Corporate turnarounds seldom turn, especially in markets that tend to overreact and become irrational. But when they do, they are a sight to behold.
Such has been the case with Union Properties, which, not too long ago, was facing a dissolution vote.
With determination, perseverance and skill, it has managed to maneuver towards profitability, through a combination of legal wins, a disciplined cost structure overhaul, and a repositioning of its project profile status towards sustainable growth. Shareholders in the last year have seen its stock rise by over 85 per cent as a consequence (at a time when most analysts were focused on the downside risks and failed to see the shareholder value underway).
This brings to attention a number of variables that investors need to focus on, with the high order bit being the fact that shareholder value is an outcome, not an objective.
In the last decade or so acquisitions (whether share buybacks or buying companies) have become the mantra of management as a driver for growth. This is especially true in the technology sector, and each acquisition announcement has often been met with share price rises, as giddy analysts and media outlets cheer on the ‘activist mode’.
However, for long-term investors, this has been somewhat of a conundrum because many acquisitions have made little sense. Often fueled by debt, and with rising interest rates, this has left a gaping hole in the balance-sheets.
As businesses have become more complex, financial statements of combined entities have become largely incomprehensible. (Curiously, this has often been cited as a strength and not a weakness of the strategy).
With a focus on ROCE (return on capital employed), management in many companies have focused on either the denominator (which is de-equitizing the business through debt), or increasing earnings through cost cutting, or ‘buying earnings’.
Clearly not for the long-term
Neither is sustainable, and after the curtain falls, investors move on to the next ‘new new thing’ (most recently, onto AI), whilst investors left holding the bag of the last fad continue to languish, hoping for some miracle that allows them to recover their money.
In the last decade, there have been many such miracles. Some would call them asset bubbles, but who doesn’t like a bubble when money is being made? It is only the aftermath that becomes nightmarish. But in an era of shorter and shorter duration when investing, tomorrow is a long time, as the Bob Dylan song goes.
The Union Properties’ story was different and involved a restructuring play. A buoyant real estate market certainly fueled the engines, but management’s ability to pursue its legal claims successfully, restructure its cashflows in the face of significant erosion of equity, and launch new projects was nothing short of herculean.
All investors needed to do was to look at the credibility of the new management involved, along with the legacy brand value of the company to recognize that a return to first principles was the philosophy that was at play here.
The burger giant McDonald’s corporation had a successful restructuring brought on by new management a decade ago. Again the philosophy was similar in terms of tapping into its long legacy of brand value to turn around its operations through laser like focus.
Take on more challenges
There is no doubt that challenges remain for Union Properties, not the least of it being a sudden slowdown in the real estate market. But even a casual analysis of its recent financial statements reveal that much has been put into place via buffers that will carry on the growth trajectory.
Analysts have, in recent years, been predominantly focused on short-term results, (aka financial engineering, when they have looked outside of technology that they don’t quite understand). They did not seem to realize that without a business selling something that customers want, no amount of financial wizardry will create lasting value.
This is what Union Properties has done consistently. Even when the company was going through its difficulties, the communities that it had created sold and retained a premium value relative to most of its peers.
This brand value is what created loyalty and has made the turnaround process sustainable. Investors, of course, will have differing viewpoints on where the stock price goes from here after its surge. With the moves that are currently underway, any analysis seems to indicate that the risk/reward potential continues to be skewed towards the upside.
