Join our community of smart investors
OPINION

Play on Macau property

Play on Macau property
September 23, 2014
Play on Macau property
IC TIP: Buy at 230p

The full-year results to end June were always going to make for a good read as I noted in my July article: in the event the company's adjusted net asset value per share increased by more than 30 per cent to 489 cents in the second half alone, buoyed by substantial residential price rises in Macau - the Chinese equivalent of Las Vegas.

Moreover, the underlying growth was in effect even greater because Macau has reported its accounts inline with a new and very recent interpretation of international accounting standard IAS 12 with regards to a deferred tax liability. This meant that net assets of $398m (£244m) were understated by $19.6m (£12m) in the company’s accounts, equivalent to 15p a share, even though all of Macau’s asset disposals to date have been transacted through special purpose vehicles, and so avoid taxes. The company’s directors intend to continue operating in this way which means that they have adopted a very conservative stance by accounting for this 15p a share deferred tax liability.

It’s also worth noting that Macau’s board have sensibly been using surplus funds to buy back shares since the June year-end. In fact, the company has purchased 2.43m shares at an average price of 248p in the past 12 weeks. On a proforma basis, I calculate they have added another 1.5p to net asset value (NAV) per share. Factor in the weakness of sterling since the end of June, and I reckon spot NAV per share is now north of 300p. Moreover, the board intend to exploit the 25 per cent share price discount to book value by continuing to make further share buy backs too. They can certainly afford to do so as the $536m (£328m) portfolio only has a loan to value ratio of 22 per cent, so the balance sheet is hardly highly geared.

Strong growth drivers

Financial accounting issues aside, the dynamics of the business are just as strong as they were at the time of my last update. For instance, demand for housing in Macau continues to outstrip supply, a trend that is unlikely to change given the lack of new housing starts; new casino openings planned for the next four years will require an extra 30,000 staff, all of whom will need housing and will place added pressure on rents and house prices; and the projected addition of 19,000 hotel rooms and 4,000 gaming tables is expected to pull in more punters from mainland China, which should be good news for the local economy and the housing market. In fact, analysts at The Economist Intelligence unit predict GDP growth of 11.3 per cent this year and 10.6 per cent in 2015, three times faster than the global economy.

On a company specific level, Macau Property is well placed to exploit these positive trends. A recent debt reorganisation provides the company with additional firepower; the Waterside development of 59 flats (book value of $306m) offers upside to both further capital growth as well as rising rents; sales of the remaining apartments at the One Central Residences development are expected to command prices at above their combined book values of $19m, reflecting the tight supply; and the 5,200 sq ft mansion Green House in the upscale Penha Hill neighbourhood will only be sold at a premium to book value of $19m given its rarity value.

In addition, analysts at Liberum Capital have very conservatively not factored in any potential in their June 2015 net asset value estimate of 335p for pre-construction capital growth at the 70,000 sq ft Senado Square retail redevelopment where construction commences next year.

So although it’s only sensible not to expect the Macau housing market to continue to roar ahead as it has done - prices have more than tripled since 2009 - the dynamics for future growth still look positive even after factoring in the authorities attempts to curb price rises. In any case, with Macau Property’s shares now rated on a 32 per cent discount to June 2015 NAV forecasts, and the board committed to exploit short-term share price weakness by repurchasing shares in their company, the discount is far too deep. My price target remains 290p on a six month basis. Buy.

■ Simon Thompson's new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'