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QuestionsCategory: Valuation QuadrantProperty Developer Valuation Challenge
Ray Titus asked 2 years ago

Hi Team,
Apart from PS and PB, is there any other recommended valuation for property developer? As I understand these companies are cyclical in nature, DCF and PCFO does not seem to be able to address this.
Moreover I’m also facing challenge with PE as well. While using the median PE multiply trailing 4 quarters of EPS and due to their Net Debt per share, the intrinsic value is -0.25 .
Would love your input on this. Thank you!

2 Answers
Jieren Zheng answered 2 years ago

Just sharing my thoughts, if you are using a earnings/cashflow metric on a lumpy income/cyclical company, you might want to take an average or normalise the earnings. Might help to smoothen it for comparison.

Ray Titus replied 2 years ago

Hi Jieren,

Thanks for the response. I don’t really get how do you mean. Could you assist to elaborate further please?

Jieren Zheng replied 1 year ago

Maybe this article from investopedia might help:

Something like:
Divide total earnings by the number of years of the business cycle to calculate your normalized earnings. Continuing the example, divide $430,000 by 5 to get $86,000 in normalized earnings. This means that your business generates an average of $86,000 in a typical year of business.

Victor Chng replied 1 year ago

Thanks JR

Jieren Zheng replied 1 year ago


Ray Titus replied 1 year ago

Hi Jieren, thanks again for the assist.

Victor Chng answered 1 year ago

Hi Ray,

PB is the best valuation method on Property Developer business model. On the other hand, you need to really understand the projects that the property developer are doing for instance the condo or apartment that they are building. Fact like, how many units are sold, how much they are expected to earn and when are their completion date.

The ideal scenario is to purchase the property developer before they complete the project and the company still at low PB ratio. After the project completed, they will start to record their revenue, earning start to flow in and PB ratio will start to increase. It is not advisable to hold property developer for long term, best is to sell when they complete the project as their revenue and earnings can be lumpy.

Ray Titus replied 1 year ago

Hi Victor, thanks for the guidance.

Will relook and evaluate the feasibility of this company further. Has been holding this company for quite number of years without price appreciation until came upon your training module.

Need to really consider if it’s worth cutting the loss as it’s much lower in terms of valuation compared to when initially invested in.

Victor Chng replied 1 year ago

Welcome :)