My Holdings - Telstra

Greg Fraser, analyst, Fat Prophets
Perversely, the government's ultimatum to Telstra to physically untangle its network from its retail business provides a smidgin of certainty. Shareholders now know they will own two companies after Telstra complies with the minister's decree.

The first will be a network company. It will have about nine million residential and business customers, plus a clutch of wholesale customers who pay to access Telstra's network to connect their own customers. The regulator -- the Australian Competition and Consumer Commission -- will have very strong powers to set and control the price of access to this network.

It will effectively operate along the lines of a utility and will therefore generate steady earnings, but with minimal growth.

The second will be a retail company. It will still own some networks, such as the Next G mobile network and the Next IP network that Telstra spent several billion dollars constructing over the past few years. These networks are the platform for delivering you-beaut services such as wireless broadband internet, 3G mobile and fixed line broadband connections via the HFC cable network or ADSL2+. In addition, this company will own Sensis and a 50percent stake in Foxtel.

This scenario assumes Telstra submits a plan the ACCC finds acceptable, thereby allowing Telstra to keep its Foxtel and HFC cable assets.

On separation, the market should be able to transparently value each business. It may be that the parts are worth more than the whole, even after allowing for the cost of the exercise.

It is possible most of the bad news is already reflected in the share price. If so, shareholders have little more to lose and much to gain by hanging in there. After 10 years of transforming the business, Telstra's cash flow is healthy and able to sustain the current dividend or even increase it, though that is for the board to determine in light of the new information.

Quantitative Analysis
Telstra is a financially sound company with a very strong free cashflow generation. Although it has a debt/equity ratio of around 140%, it is able to pay down all the debt using just 4.5 yrs of free cashflow. It has predictable earning power and its ROE, ROA and even ROC is very acceptable at 29%, 9% and 13.5% respectively.

At current price, Telstra is valued roughly around 10x P/E with a dividend yield of 8.5%. My own estimate of a fair value for Telstra using Free Cashflow is around $3.30.

Qualitative Analysis
Telstra is a triple play company similar to singapore telcos which are operating in a protected regulatory environment. While I was staying in Australia, Telstra was and still regarded as the defacto company for your residential line as well as for Cable TV. If you do not subscribe to their internet service and subscribe to a 3rd party internet provider instead, the 3rd party provider still need to pay for usage of Telstra DSLAM network. On the mobile front, it still has a good market share against Optus and Three.

Current speculation about the proposed breakup, like what the Fat Prophet analyst above who is a value investor, has probably been priced into the stock and upside potential could be great if the broken up entities are listed and valued at a premium.

Vested at $3.24

My holdings - GuocoGroup

One of my holdings is HK listed GuocoGroup. While many singaporeans would be familiar with the Singapore listed GuocoLeisure and GuocoLand, GuocoGroup is the one you want to be holding. Here's why I think GuocoGroup is a good buy.


Company Summary
Guoco Group Limited ("Guoco") (Stock Code: 53), listed on The Stock Exchange of Hong Kong Limited, is an investment holding and investment management company with the vision of achieving long term sustainable returns for its shareholders and creating prime capital value.

The Group is engaged in the property development and investment; stock broking and commodities trading; insurance and fund management services; and treasury and investment managemnet.

In response to this worsening market environment, the group has trimmed down substantially the level of investment activities and the size of the investment allocation thereby reducing market exposure. The approach is to focus on a list of strategic stocks that the group believes offer reasonable valuation with good long-term underlying businesses and potential. It will look to acquiring significant positions in selected companies, strategic investments that present synergistic business opportunities to the Group. The company had undertaken a corporate streamlining initiative to consolidate the Group's interests in GL. A detailed plan of space utilisation, development opportunities and alternative use is being studied by management with a view to unravelling and enhancing the significant capital value of the hotel properties in London bearing in mind the potential boom in the hotel industry as London prepares to host the next Olympic Games 2012.

Core Assets/InvDao Heng Securities (100%); GLL (65%); Principal Investment(100%); GuocoLeisure Limited(54.1%); Hong Leong Financial Group Berhad(25.4%).

Quantitative Analysis
Share price at hkd$75.50 is around its net current asset value (Total current asset minus all currnet liabilities) of $78.218HKD. In other words, they can pay off any debt they have if they want to today.

GuocoGroup owns 65% GuocoLand (mkt cap – sgd$1700mil) and 54.3% GuocoLeisure (mkt cap - sgd$533.5mil). At current market value, GuocoGroup owns sgd$1394.69mil which is a per share value of hkd$21.20(sgd$4.238).

Just adding the net current asset value and the current market value of guocoland and guocoleisure subsidiaries, GuocoGroup has a net book value of hkd$99.41. Since GuocoGroup chairman controls 74.79%. of GuocoGroup, we have to give a discount of at least 10% for the illiquidity as bid/ask spread will be wide. So, we arrived at the final net book value of around hkd$90.

By buying at hkd$75.50, you are essentially paying for GuocoGroup net current asset value and getting GuocoLeisure and GuocoLand for free, not to mentioned other assets under GuocoGroup (example, their stake in Bank of East Asia) I've not accounted for. Further to that, it also have a manageable 5yr average annual payout ratio of 37.82% which gives you a yield of around 5%.

Even with the simple valuation measure of book value or p/e ratio, it is also undervalued.

This is a buy based on what I've pickup from Security Analysis by Graham & Dodd.

Qualitative Analysis
I am not much of a believer in scrutinizing every minute details of how a business works as I know I will not have more detail than the cursory glance off glossy financial reports while management will have in-depth access to the "on-the-ground" details as well as expertise to make strategic and operational decisions.

Thus, I adopt a more macro view of the business with relation to the business cycle and whether I feel good about the management. For GuocoGroup, the Quek family have shown themselves adept in business management and have been consistently creating value for the shareholders as can be seen from the increasing book value without resorting to any form of increased leverage or equity fundraising. Further, a family owned conglomerate is a good buy for me as the management interest is often aligned with the shareholders and excessive compensation will not be so prevalent as management are more interested in raising the book value of the company and they are unlikely to walk away from the company like a hired-CEO can.

Vested 5,000 shares at avg cost of hkd$66.04