« We’re looking for new Team mates! | Home | China Hong Xing, ripe for a rebound »
FA: UOB Kay Hian
By JL | August 2, 2007
UOB Kay Hian (U10.SI) is the largest stock broking firm in Singapore (it accounts for at least 10% of all the trades done in SGX) with an outstanding track record and diversified geographical reach (businesses also in HK and Thailand). With the record (and still increasing) trading volumes witnessed since the bull run began last year, it is natural that brokerage firms like UOBKH, Kim Eng and GK Goh etc have been reaping huge profits.
Stock performance YTD has been rather unusual, given its traditionally dormant nature. It opened from $1.32 and jumped spectacularly to $2.87 at one point last month, before the big correction set in the last couple of weeks and dropped it all the way down to $2.34 (as of 2 Aug). Current support level is between $2.26 to $2.34. So, this to me is an excellent time to accumulate to cash in on its potential.
Without lingering on perceptions, let’s move on to the facts that really matter. I managed to pull out the reports for the last 5 quarters detailing income statements that go 9 quarters back, and here’s what I’ve found out:
- UOBKH derives the bulk of its income from stock trading commissions. This has been increasing at a pace of 15% per quarter since last year.
- Their fat dividends are the biggest attraction of all. It’s up to 65% of their annual EPS, and even higher when times were bad earlier this decade.
- PE ratio is at an incredible low of <10.
Q1 results indicate a YOY 64.3% improvement of income. This is not skewed by any exceptional one time gain. Checking back 4 quarters showed a consistent gain of such a magnitude. It’s not hard to imagine why, given the daily market volume has increased from a traditional $2 billion a day in the beginning of the year to slightly less than $2.5 billion from Apr to Jun, and a spectacular $3 billion for July. We even hit $4 billion twice in the month of July, but that will go into Q3 results. Overall, with more and more people trading, the only way to go for UOBKH’s earnings is up. Remember, whether the market is up or down, this company makes money.
There have been many rumours in regard to the EPS for this year, and not surprisingly, none is bad. Given the stability in its business model, and its big reliance on market volume, it’s not hard to predict at all.
FY2005 = $0.1041
Q1 = $0.0195
Q2 = $0.0274
Q3 = $0.0342
Q4 = $0.0230
FY2006 = $0.1893
Q1 = $0.0448
Q2 = $0.0668
Q3 = $0.0305
Q4 = $0.0472
FY2007 = $0.3982 (estimated)
Q1 = $0.0844
Q2 = $0.1046 (estimated)
Q2 results will definitely be better Q1. Based on data released by SGX which makes its money on market activity, we can expect a similar 23.9% increase in revenue and EPS on a quarter on quarter basis. This is conceivable given the daily market volume we have been achieving so far. Meaning, a highly possible EPS of $0.1046 for Q2. While Q2 has been good, July has been even more spectacular. Using the same estimate for Q3 and Q4 (that’s being conservative), we are looking at a full year EPS of $0.3982. Short of the market crashing and turning into a bear, that will be the minimum we should be expecting. And what’s the current forward PE ratio based on this estimate? 5.85. The TTM PE ratio of this stock has always been low, but it has never deviated from 7 to 8 at the end of each quarter. Assuming it’s 8 by year end, the target stock price based on our estimates is $3.18, which is a capital gain premium of 35.9% for 5 months.
On to the next good bit. Dividends. I have never seen any company that’s so generous when it comes to dividends. Throughout the years, the super cash rich brokerage firm has consistently given back shareholders a stupefying 60% to 80% of their earnings. Yes, I kid you not. Just this year, based on FY2006 results, total dividends given out was $0.125, a whopping 66% of their total earnings. If they continue the trend for FY2007, it will be $262 per lot. This translates to a dividend yield of 11.2% at current prices. You don’t need me to tell you how much better this is than bank interest rates.
In conclusion, market outlook remains positive in terms of trading volume and value. There are more and more investors flooding into the market every day. This only means more earnings for UOBKH. And if you’re a shareholder, it means more money for you too.
Recommendation: BUY
Current price: $2.34
Target price: $3.18 by end of the year (estimated)
Dividend yield: 11.2% (estimated)
[ps] Q2 results will be out in a week’s time, around 10 Aug.
Topics: Company Review |
August 3rd, 2007 at 2:09 am
Hi Pehon,
Could I beg to differ on just one point ? All you have written is very informative and accurate, and paints a very positive picture of a good growing company with steady dividends. While I acknowledge the part about good dividends (brokerages are, after all, cash-rich creatures haha); I must be the devil’s advocate when it comes to growth.
Recall that market volumes only started to increase substantially this year (i.e. 2007) and this is because of the bull run and penny stock speculation play. The point is: can trading volume remain this high say 3-5 years into the future ? As most of the revenues and profits come from brokerage commissions, we would expect decent growth to come only through consistently higher market volumes.
Personally, I feel this will be unsustainable in the long run; thus I will not invest in this company. If one wishes to consider this as a dividend play (not a growth play), then I think it’s fine since the dividend yield is so high.
Cheers !
August 3rd, 2007 at 9:14 am
Hi musicwhiz, market volume is more or less proportional to the state of the economy, which determines the rate of growth in companies. As stated in the article, unless we run into a bear market, it’s hard to foresee a slow down in the company’s growth. If we do run into a bear market however, that would indicate a deteriorating economy. In which case, no company would be spared from slowing growth.
Our population is steadily increasing, and so’s SGX’s exposure worldwide. We see more and more overseas funds flowing into our local companies (e.g. Tokyo Stock Exchange’s stake in SGX and possible China QDII funds). Assuming status quo in Singapore’s economic expansion, I do not see any peak in trading activities soon.
Another point I would like to make is regarding penny stocks. Penny stocks generate market volume. But the commission revenue of brokerage firms come from market value. $4 billion was achieved twice in July, once on the back of panic selling of penny counters and once on the shift of focus to big caps. They were generated from 9 billion and 4 billion shares respectively, which proves the impact of penny stocks on total value is not significant. Unless people stop investing altogether, market value will not subside. Anyway, do you see people staying away from penny stocks after the recent correction? The sad answer is no.
Oh yes, let me add one last thing. This estimations for this stock claim the following. Buy and hold it: (1) until Christmas for it to reach $3 or (2) for 9 months to realise both the target price and the dividend yield. For a one year investment, I consider this return as rather outstanding. Realistically, 12 months’ worth is about as far as I would project into the future with confidence. Once you pass that, everything gets too hazy too quickly. 3-5 years is too much, IMHO.
August 3rd, 2007 at 9:12 pm
think this is a good stock ..
but not enough $ to buy ..too exp for me now .. sad sad..
August 4th, 2007 at 1:42 am
Hi JL,
Thanks for taking the time to explain. I agree with you on your point about frenetic trading continuing for at least another 12 months. I guess our investment horizons are radically different as I always think 3-5 years or even more. No worries it’s just a different perspective.
I won’t really comment on the 12-month forecast either because things are pretty uncertain these days as well. One large tremor in the economies of either USA or China would scare people off equities for quite some time (maybe 3-6 months or more ?) and this would also affect market volume and value.
Bottom line is I don’t want to risk investing in UOBKH as I don’t see much clarity for even 12 months ahead.
Cheers, thanks for the sharing.
August 4th, 2007 at 12:58 pm
hey musicwhiz. yeah this blog entry with alot of accurate information is not by me, but by JL. all credits to him =)
August 12th, 2007 at 11:43 pm
hey.. any idea when UOBKH results are coming out?
August 13th, 2007 at 6:12 pm
It’s just been released.
It’s not good.
It’s GREAT!
I’ve completed the follow up for it. Now waiting for PeHon to review and publish it.