Novaland — VietEcon

Continuing my survey of recent stock market news, today I want to talk about Novaland (NVL). A few things:

Share purchases: The reason I was interested was because the Chairman of Novaland announced he would buy 10m shares, which is a good amount. It equates to VND530tr (USD23m) at current prices, or about 1% of the market cap. He will own 20.8% at the end of this. Usually the company buys back shares to juice the price, but this is kind of second best, I guess? Maybe?

Fewer handovers: We have talked before about the difficulties real estate companies are undergoing because of the corruption cases that have ensnared land deals. Lots of local governments have been slow-rolling approvals, in fear of coming under scrutiny, resulting in delays for companies. For Novaland, it handed over fewer units in 2019 than 2018 because of these legal delays. As long as the handovers eventually happen, this is only a small hiccup and shouldn’t matter that much

Legal delays result in emergency request: But these delays are getting really long and are really hurting companies. NVL sent an emergency request to get its Binh Khanh Residential Area Project approved. NVL has invested VND6tr ($261m) in the project so far, and it is kind of stuck. That hurts margins (there are costs to keep the project going) and hurts returns (because they are over a longer period).

Because of the delays, revenue in 2019 was down 29% to VND10.9tr, with 3,468 units handed over. That’s an average price of VND3.2bn ($137,042) per unit. Gross profit was VND3.15tr, for a margin of 29%. I am kind of surprised that this isn’t higher. It was 34% in 2018.

Underlying operating results were significantly worse in 2019. While net profit was similar to 2019 at VND3.3tr, revenues were higher at VND15tr, and gross profit was VND5.2tr for a 34% gross margin. Operating profit in 2018 was more than double at VND4.4tr.

But the company continues to invest. Total assets rose 30% to VND90tr. Equity grew to VND24.5tr from VND20.0tr. The current book value implies a P/B of 2.1x. I suspect that a lot of their land/units are at cost, which may mean that they don’t reflect the true value. If we wrote them up, then equity would increase, and P/B would fall. Having said that, 2.1x is high, even for a real estate developer, as we talked with Vinhome.

Borrowings reached VND34.6tr, but net debt was VND28.1tr or 1.1x D/E. Again, quite high, but if Equity was written up, then it wouldn’t look as bad.

Income was VND3.4bn, helped by some bargain gains on purchases that amounted to VND3.7bn. So basically, the company lost money, if these gains weren’t counted.

Bargain gains potentially show good acquisition skills: These bargain gains happened because the company made a number of acquisitions for prices that were below the fair value of the assets. The difference is recorded as an immediate gain, but it doesn’t really speak to strong operations. It does, however, mean that the company is very good at acquiring. Of the 9 acquisitions detailed in their 2019 financial statements, 6 cost less than fair value for a total bargain gain of VND3.7bn. For the three that were done above fair value, goodwill amounted to VND1.3bn.

To break it down a bit more, the company had net cash outflows of VND13.9tr for these 9 acquisitions. For this money, it bought assets (mostly inventory) worth VND16.2bn. Inventory is held at the lower of cost or net realizable value. Because the inventory is going to be sold for more than cost, at the acquisition, the company can mark it up to the net realizable value. But that only happens at acquisitions. The rest of NVL’s inventory is marked at cost, and that’s why I said that the equity value of NVL is probably too low.

The weird thing is that the seller also knows that their projects are worth more than cost, so it was surprising that NVL was able to buy them for less than fair value. I don’t have any great insight into how it happened. Maybe the companies needed cash, or they thought that NVL could get more out of the assets, and so sold them higher than they would be able to sell them. I would want to see more on these transactions to really count them as great wins for NVL. Real estate, as a sector, has a history of complex transactions between closely-linked entities that look too good to be true.

Source: Vietstock.com.vn, chart by Vietecon.com

Despite the strong acquisitions, the stock hasn’t performed. I am going to say something kinda stupid here, but the stock chart basically seems to be incorporating these weak results pretty fairly. Basically, it’s been trending down, which makes sense as delays result in lower profits for the company.

The stock is trading at 15x P/E, and we talked about the high-ish P/B of 2.1, so it doesn’t look like a true value stock right now. And the 2019 profit figure was goosed by the bargain gain, so a true P/E is probably worse. But it will probably bounce back this year, if the company is able to handover lots of units.

Finally, going back to the share purchases, they may help the stock, although the announcement didn’t do much, so I wouldn’t get too excited…