A pot of gold down under

Stamford Land Corporation (formerly known as Hai Sun Hup Group Ltd), led by Mr Ow Chio Kiat, received an unsolicited offer of AUD 850 million (SGD 1.05 billion) for its hotel portfolio.
Not surprisingly, the current market cap of Stamford Land, prior to the announcement, was way below the offer price (Market cap of S$388.7million). (Byebye EMH?) The hotel portfolio is valued at a total net book value of just AUD 382 million.

SLC received AUD1.3 million for the purposes of conducting due diligence under the exclusivity agreement (which has since lapsed on 7 March 2008). Since then, SL has received approaches from other parties for the hotel portfolio.

Stamford Land said its property development arm is a growing core business. If its hotels are eventually sold, it said it would focus on increasing its investment in property development and return surplus funds to shareholders.

In its statement, the group said the high and continually rising cost of hotel development in Australia and New Zealand means it will not face much competition as there is unlikely to be an oversupply of room stock in the foreseeable future.

Stamford Land said its second core business - property development - has evolved from its initial foray into the hotel industry. The development and sale of luxury apartments has prospered and expansion is on the cards, it said.

Its property development portfolio, also based in Australia and New Zealand, includes The Stamford Marque, an 83-unit luxury residential development in Sydney.

MYOB thinks that....

Given the current unfavourable situation in the credit market, it takes a strong buyer to fork out such a significant sum. The buyer was said to be a substantial public group with a diversified international portfolio of investment and residential properties and hotel.

Some background on Mr Ow. He's a man who enjoys (and thoroughly deserves) the high life. Back when Stamford ventured into hotel development, Mr Ow did the unthinkable – he chose to operate the hotels under their own name. Stamford Land now owns a collection of landmark luxury hotel properties strategically located in key cities in Australia and New Zealand.
Stamford Land launched its foray into the hotel sector by buying up existing hotel properties. For property transactions, valuations are based on three methodologies: replacement cost; willing-buyer, willing-seller based on the most recent transactions; and yields from earnings streams.

'I feel very passionate about the hotel business because I built it up myself since 1994,’ --- Mr Ow

MYOB assesses that it is a matter of time (and price) before SL sells the portfolio. Back in 2002, Mr Ow emphasized the importance of the expected yield. He strongly claimed that he would not buy properties without yield. Fast forward to 2008, based on the bid of S$1.05 billion, the entire hotel portfolio is offering a low yield of (about) 2.1%. Unless there is something spectacular about the hotel's performance in the coming years, MYOB thinks that at S$1.25billion/yield of 1.75%, SL and Mr OW should seriously consider parting with the pot of gold.

No doubt the hotel portfolio is the core business of SL, the property development arm has the potential to replace the hotel business. Mr Ow has also confirmed the intention to return funds to shareholders which are surplus to requirements. Followers of OCK should know that he is known to be fair to shareholders. Cougar Logs returned much cash from the sale of one of its unit.

If only the market cap of SL is much larger, I would believe that Mr Whitman favours such a unique company which is safe and cheap. With the Aussie economy well supported by the commodity bull, there is less risk of the market falling off the cliff, as compared to the US economy.

MYOB will continue to analyse the numbers to give you a better idea.