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Saturday, September 10, 2011

Two big questions for BRDB

A file photo shows BDRB’s Bangsar Shopping Centre.

Two big questions are yet to be answered in Bandar Raya Development Bhd's (BRDB) recently announced related-party transaction. At what price the key assets will be sold to Ambang Sehati Sdn Bhd and what management plans to do with the cash proceeds from the proposed disposal.

A few days ago, it was announced that BRDB's major shareholder, Ambang Sehati, had proposed to acquire selected investment assets to “enable the group to monetise these assets and achieve a more efficient utilisation of its capital”.

Ambang Sehati is the private vehicle of BRDB chairman Datuk Mohamed Moiz Jabir Mohamed Ali Moiz, who owns 18.8% of BRDB. The assets essentially include the Bangsar Shopping Centre, Menara BRDB, CapSquare Retail Centre and Permas Jusco Mall.

BRDB said the purchase consideration would be based on fair value that would be determined by independent valuers. BRDB has up to Sept 19 to revert with its decision. This acquisition will be paid fully by cash.

According to BRDB's 2010 annual report, the carrying value for Bangsar Shopping Centre and Menara BRDB is RM660mil while Cap-Square Retail Centre and Permas Jusco Mall are valued at RM214mil and RM68mil, respectively.

The jewel of the assets would be Bangsar Shopping Centre, which is located in the prime Bangsar area and has a net lettable area of 330,000 sq ft.

Bangsar Shopping Centre is currently almost fully occupied with average rental rates of about RM10 per sq ft. On the other hand, activity in CapSquare has much room for improvement and is relatively quiet after office hours.

“Only the food and beverage (F&B) area is doing okay. The mall isn't exactly bustling with activity. Selling it off may be a good idea,” says a property analyst.

He says that based on estimates, the four properties would fetch a value of about RM960mil, with Bangsar Shopping Centre accounting for 64% of that, valuing it at RM594mil (or RM1,800 per sq ft).

Currently, the group has a net gearing of about 0.4 times with total borrowings in the region of RM780mil. The bulk of the debt is tied to its CapSquare development.

The group could have excess cash of RM120mil to RM150mil, or 25 sen to 30 sen per share, after paying off its outstanding debt, says the analyst.

He does not think rewarding shareholders with bumper dividends are right at this point.

“Apart from reducing its gearing, we think the group would be better off deploying the cash for its property development, either for landbanking or to fund its future development.

“BRDB is not as aggressive as other developers in developing its properties and land bank. Without Bangsar Shopping Centre, earnings may not be as stable,” he adds.

An industry observer says BRDB may be doing the right thing by disposing of Bangsar Shopping Centre and the other retail outlets.

“Are the returns from these outlets actually attractive? Earnings-wise, it is only delivering some 20% to operating profits. This is low when compared to the amount of capital expenditure and debt the company is taking up.

“Also, when I walk into Bangsar Shopping Centre, it is the F&B segment which is doing well. If Bangsar Shopping Centre continues to charge rentals at a premium, how will the normal retail tenants be able to survive?” asks the observer.

In 2008, BRDB was reported to have invested RM250mil to upgrade Bangsar Shopping Centre. The renovation was completed in 2009.

Another property analyst says much depends on what BRDB does with the cashpile it receives from the sale of the properties.

“Bangsar Shopping Centre now provides stable earnings. Selling it off will only yield a one-time dividend. However, what happens after that? Management needs to use the cash proceeds wisely,” he says.

Meanwhile, an AmResearch analyst says that BRDB's latest project, Verdana North Kiara condominum, has been well received, with take-up rates averaging 70%-80% for the first phase.

There are two blocks with 250 units on offer at an average selling price of RM600 per sq ft. The price represents an 8% discount to the ongoing rate at its neighbouring Mont Kiara of about RM650 per sq ft. Verdana has a gross development value (GDV) of some RM600mil.

BRDB has another condo development in Bangsar with a GDV of some RM900mil which will likely be launched next year.

“Timing-wise, BRDB has been a little slow. It should have launched its products earlier this year when demand was extremely hot,” says the property analyst.

At present, BRDB has a joint venture with Multi-Purpose Holdings Bhd (MPHB). It is centred on developing 268ha in Mimaland (Gombak), Rawang and Penang with an estimated GDV of RM4.25bil after 2012.

Last November, BRDB signed supplemental agreements with UEM Land Bhd, the master developer of Nusajaya, to buy a 60% stake in a special-purpose vehicle used for the development of Residential North in Puteri Harbour.

The project, on a 111-acre freehold parcel, is expected to be completed in six phases over seven years. The expected GDV is RM2.3bil.

For its quarter ended June 30, BRDB's revenue stood at RM198.9mil, of which RM152.05mil came from property development while RM28.25mil was generated from property investment.

Operating profit derived from the two divisions was RM31.02mil and RM10.62mil, respectively.

For its financial year ended Dec 31, 2010, revenue dropped 31% to RM626.21mil as the group came to the completion on a number of different projects.

Net profit, however, improved 8.7% to RM125.6mil as its property and wood-based divisions were mitigated by higher rental income and fair value gains from investment properties.

By The Star

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