A close look at VRE
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Source: Vietstock.com.vn, chart by Vietecon.com
VRE reported a few days ago, and I wanted to take a second and look at the company. It is in my old sector (I covered real estate for years, so I feel like I have a sense of how the companies should look), and the stock has had weird moves.
Over the past two years, it fell a lot: -39%. Although over the past year, it was up a little: +6%. Basically it has been around VND32,000 with moves around that for the past year. It’s just not been an exciting stock despite the excitement around Vietnam’s retail sector.
Source: VRE, chart by Vietecon.com.
But as a company, it’s pretty exciting. Just in 2019, revenues from leasing grew 27% with a CAGR of 29% since 2014. It’s been amazing. Just in the past two years, leasing revenues have grown 57%. Leasing net operating income (NOI - which is basically operational earnings from leasing, not counting depreciation) has been growing. NOI margin was 70.6% in 2019, up from 68% in 2014. And it’s been a pretty steady trend up.
The balance sheet isn’t too bad either with net debt-to-equity of 4.9% as of YE2019 (the company had net cash at YE2018, which is generally negative for a real estate company - some leverage can help goose equity returns).
Equity fell and net cash turned into net debt in 2019 because of two things: 1) a VND2.45tr dividend, and 2) a buyback of 56.5m, or VND1.95bn. So in total, the company returned VND4.4tr to shareholders, which is about a 6% yield in total.
Even this aggressive returning of cash to shareholders didn’t help the stock, and I think there are is one main reason for that: it looks so expensive at first blush! P/E is 25x (trailing), and P/B is 2.6x.
For P/B, as we have talked about before, it looks expensive because all assets are marked at cost. That’s not really fair, because things like malls are probably worth more, and that should be reflected.
I ran a quick scenario analysis to look at the potential book value of the company if all we did was update the valuation of investment properties.
A few assumptions:
Source: Vietecon.com
All other assets are unchanged on the balance sheet. This is probably pretty conservative. Liabilities are probably not going to be worth more than what they are listed at. And it is conservative with other fixed assets, which may be worth more now. Receivables are a big question - because hopefully the company is using a reasonable net figure.
We assume that the caprate is somewhere between 7% (low, resulting in a high value) and 11% (high, resulting in a low value). The formula for caprate is NOI/asset value. So to find the asset value, you take NOI/caprate.
These assumptions result in a price-to-revalued book (or let’s call it P/NAV) of between 1.0x to 1.6x, well below the 2.6x reported value.
Unfortunately, it isn’t that cheap. Should VRE be trading above its Net Asset Value (NAV)? Unless we used a caprate below 7%, the company would be trading above its NAV (which is what 1.02x P/B implies). And that’s a pretty aggressive caprate for a company in Vietnam.
Of course, this is all backwards looking. Let’s make some quick assumptions:
NOI grows by another 20% to VND6tr in 2020..
Investment property costs grow by just VND2tr to VND30tr.
The caprate range stays at 7-11%.
Our new assumptions get us to a forward P/NAV of 0.69x to 0.98x. That doesn’t really take into account any of the sales properties they are doing (things like land and inventories should be written up as well). And the 20% growth in NOI is pretty conservative, given the company opened 10 malls in 2H2019, or 15% additional malls. There are new malls coming in 2020 too, and leases are likely to increase.
Of course, there are some headwinds around VinPro stores closing (2.4% of VRE revenue). The company says this will actually result in higher prices, but we will have to see. Plus, coronavirus may hurt retail, if people stop going to malls.
But ultimately, the stock seems fairly cheap right now, at least on a forward P/NAV basis. It might be hard to buy at this exact moment, but it is is definitely something to watch. It dropped below VND29,000 a few days ago, and that just is crazy cheap. At that price, it would be trading below forward NAV using just a 9% caprate.
I would probably feel pretty comfortable about buying the stock and waiting for it to grow over time, plus there is a very good chance that dividends will help support returns over time, especially as the company gets bigger and has less need for new properties.