Strategy
Events Trades
Australia

Sunland Group Ltd (SDG:ASX)

4 Nov 2020
By
Sunland Group Limited is a property development and construction company. The Company's development sites includes residential housing, apartments and hotels. The Company is also involved in hotel investments and operations.

Current advice: Sell at around $2.15, no lower than $2.10 / Buy at up to $1.92

Recommendation update – 4 November 2020, 09:15am

After a week of patience, members were rewarded yesterday as SDG traded through our sell price of $2.10. This closes a profitable trade in roughly two weeks of 9.4% which is a great short-term return considering our original expectation of holding the stock for up to three years.

To some degree, it was a questionable decision to sell the stock at this price and we want to make it clear that if we achieved that return 6-12 months down the track we wouldn’t consider selling. Every investment is weighed on its risk/return and the annualised return dropped markedly after the stock rallied so quickly. Having said that, the story supporting the investment remains compelling so the hope is that we will get another bite of the cherry in the future. For that reason, we will keep SDG in our open trade table and will continue to discuss it in our fortnightly Event Strategy videos.

To view the rest of our current Event Trades, please click here.

Recommendation update – 26 October 2020, 11:15am

We only got into SDG last week at around $1.92, but on Friday some significant buying came into the screens and the stock was up over 10% on the day. There were no announcements made by the company, so my best guess is that some research house or broker put a buy on the stock.

The intention when buying this stock was to hold it for up to three years and enjoy the value uplift that would be seen as the company wound up its operations and returned capital to shareholders and, at the entry price and when including the value of the significant franking credits, we felt there was substantial upside in buying at $1.92. At today’s price of $2.15, the equation for the investment over the next three years has already changed markedly. Assuming no change to the company’s estimated net tangible assets, there is only roughly 19% capital upside over the next three years. The franking credits do offer significant value but not all shareholders can take maximum advantage of that value.

Additionally, there is risk as the company liquidates its portfolio that the net tangible assets could end up lower than estimates and, in that event, it is very possible that the company holds off on disposing assets and the windup that we bought in for does not eventuate. It should not be forgotten that this board’s view of the value of its assets was ignored for many years so some scepticism is a healthy approach when considering one’s investments.

Despite only buying into the stock last week we can’t ignore the excellent profit we sit on so shortly after and feel that the stock may have gotten ahead of itself in the short term. Liquidity of the stock could mean that exiting will be difficult, but we would prefer to try and fail then hold at a price we’re uncomfortable with. We are therefore recommending members sell the stock at around $2.15, or no lower than $2.10, to lock in a surprising profit in just less than one week. For those members excited by the franking credits, you are more than welcome to continue holding the stock over the long term and our hope is that all members will be able to get back into the stock at a more appropriate risk-adjusted price.

Original Recommendation – 20 October 2020, 11:15am

SDG is a Queensland-based property developer which has a long track record of reliable income and growth in its net tangible asset backing (NTA). Despite this, the stock has historically traded at a significant discount to its NTA and, as of today, it appears the board has found no alternative avenues to close that discount other than effectively winding up the company. Unfortunately for us, the stock is so illiquid that getting set will be difficult, but we’d prefer to discuss the investment opportunity and we can hopefully buy the stock with patience. Given the dynamics of the investment, the best risk/reward would be for those investors able to take advantage of franking credits as there is a significant franking credit balance that SDG will pay out.

SDG closed yesterday at $1.33 versus an NTA at 30 September (based on internal estimates) of $2.56. Additionally, SDG is sitting on franking credits worth roughly $0.59 as of 30 June. SDG plans on selling its assets over the next three years and through a combination of capital returns and special dividends, return the entire value of the company. In doing so, it will no longer replace inventory with new projects and will also therefore eventually make staff redundant which may have an impact on NTA, but to a large degree, employee entitlements would have been expensed in the normal course of business.

SDG currently has roughly 70% of its inventory value under development and the goal is to complete these projects before selling them, so realistically (and perhaps unlike our recent investment in OneMarket) the majority of our capital will be returned over time (assuming we invest). It should be noted as well that most of SDG’s recent asset sales have been above book value so there is reason to be optimistic about the board’s estimate of NTA despite the impact the COVID pandemic may have had on asset values.

Considering the risks involved, I would suggest a return in excess of 10% per annum is required to consider investing. With 30% of the portfolio possibly up for sale in the near-term, we could get a decent chunk of our capital back quickly but for the sake of the argument let’s assume 1/3 of NTA is paid back per annum. Let’s also assume that the NTA exceeds reality by 10% in the event that the environment is worse than internal expectations – it should be noted that this could go either way technically but best to plan for the worst-case – which would mean proceeds of $2.30 over the next three years. Add to that $0.59 in franking credits and there is total potential proceeds of 52% over the next three years at the current price of $1.90 which far exceeds our return target, with upside to 66% if NTA estimates are accurate.

The investment would require your capital to be locked up for up to three years but given the potential upside we feel this is worthwhile. We therefore recommend members (particularly those able to take full advantage of franking credits) buy SDG at up to $1.92 for a long-term, medium risk investment.

 

 

SHOW COMMENTS / QUESTIONS (6)

6
Comments

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Anthony D.

Well done on the excellent call on buying SDG at around 1.92! I note they climbed from around that level to close at 2.15 on Friday. What would have caused that sudden rise? I am thinking either a fundamental re-rating of the stock by the market, or an inking of a takeover bid, with the latter being perhaps the more likely. Would there be any point in buying at this elevated level, or alternatively perhaps take profits on what was bought at your recommended levels?

Shannon Rivkin

Hi Anthony,
I put out an update on SDG this morning discussing it as a sell at these elevated levels. I think the moves probably came from a buy recommendation from a broker/research house. There is very little chance of a takeover as the one family (the Abedians) account for an effective controlling stake. And with so much of this investment in the value of the franking credits, I think a $0.28 reduction in the capital upside after a week is worth taking advantage of.
Regards,
Shannon Rivkin

Luke W.

Hi Shannon,
My sell order seems to have missed the highs discussed ($2.15, no lower than $2.10). With a current price of $2.05, what do your numbers suggest? Is it better to take the $2.05, or hold out for the original intent of the recommendation? Thank you.
Cheers,
Luke Wallyn

Shannon Rivkin

Hi Luke,
I think wait to see if we can get $2.10. My comfort in holding at higher prices will ease over time to take into account the expected annualised return, so if we don’t get $2.10 now we will probably be happy to hold at that price if it takes some time to get there. So, keep the sell in there at the moment and we’ll see how we go. It’s only 1c away from there this morning!
Regards,
Shannon

Luke W.

Hi Shannon,
Yep, got my sell confirmation this morning. Thanks.
Cheers,
Luke

Shannon Rivkin

Great – it worked out well. Hopefully, we get a chance to buy back in.
Regards,
Shannon

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