This post first appeared on substack.
This is a short commentary about UOI and not a full review for the stock to be in the portfolio. Interested readers, please click the following newslink for context.
https://sg.news.yahoo.com/minority-investor-says-uoi-over-014825695.html
Activism is coming into Asia. It has already taken Japan by storm. It may take years, or even decades but it is a matter of when, not if. Why? Because tonnes of Asian stocks trade below book. In Singapore, >50% of our listed stocks trade below book. We are worse than Japan (which only has 40%).
We have listed stocks trading at 0.03x price to book. More than one. There is Sapphire Corp, China ShenShan Orchard and Fuxing China Group. All trading at 0.03x. (See screenshot below).
Take the case of Fuxing China Group trading at $3.15m (not enough to buy a 3-bedroom condo in Singapore) which is at 0.03x book value. What it means is that you can buy the company for $3.15m today (technically, you may need to pay a takeover premium but let’s keep is simple), but the net assets on its balance sheet is worth c.$100m. Isn’t that the bargain of the century?
Alas no. I dug into its financials. $50m of that is account receivables, which is money not paid to Fuxing yet. The other $50m is supposedly depreciated property, plant and equipment: its factories and facilities. Apparently, Fuxing make zippers in China. Someone needs to fly down and check those assets. They may not be there. So, yup, even though its 3c to the dollar, nobody is buying.
But there are real unpolished gems around. Usually companies that are, for one reason or another, trading very cheaply for some time already. That is when activists come in to try to unlock value. Today’s story is about the curious case of United Overseas Insurance (UOI) with an individual activist.
First, let's look at UOI's financial numbers:
Simple Financials (Dec 25 estimate, SGD)
• Sales: 100m, Net income: 30m
• Operating Income: 35m, Investment Income: 17m
• Debt: -100m (Net cash), Mkt Cap: 477m
• Investments: c.414m of which 47m in Haw Par shares
Financial Ratios
• ROE: 6.5%, ROIC: 2.6%
• PBR: 1.0x (Dec 25)
• PER: 15.9x (Dec 25)
• Dividend: 23 cents per share, Yield: 2.9%
UOI used to trade below book but has since rallied because the said individual activist called management out via the media. The market got interested and bought the shares up. However, without more firepower, it might be difficult to create genuine change.
That’s the difficulty and complexity about activism. Many things need to fall in place. E.g. Low allegiant shareholder ratio. Latent value that needs to be unlocked. Potential angle to catalyse some transformation and importantly, the core business should be sound and valuations should make sense.
Here’s the usual Fundamentals, Technicals and Valuation framework.
1. Fundamentals
UOI operates a simple business of selling insurance via Singapore’s second largest banking group - United Overseas Bank (UOB) Group. It is a unique bancassurance business which has enjoyed steady growth alongside Singapore’s economy (or perhaps more relevantly Singapore’s property market). By leveraging on the UOB Group’s infrastructure, UOI has also been able to keep underwriting cost low (no agents and lower IT cost), thereby generating steady underwriting profits.
Actually, both underwriting and investment profits had done well. From what I can tell, UOI had positive investment income for the past few years. Please see slides below:
It is not clear if other income is investment income. The assumption is yes. The slide above shows it has been positive from 2018-2022 and the next slide shows 2023-24 did well too.
Investment profits had grown last year as a function of the stock market. UOI uses its own inhouse asset management team and Schroders and both adopt conservative investment strategies and have, by and large, made returns. In short, it’s a decent business.
Let's discuss the elephant in the room.
Activism in Singapore: What's really the crux of the issue here is that an individual activist has called out poor management under UOB’s leadership. He believes that UOI is over-capitalized (>400% capital adequacy ratio) and should sell stuff to return capital to investors and he proposed the following two resolutions:
Resolution 1: To distribute UOI’s 4,274,600 ordinary shares in Haw Par Corporation directly to UOI shareholders.
Resolution 2: To appoint a financial advisor to evaluate strategic options for maximising shareholder value.
As we can expect, UOI threw them out, citing no legal requirement to put these to the vote. What transpired was a tense shareholder meeting which we all get to learn more a little bit more about UOI’s business.
Due to to the lack of disclosure, it is hard to analyze UOI. What we know is that it runs a profitable general insurance business (after selling the life insurance to Prudential) and pays 2+% dividend yield. It used to be cheaper, but thanks to the spotlight being shone on it now, share price has rallied. The investment thesis should still be intact though.
Investment Thesis
UOI enjoys an interesting niche general insurance business (Residential mortgage, property, personal accident) in Singapore with its lower-than-industry cost base by leveraging on UOB’s group infrastructure. It enjoys marginal growth alongside the strength of Singapore’s property market. Recent shareholder activism while un-successful would keep management on their toes to continue to increase its dividend payout (currently 47% payout ratio).
Risks
Conversely, the risk is that management decides to do the opposite, since the activist would never gather enough shares to mount any serious challenge to the UOB group (which owns c.60% of UOI). It is a given that UOI will not sell Haw Par shares nor change anything that the activist demanded (even though he may be right, and especially if he is right, that’s how politics work right?). The only hope is that dividend can be raised because the UOB group will also benefit.
Should that not happen, share price will then trade at where it is now and we can only eat the 2+% dividend or worse, the bigger risk is that share price corrects back to a lower level (c.$6.50 from current $7.70). That’s 18% downside!
The rest of it is on substack.
This post does not constitute investment advice and should not be deemed to be an offer to buy or sell or a solicitation of an offer to buy or sell any securities or other financial instruments.
