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Monday, February 4, 2008

Solidly structured corridor

The Sabah Development Corridor (SDC), launched last week, follows a smart partnership model that has occasionally been adopted in the peninsula.

This model involves the participation of private sector companies - industry leaders – in government projects.

This is a premium partnership because private sector companies are market-driven, that is, they develop projects that would attract customers whereas government agencies often develop properties that are rebuffed by the public.

It was announced last week that a major component in the SDC – Suria Capital Holdings Bhd's Jesselton Waterfront project – would be jointly developed with partners such as the IJM and Glomac groups.

Suria, controlled by the state government, had planned to develop its large land bank on the waterfront from the time that Sabah's ports were acquired by the company five years ago.

From the start, there were concerns, rather than anticipation, over the property plans. It was questioned whether Suria might lose its focus on port operations, especially when it was not clear if management was experienced in the commercial property sector.

Those questions have now been addressed. IJM and Glomac have a track record of profitably developing properties that people want to buy or rent.

Suria, which had previously housed the failed Sabah Bank Bhd, has shown it is managing its ports in a financially responsible way, and the business model it has now adopted for its property business should give comfort to investors.

Suria's structure for property development is a model for other state agencies, in particular the various state economic development corporations or SEDCs.

It has long been shown that governments tend to be successful in developing and operating infrastructure where they do not face competition, and their projects that are exposed to competition produce overcapacities and losses.

Increasingly, it has also been shown that infrastructure can also be better developed by the private sector, leaving the Government to a role of capital allocation.

Cheaper plants
The falling markets last month showed that stocks on the Singapore Exchange (SGX) were far more volatile than their peers on Bursa Malaysia. One factor could be the larger presence of foreign portfolio funds in Singapore, and their sudden absence.

Plantation stocks also came under heavier selling pressure across the causeway than those over here. The plantation stocks on the SGX mainly have their assets in Indonesia, and these stocks, valued at a discount to Malaysian plantations stocks, became even cheaper last month.

The share price of Indofood Agri Resources Ltd, for instance, fell 28% from early last month compared with a drop of just 6% for Kuala Lumpur Kepong Bhd (KLK) during the same period.

As a result, Indofood Agri traded at a price/earnings ratio (PE) of about 13 times its forecast earnings this year compared with about 19 times for KLK, a difference of over 40%. Furthermore, Indonesian plantation companies are generally expanding their output faster than Malaysian planters due to aggressive planting by the former after the regional financial crisis.

That has made it that much more competitive for Malaysian plantation groups to attract foreign funds than before. Even so, Malaysia's plantation heavyweights such as Sime Darby Bhd, IOI Corp Bhd and KLK are expected to maintain a hefty premium over their Indonesian peers, even those listed on the SGX where they are subject to the strict accounting and regulatory environment there.

The premium is accorded for the far longer listing history of the Malaysian planters in which there are far less concerns over corporate governance. The expanded valuation gap created last month, however, could be narrowed, and provide an opportunity for investors in the region as foreigners flee.

Two relatively small plantation companies on Bursa reported surging profits last week. Glenealy Plantations Bhd earned a net profit of RM42.9mil, including an exceptional gain of RM21.6mil, for its second quarter (Q2) ended Dec 31, 2007. The exceptional gain came from the sub-lease of an area in its forest plantation.

Stripping out the exceptional gain, Glenealy's Q2 net profit was a 35% increase over its first quarter (Q1), and 173% over that of Q2 in the previous financial year.

The high performance results were mainly due to the company's sales of crude palm oil (CPO) at RM2,845 a tonne in Q2, which is close to the average spot price for CPO during that period. As CPO prices climbed, the company made the right call in apparently not having made forward sales.

With the strong profits, Glenealy's cash rose to RM163mil which works out to RM1.42 per share. It was commendable that it introduced an interim dividend of 10% compared with a first and final dividend of 10% in its financial year ended June 30, 2007.

Chin Teck Plantations Bhd reported a similarly robust set of results. Its net profit rose to RM19.4mil on a turnover of RM33.2mil for its first quarter ended Nov 30, 2007.

That works out to a net profit margin of 58%, the stuff of software companies that enjoy the highest margins in business.

Other results
PLUS Expressways Bhd revealed high traffic volume growth on all its highways in December last year compared with the same month in 2006.

Its North-South Expressway, for instance, registered traffic growth of 14%.

Traffic in December is seasonally higher than other months because of the school holidays. Even so, PLUS registered double-digit expansion in traffic growth over the same holiday period a year ago.

Malaysians were on the move in December.

Traffic growth rates on PLUS' other highways were 18.2% for New Klang Valley Expressway, 18.2% for Federal Highway Route 2, 16.2% for Seremban-Port Dickson Highway, 8.2% for North-South Expressway Central Link, and 16% for Malaysian-Singapore Second Crossing.

This high traffic could be due to a more dynamic demand in domestic tourism as more Malaysians travelled to local resorts during the school holidays instead of Europe or Australia due to the stronger currencies there and hefty fuel surcharges imposed by airlines.

Furniture maker Eurospan Holdings Bhd reported a 43% increase in net profit to RM1.7mil for its Q2 ended Nov 30, 2007.

With earnings per share of 10 sen in the first half year, Eurospan introduced an interim tax exempt dividend of 3 sen a share compared with a first and final dividend of 8 sen last year.

It can afford to do so as its cash rose to RM28.6mil, which works out to 71 sen per share. Theoretically, its business was valued at just 31 sen a share, stripping out its cash, based on its share price of RM1.02 on Thursday.

While some markets had bubbles in their shares and properties, Malaysia seems to have many stocks that are valued very conservatively.

By The Star (by C.S. Tan)

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