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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







Wonderfood Museum













































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 
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