Singapore Equity: UOB Kay Hian

Quick update to the portfolio, no major changes, some weakness seen in Compact Metal in line with overall market weakness on small caps:

Equity Portfolio

Do note the ex-dividend dates for Overseas Education (05 May 2015) and Ho Bee Land (12 May 2015).

The following stock, UOB Kay Hian (UOBKH), was highlighted to me a couple of times over the past month as a beneficiary of the recent significantly higher turnover on the Hong Kong Stock Exchange due to the South-bound flows from Mainland Chinese investors into Hong Kong.

I would classify this stock as a momentum trading stock so I won’t be adding this into the model portfolio but it does look significantly undervalued and has a high probability of re-rating if the bull market in Hong Kong continues.

Moreover, the recent announcement of a likely takeover by China Minsheng Bank of a local HK broker cum corporate finance and wealth management firm, Quam (952 HK), at high valuation multiples has brought attention to local brokers in Hong Kong such as South China Financial (619 HK) and Sunwah Kingsway (188 HK).

If UOBKH’s HK operations are re-rated to similar multiples, there is significant upside to the share price.

Company Name: UOB Kay Hian
Share Price: SGD 1.53
Market Capitalisation: SGD 1,122m

UOB Kay Hian (UOBKH) is the largest stockbroker in Singapore, with 947 retail and institutional sales personnel.

Mr Wee Ee Chao has a deemed interest of 24.17% of the outstanding shares and has been increasing his stake via married trades at SGD 1.42 to SGD 1.45 per share.

Do note that UOBKH went ex-dividend on 29 Apr 2015 (SGD 0.05 scrip dividend).

My analysis involves:
1. Estimating UOBKH’s pro-forma 2015 earnings based on the significantly higher market turnover seen in HK in Apr 2014; and

2. Valuing UOBKH on a Sum-of-the-Parts basis.

2015 Pro-forma Earnings Estimate
UOBKH 2015 Earnings Forecasts

For Singapore, I have used the average YTD March contribution to full year trading volumes from 2011 to 2014 to estimate 2015 full year trading volumes.

For HK, because the surge in trading volumes occurred only in Apr 2015, I have provided a pro-forma estimate which is the estimated full year volume if the South-bound volumes had started since the beginning of Jan 2015.

For Thailand, I have simply used the YTD March 2015 volumes divided by the YTD March 2014 volumes and applied this ratio to the full year March 2014 volumes to estimate full year 2015 volumes.

Net profits are estimated based on average margins from 2011 to 2014 for all segments.

The forecasts show that UOBKH will potentially record a 3-fold increase in net profits for its HK operations on a pro-forma basis with the higher turnover seen in HK.

On a pro-forma basis, UOBKH is trading at 11.0x FY15 P/E (FY14 P/E: 14.9x).

Sum of the Parts Valuation
UOBKH Sum of the Parts Valuation new

A sum of the parts valuation shows that UOB Kay Hian is potentially worth between SGD 2.84 and SGD 3.86 per share assuming similar M&A multiples applied to its Singapore and HK operations.

The bull case valuation of SGD 3.86 per share assumes its HK operations are sold at a similar 5.3x FY15 P/NTA multiple to Quam.

Since it is unlikely that UOBKH will break up its operations, the base case valuation of SGD 2.84 per share is more realistic which assumes UOBKH’s HK operations trades at peer valuation multiples.