08 July 2014

Things to Note when Investing in Singapore Listed Property Counters - July 2014

When I first started investing in Singapore stock market, especially the property sector which I am quite interested in (as I know that, the longer you stay invested in property market, the higher chances you will become a millionaire as time goes by due to two facts - inflation as well as real value gain due to increase in economical activity), so I thought of using the same method copied from Bursa Malaysia. But after a while, I noticed that I fall into a trap where I noticed that started from year 2011, the Singapore property players have to apply FRS115 into their financial reporting. It is a nightmare to me, as I could not really compare the developers "apple to apple". Why?

FRS 115 states that you have to apply Completion of Construction method to real estate properties other than private residential and mix development projects. Below is the snapshot from ISCA:

What is the different between Percentage of Completion (POC) vs Completion of Construction (COC)? For those counters listed in Bursa Malaysia, they are all using POC method. The POC method immediately recognize the revenue and profits as well as the construction is in the progress towards completion. So to invest in Bursa Malaysia, it is quite clear cut that we will know the progress billings to be displayed under income statement.

But COC method would defer the recognition of the revenue as well as the net profits and they only display progress billings and account payables in balance sheet. So what is the impact of COC method?

  1. Increase Debt Ratio of the Company, as the account payables is increased. 
  2. Reduce Return of Asset (ROA) of the company, hence ROE of the company.
  3. The income stream displayed under income statement becomes volatile, as it takes at least 3 or 4 years to complete a project.
So how do Singapore developers to counter this? 
  1. By forming a JV / associate companies, it is no longer a requirement to display total assets & liabilities of the JV in the balance sheet, but only display net profits (under Income Statement) & the equity portion of the JV (under Balance Sheet). It would beautify the balance sheet of the developer, and hence increase ROE of the company. Nonetheless, you are still able to check the total assets & total liabilities of JV in annual report which the company is required to explain it to shareholders. 
  2. By launching the project phase by phase, it may smoother the recognition of the income stream of the overall projects. However, as we all know, there is a cycle in property sector, so it is unavoidable for some developers to launch more units during "hot time" and reduce their size during "cold time". 
  3. Diversifying the income stream into other property related business such as hotel management, property investment as well as securities investment. I noticed that there is really no pure developer just concentrate on property development. Instead, most of the developers listed in Singapore stock exchange have other pillars to support their business. With property investment, they could easily note down the "fair value gain" of invested properties into income statement. 
So what should we take note when investing in Singapore listed property counters? 
  1. Check through all the land banks as well as projects launched during the financial years. 
  2. Check through the percentage of selling of the projects launched. 
  3. Check through the items below the top line of income statements such as other income & expenses as well as fair value gain from invested properties. 
  4. Check through the items in balance sheets, especially the progress billings and account payables and invested properties / investment in JV / investment in associate companies.
  5. Cash flow statement may not be a good indicator, as I mentioned earlier that there is a cycle in property sector, so it is quite common if the developers need huge capital to kick off a project and receive a bulk of cash flow once it's completed. 
  6. Some investors prefer to use RNAV as key financial analysis. RNAV is a figure which likely to rely on your experience in determining the discounted future cash flow from ongoing projects added to current NAV. I am not so keen on using this method because it is quite subjective to use.
  7. I prefer to use long term average ROE by averaging ROE over the years. It is a key performance indicator for the company to increase / enhance shareholders' fund value over the years. Of course, we also have to adjust for the exceptional items (e.g. fair value gain of invested properties etc) to get a better comparison among peers.
  8. As more developers venturing oversea due to limited land supply in Singapore, we have to take note of the currency risk as well as political risk in oversea market. 


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