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Monday, January 14, 2008

Locked-in profits

At this time of uncertainly in the global economy, a number of developers have locked in en bloc sales of sizeable properties that will be constructed over the next one or two years. They offer good visibility of revenue and earnings for some time.

There was renewed interest from investors in property stocks last week, enthusiasm not seen since a sell-off of these stocks in the region when the subprime loan crisis erupted in the US in October last year.

One of the factors for this re-discovered interest is the trend of en bloc sales of commercial and condominium properties projects to institutional investors.

These en bloc sales enable the developers to instantly sell 100% of the units in these properties.

The impact of these transactions on the revenue and earnings of these developers is significant over the next two years, as the sums involved are large.

Furthermore, pre-tax profit margins from these sales are lucrative, typically about 30%, as they comprise high-end properties being developed.

Mah Sing Group Bhd's sale of The Icon@Mont Kiara and the East Wing of The Icon@Tun Razak late last year, for instance, produced revenue to be booked of about RM540mil. This is equivalent to the revenue of half of a RM1bil township that generally takes at least a few years to develop.

Other developers that have made en bloc sales include Glomac Bhd which, through a 51% owned subsidiary, sold its Glomac Tower for RM576.9mil late last year.

This year opened with two exciting en bloc sales. Bandar Raya Developments Bhd announced last week that a 70%-owned subsidiary would sell Office Tower Two of its Capital Square complex in Kuala Lumpur for RM439.3mil cash that would be received progressively.

This is an encouraging turn of events as the sale price will enable the group to resume construction of Office Tower Two, which was suspended since 1997, some 10 years ago. In addition, the cash will also enable the group to develop the rest of the Capital Square complex.

Interestingly, the buyer is a German real estate investment management company, which shows it's not just Middle Eastern investors that are keen on high-end properties in this country.

Just a day after Bandar Raya's announcement, Sunway City Bhd said Block B of its Palazzio condominium was sold to a company called Radiant Splendour Sdn Bhd, which is reportedly linked to Middle Eastern investors.

En bloc sales represent unbilled sales which will progressively be recognised as revenue.

With such sales, there are now several developers with unbilled sales totalling over RM1bil.

Anchoring sales

In other industries, there are also business models to lock in revenue, especially when business is booming.

In the oil and gas (O&G) industry, revenue from vessel chartering is viewed as secure in the sense that vessels are chartered out over a period of a year or more.

For this reason, price/earnings ratios (PE) of vessel chartering companies are around 15 times their current year earnings.

In contrast, the revenue of vessel builders is considered less consistent because it is dependent on orders received and vessels delivered. Hence, a builder like Coastal Contracts Bhd is valued at a lower PE of about 10 times.

However, Coastal has an order book of RM787mil, which will keep its shipyard busy till 2010. Hence its revenue over the next few years is as secured as those of the vessel charterers. In terms of size, Coastal is steadily expanding, and building larger vessels. An order from a Singaporean group late last year, for instance, was for four offshore support vessels for a total of RM365mil, or about RM90mil each. These vessels, to be delivered in 2009 and 2010, will be the biggest that Coastal has ever built.

For comparison, Coastal's revenue was RM72mil in its third quarter (Q3) ended Sept 30, 2007.

That means that delivery of a single large support vessel next year would produce higher revenue than that of Q3 last year. In that quarter last year, Coastal delivered 12 vessels.

As Coastal builds a range of tugs and boats as well as RM90mil vessels, its revenue would swell to over RM100mil in some of the quarters in 2009 and 2010.

In recent years, Coastal's high earnings growth has transformed its balance sheet into a conservative one, which reflects the character and disposition of management.

The group's borrowings were about 40% of its shareholders funds in 2005. That is estimated to have changed to net cash of about 20% of shareholders funds at the end of last year.

Coastal, in fact, has a superior balance sheet (net cash), net profit margin (24% last year), earnings growth (37% this year) and return on equity (22%) than many of the other O&G companies favoured by brokers.

JP Morgan forecast Coastal to turn in a net profit of about RM110mil next year, which makes it a mid-cap stock that could eventually interest fund managers who generally shun small cap stocks.

Oil fields

Going by the oversubscription for IOI Corp Bhd's exchangeable bonds, demand for palm oil stocks continues to be very strong.

IOI announced last week that its exchangeable bonds, also known as convertible bonds (CBs), were snapped up within 1½ hours after the book opened. The offering attracted bids for US$3bil (RM9.8bil), an oversubscription six times the planned issue size of US$500mil (RM1.6bil).

As a result of the strong demand from global investors, the issue size was expanded to US$600mil (RM1.9bil), the company said.

The demand was huge in spite of the exchange price of RM11.00, which was a premium of 30.2% over IOI Corp's share price of RM8.45 on Jan 8.

The investors obviously believe IOI Corp shares price would grow to well as RM11.00 each, which would be their only payoff because the yield-to-maturity is just 1.25%.

For IOI Corp, it has raised a lot of cash at a very low cost, which could be used for a very sizeable acquisition.

By The Star (by C.S.Tan)

1 comment:

Anonymous said...

good to see property players making big bucks in malaysia