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Hong Fok Corporation: How Much Are Its Investment Properties Really Worth?

Hong Fok Corporation: How Much Are Its Investment Properties Really Worth?

Investment properties are a common driver of asset plays in land scarce countries like Singapore and Hong Kong, which also happen to be the financial hubs of the region. Valuing investment properties is a relatively straight forward endeavour as they are usually revalued every year by professionals. That being the case, we believe a conservative value investor should still reserve their judgement over such figures. We will elaborate more, as well as the concept of investor comfort level, through our analysis of Hong Fok Corporation.

Trading at 165% MOS

Hong Fok Corporation engages in the investment, development and construction of properties in Singapore and Hong Kong. The bulk of its value comes from its investment property portfolio which makes up 84.6% of total asset value, based on FY14 figures. As these are revalued on a yearly basis, we will assume that they are fair values for now. The intrinsic value of Hong Fok would be the residual value of its investment properties after deducting all liabilities.

Based on its market capitalisation of SGD516.6m, this gives us a hefty 165% margin of safety – a likely addition to any value investor's portfolio. However, upon deeper digging, such a valuation seems a tad optimistic.

Implied Rental Yield of 2.5%

According to Note 19 of its 2014 Annual Report, Hong Fok's investment properties generated gross rental income of SGD55.3M Co (NYSE:MMM) which corresponds to a mere rental yield of 2.5%. Such a value is unwelcoming for a conservative investor who will prefer a valuation based on a high yields rather than low yields. From another perspective, a 2.5% rental yield translates to a 40x...


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