13.359Mil ; Retail $0.507Mil
• Other Income $12.773Mil +$140.5Mil
• Forex Gain $5.397Mil ; Interest $2.544Mil ; Dividend $0.408Mil+$1.965Mil
• NAV 100.3cts (up fm 96.6cts)

Q106 Review

• Group turnover for the three months to 30 June 2005 rose 11.6% from $44.1 million to $49.2 million mainly due to higher sales reported by the retail division.
• Higher rental income from Metro City, arising from an improvement in the tenant mix and other asset enhancement exercises, accounted for the increase in the property division’s revenue for the quarter from $9.1 million to $10.3 million. The completion of the disposal of The Oasis Resort and the consequent conversion of Australian dollar assets to Singapore dollar assets resulted in a realized exchange gain of $4.7 million which raised the property division’s operating results. Dividend and other income from investments including the unquoted investment in Shui On Land Limited, also drove the property division’s improvement in operating results. The net outcome was a rise in the property division’s operating results from $5.8 million to $13.4 million.
• Higher sales from the Metro Anniversary Sales and the Great Singapore Sales as compared with the corresponding period of the previous financial year, helped the retail division to improve on sales turnover which rose 11% to $38.2 million for the first quarter with a consequential increase in operating profit.
• Other than the effects of the completion of the disposal of The Oasis Resort, the disbursement of the balance of the investment in Shui On Land Ltd and the collection of the final balance of 5%, being $26.9 million, due on the disposal of the Group’s 27% interest in Ngee Ann City in 2003, during the quarter, there were no material factors that affected the cashflow, working capital, assets and liabilities of the Group during the current financial quarter reported on.
• The disposal of the junior bonds and preference shares of Orchard Square Capital Assets Ltd was completed on 5 August 2005. The financial effects as set out in the Circular dated 6 July 2005 will therefore be reported in the next financial quarter. Income arising from other investments and performance of the Group’s properties are expected to remain stable.
• With the economic climate steadily improving, consumer spending should continue to show incremental improvement. However, competition remains keen for the retail division.

Highlights : 2005 Result

• Revenue : Property 21% Retail 78% (4 stores in S'pore, 4 in Indonesia via associate)
• Operating Profit : Property 82% ($17.7M in 2004 ; $29.9M in 2005)
• Exceptional Items : 2005 - $4.9M ; 2004 - $203.6M ($230.1 fm Ngee Ann City)
• Total Group Assets : $813.5M (fm $696.7M) ; 48% in China (fm 32%)
• Property : Shui Onn Land (Shanghai - Real Estate Developer), Wholesale Trading Centre (Xinjiang) + 4 Retail cum Office (Shanghai x 2, Guangzhou, Penang)

Calculation on Cash/Share

• In the fllwg computations, long term investments and other assets/liabilities will not be considered


• Total Cash that can be realised in Short Term
  = Cash + Bank Bal + Short Term Investment + Cash fm Sale of Bonds
  = $269.92M + $67.432M (Q106 : $191.7M + $75.3M + 86.72M ; FY05 : $144.4M + $44.4M + $86.72M)
  = $337.352M or $0.5348/shr (Q106 : $353.72M or $0.5608/shr ; FY05 : $275.52M or $0.4368/shr)


• Total Bank Borrowings
  = Long Term Bank Borrowings + Short Term Bank Borrowings
  = $62.719M + $44.219M (Q106 : $56.2M + $45.6M ; FY05 : $62.3M + $33.2M )
  = $106.938M (Q106 : $101.8M ; FY05 : $95.5M)


• Balance Cash
  = Total Cash that can be realised in Short Term - Total Bank Borrowings
  = $337.352M - $106.938M (Q106 : $353.72M - $101.8M ; FY05 : $275.52M - $95.5M )
  = $230.415M or $0.3653/shr (Q106 : 251.92M or $0.3994/shr ; FY05 : $180.02M or $0.2854/shr )

Comments

• Metro is expanding (evolving?) fm Retail to Investment Property biz using cash fm disposal of Ngee Ann City
• Focus shifting fm ASEAN to China
• Current benefits - Improved Margins and ROE
• Danger - Mainly driven by China property boom
• Large cash hoard - May not return much to shareholders as likely required for expanding Investment Property biz
• Share Price at high discount (38%) to NTA/share but prob also similar to Property cos. like Stamford Land (47%), MCL (39%, also has huge cash hoard), HPL (38%), .... Yes, Metro is undervalued but similar in characteristics to other Property cos. (but most do not have a large component of valuation in cash)
• Major Shareholders : Ong Family 35.64% (Jopie Ong Deemed 29.23% , Ong Tjoe Kim 6.41%), Ngee Ann Kongsi 9.08% , Free Float 50.46% , so don't hope for 3rd party to 'help' realise value of Metro

• Current mkt price is $0.52 (was aro' $0.50 but went up due to div payout of $0.02 soon), so it works out to a yield of ~4%

Conclusion

The question is thus whether u see Metro as a Retail or Investment Property co. If Retail, then yes, it's hard to understand why they are sitting on so much cash. They don't need a lot of cash to expand their Retail biz, unless they want to own the Retail space. If you view Metro as more of a Property Investment co., then they do need a lot of cash to invest in properties (can of course also use borrowings but will incur interest expenses).

Their recent devt do point towards the latter and I don't expect Metro to return a lot of cash to the shareholders unless they run out of properties to invest in or they decide to inject their investment properties into an REIT (current mkt fever).

Note : In their Circular to Shareholders regarding the disposal of these bonds and pref shares, on the 'Use of net proceeds', there's no mention of paying any special div to shareholders. They did mention,

"In line with the current focus and strategic direction of the Group, such investments would be mainly in property or property-related concerns."

My Expections : Metro to pay a special div fm the recent sale of Junior bonds n pref shares to appease shareholders

• 2004 : $230M Extraordinary Gain => $0.15 Special Div
• Now : $118M => $0.075~$0.10?? which works out to be $47.3M~$63M
• When : 1H06 (Sep05) ; Update : Didn't happen! Q3? or Q4??

If so, expect Metro share price to drop accordingly. In 2003, was aro' $0.65~$0.75 (hi $0.85 or so) but dropped by aro' $0.15 after it went xd.

Possible Future Scenarios :

1. Metro spins off Property Assets as a different entity. Previously, Hai Sun Hup, who was mainly in Shipping, invested in Australia Hotels till their portfolio was large enough to spin it off as Stamford Land. Hai Sun Hup was also renamed as Singapore Shipping Corporation.
   Comment - May be a good thing as shareholders can realign to their preferred hldgs



2. Metro sells off Retail assets to focus on Property Investments biz or vice versa.
   Comment - If it fetches a good premium, will be good for shareholders



3. Ong family sells off their stake in Metro
   Comment - Most unlikely to happen in the short term. If this happens, most likely will be good for shareholders as the new owner will help to unlock and realise the value of Metro
   

My Action

In 2003, I did several buy/sell transactions of $0.63~$0.745 and am currently hldg 2 leftover purchases of $0.745 (21-Jul-03) and $0.705 (26-Aug-03). So, at average cost of $0.725 less $0.15 special div, I am 'underwater' based on cost of $0.575 vs $0.52 (mkt price).

Now, I'll hv to decide whether to buy more for long term hold (reasonable ~4% yield and potential upside as it's 40%+ discount to NAV with lots of cash) or to average my cost down and then sell all my hldgs when mkt over-reacts due to expectation of special div :D

Update : As Metro did not declare a special interim special div, I expect the share price to correct (even tho' it's undervalued) and sold off part of my hldgs @ $0.625 on 14-Nov-05. I plan to accumulate again if it drops below $0.60.

Important Dates

• 11-Nov-05 : 1H06 Results
• 15-Aug-05 : Q106 Results ($0.53 -> $0.545)
• 12-Aug-05 : Div Pay Out Date
• 28-Jul-05 : Div Ex-Date
• 22-Jul-05 : AGM

Announcements

1. 20-May : Full Year Result and Dividend Announcement ($0.515)
2. 3-May : Acceptance by ERGO for sale of Bonds and Pref Shares
3. 3-May : Joint Announcement with HPL on decision not to proceed on IR bid. Price plunge to $0.51
4. 26-Apr : Joint Announcement with HPL on invitation to bid for IR. Price hit peak of $0.575
5. 22-Apr : Disposal of Bonds and Pref Shares. Hit high of $0.545
6. 19-Apr : Offer by Suntec for Bonds and Pref Shares. Rise to $0.53
7. 15-Apr : Query by SGX on high trading volume. Rise to $0.52
8. 7-Feb : Q3 Financial Statements and Div
9. 10-Nov-04 : Q2 Financial Statements and Div

Disclaimer : Use the above at your own risk! We'll not be responsible for any losses incurred but you can give us credit if you make money :D

# posted by Anonymous @ 7/14/2005 07:18:00 PM