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Saturday, September 1, 2012

The next stage of evolution for Dijaya

There are moments in a company that its direction and fortunes take a turn for the better. For Tan Sri Danny Tan Chee Sing and Dijaya Corp Bhd, its first metamorphosis took place over two decades ago.

Tan, a budding developer with his company Dijaya back then, had the good fortune to come across the opportunity to buy 1,000 acres of rubber land on the fringes of the upmarket Bandar Utama for a meagre RM2 per sq ft.

Danny Tan: ‘I always believe in being flexible

The nondescript land was slowly landscaped into undulating slopes with sprawling mansions called Tropicana Golf & Country Resort, creating a desirable address in Klang Valley that can rival the more famous and older Kenny Hills and Damansara Heights.

“I always believe in being flexible. With the Tropicana Golf & Country Club, I tell my people to always be flexible and try to understand our housebuyers' needs. They spent so much money building their houses here. Let them build their 3- and 4-storey houses. If we can do something for them, let us do it,” says Tan, the CEO of Dijaya Corp.

In the process of having exclusive homes that are manned by help most consider a luxury, the value of the once rubber estate has grown dramatically.

Today, the land is said to be worth RM350 per sq ft.

“In those days, nobody wanted the Tropicana Golf & Country Club land. I bought it for RM2 per sq ft and today it is worth RM350 per sq ft. I should have kept it for myself!” laughs Tan.

But like most land that reach that sort of valuation, it is a signal of maturity.

What's left of the 1,000 acres is just 36 acres but the profit that Dijaya has made from selling and developing the land has helped it expand throughout Peninsular Malaysia, having acquired new land in the Klang Valley, Johor Baru, Penang and Sabah.

Dijaya's other landmark development in about the Klang Valley is Tropicana City Mall in Petaling Jaya, which is today a bustling enclave of activity surrounded by office blocks and condos, The mall today has an occupancy rate of some 95%.

Dijaya has some 22 projects throughout Malaysia with a total gross development value (GDV) of RM31.9bil which makes it among the top ten property developers in the country. As of the second quarter of 2012, Dijaya has unbilled sales of RM636mil, which is a record high.

But things are about to change. Dijaya is set to undergo another metamorphosis as it is set to seal an amalgamation exercise with Tan's private property assets mooted in April this year.

Once completed, Dijaya will add more heft in the property developers league table and improve its size and fortunes.

Through this exercise, Tan hopes Dijaya will be catapulted to rank among the ten largest property companies in Malaysia by market capitalisation with a size of approximately RM1bil. It's current market capitalisation is about RM566mil but it will get a lift from the injection of cash and assets from the amalgamation exercise.

Last month, shareholders gave their approval to Dijaya's proposed amalgamation exercise to streamline and rationalise the majority of the lands and properties held privately by Tan for RM943mil.

The deal will see Dijaya acquire some 73 properties comprising 49 parcels of lands and 16 buildings, valued at some RM1.1bil into Dijaya. This exercise is expected to be completed by the fourth quarter of this year.

The exercise will also see Dijaya getting rental income of RM42.7mil or a yield of 8% per year, whichever is higher, over the next nine years.

Meanwhile, the new land Dijaya will acquire from Tan will have a potential GDV of RM6.1bil.

Upon completion of this exercise, Dijaya will have a total landbank of 913 acres in the Klang Valley, Johor, Penang and Sabah with an estimated GDV of RM38bil to be developed over the next 10 to 15 years.

The lettable areas of investment properties will also increase to approximately 1.4 million sq ft from the current 550,000 sq ft. The investment properties are tenanted out, offering average yield of 8%.

Needless to say, the exercise is a game changer for Dijaya.

Says deputy managing director Dickson Tan, the eldest son of Danny and and also architect of the amalgamation exercise: “I want to make Dijaya one of the leading property developers in Malaysia. This amalgamation exercise will now see Dijaya's market capitalisation increase to the RM1bil mark. The next level, and we hope to do this within 3 years, is to increase the market cap to RM2bil to RM3bil,”

When asked how Dijaya plans to achieve that, Dickson says the company is open to mergers and acquisitions with other entrepreneurially run property companies.

“First things first though. Our launch plan for our new land will start early next year and this will keep us busy over the next 8 to 10 years. We have the development order for some RM2bil of the new land under the amalgamation exercise. We are already prepping for developments to start next year,” says Dickson

Related party transactions

Interestingly, it was Dickson who persuaded his father to go ahead with the amalgamation exercise, and it took a lot of convincing for a number of reasons.

The assets held by Danny that are going to be injected into Dijaya are receiving a healthy rental yield of 8%. Secondly, Danny is receiving less than the market value of his private assets, a necessary loss some might say to overcome the stigma of related party transactions (RPTs) that have been a blight on companies for years.

“When Dickson first told me about the amalgamation exercise, I was unsure. First of all, everyone thinks RPTs are bad deals. I didn't want to go through so much effort, only for people to have a bad perception of the company. “I also know that my private assets are valuable, and by injecting it into the company, it would not only significantly increase the value of my company, but we get access to bigger funding facilities. We need big working capital for the big projects. That's how the company grows,” says Danny.

Presently, Danny owns 66.4% of Dijaya. He directly owns 30.4%, and indirectly owns 17.8% through Impeccable Ace Sdn Bhd and 18.2% through Golden Diversity Sdn Bhd.

“My father is not taking a single sen out of the company. In fact, he is subscribing for the entire portion of his rights issue, which adds up to RM250mil,” says Dickson.

Under the deal, the proposed amalgamation exercise will be satisfied by RM250mil cash and the balance via the issuance of a 10-year 2% coupon redeemable convertible unsecured loan stocks (Rculs), with a staggered conversion price range of RM1.30 to RM2.50 over a 10-year period.

There will also be a renounceable rights issue of up to 491.3 million new shares of RM1 each, which Danny has committed to take up at least RM250mil, which is also the minimum scenario of the proposed exercise.

The chances of Danny triggering a general offer threshold is remote as there are clauses which limit the quantity of RCULS to be converted depending on profits made by Dijaya over the next 10 years.

While Dickson admits that it is one of the largest RPTs in Malaysia, he feels that so long it is implemented fairly and without detrimental effect to the interest of minority shareholders, investors should not discriminate against the transaction.

Astramina Advisory managing director Wong Muh Rong, who is also the advisor for the deal, says it is unfair for people to always view RPT as a crime.

“RPTs done in a fair and transparent manner should in fact be encouraged. Only the owner of a company is able to sacrifice for his own company. The market may be scared of RPTs because of previous bad deals,” says Wong.

“However, it is only with this sort of RPTs, that good and prime land can be injected into public companies, and they become bigger. Right now, by going through this amalgamation exercise, the major shareholder has to hire advisers and go through so many complications. There is so much effort and resources spent to execute this deal, when he could simply enjoy the private land on his own,” says Wong.

She adds that if RPTs continued to be viewed negatively, in future, property developers with good land bank may think twice before injecting those assets into a company, and this could hinder the growth of a company.

“If not for this RPT, Dijaya shareholders will not have the opportunity to have exposure to all the prime development land and investment properties, which provide diversification in earnings stream as opposed to concentrated earnings from property development pre-amalgamation,” says Dickson.

“I have no regrets about the amalmagation exercise. I am proud of Dickson for doing something so impactful for the company. Right now I own more than 60% of the company. I don't mind paring down a lot more of my stake if it means bringing in a new partner or embarking in an exercise where my company can go to the next level,” says Danny.

“Even if I halve my stake to the 30% level, do you think it is so easy to kick me out of the board?” laughs Danny.

“If my children are going to eventually run my company, I only want the best for Dijaya. That's one reason why I want Dijaya to grow big. I do it for my children,” said Danny.

Growth Strategy

His hint of a succession plan follows in the footsteps of Danny's elder brother Tan Sri Vincent Tan Chee Yioun who recently took a backseat to allow his son Datuk Robin Tan to assume the positions of chairman and CEO of Berjaya Corp Bhd.

“Every company needs to have succession planning. It has always been my hope that one of my children will be able to take over the company. I have high hopes for Dickson. He has been with the company for the last seven years. I always tell him to work hard,”

“There are other things in life which are important, like health and happiness. I am not as ambitious as my brother (Vincent). He gets involved in everything! If my children can successfully run my company, then I can go travelling and relax. Right now, I am still working late nights,” says Danny.

Having engineered the injection of his father's assets into Dijaya, Dickson feels that's the fastest way to bring value to shareholders.

“Through the private assets, we had access to great land bank and great recurring rental income. If we were to be serious in joining the big leagues, then we had to do something drastic,” says Dickson.

Having been in the company since 2004, Dickson joined the board of Dijaya in end-2010 as deputy managing director. Dickson says there are numerous hurdles to overcome when a company is small. First up, it's almost impossible to capture the interest of institutional investors, and therefore enhancing shareholders' value becomes difficult. Without interest from the big funds, liquidity becomes an issue.

“So increasing our market capitalisation to the RM1bil mark was the first step. Now that we have a strong balance sheet, this gives us better access to debt and equity capital market for funding requirements. I believe it is a matter of time before Dijaya receives attention from investors and be re-rated accordingly,” he says.

Secondly the company has been hiring new talents over the last two years, as it prepares for its bigger roadmap.

This includes Koong Wai Seng, the former chief financial officer of Sunway City Bhd, Edmond Kong who was previously TA Global Bhd's chief operating officer and Datuk Andy Khoo Poh Chye who previously was managing director of GLM Reit Management Sdn Bhd.

All these new recruits now sit on Dijaya's board. Its latest recruit is its new chief marketing officer Richard Tong, who was previously from the Sunrise group.

“With the amalgamation exercise almost complete, we now plan to ramp up our launches. We have targeted to complete RM1.1bil worth of sales this year. So far, we have done 60% of that. We hope to more than double this sales figure next year to RM2.3bil and RM2.4bil in 2014.”

Dickson says Dijaya plans to diversify geographically into the Klang Valley, Penang and Johor. In addition, it has also ventured into Sabah, which is identified as the key regional development area attracting investors from South Korea, Japan and China among others.

Through the amalgamation exercise, 24 pieces of land are slated for development and 24 buildings injected for rental income.

“Our first target is to exceed the RM100mil net profit mark in financial year 2013. This is possible as the size of our investment properties will increase to 1.4 million sq ft from the current 550,000 sq ft. This also will generate recurring income of approximately RM43mil. Thus, post amalgamation, our estimated group earnings can be more than RM100mil,” explains Dickson.

As for Dijaya's financial year (FY) ended Dec 31, 2011, the company has recorded a 51% increase in net profit to RM65mil on the back of a 28.42% increase in revenue to RM375mil.

For the second quarter ended June 30, 2012, net profit jumped to RM107.2mil from RM20.8mil previously on the back of a 66% increase in revenue to RM70.7mil

The 417% increase in net profit was mainly due to the fair value adjustment on investment properties as well as contributions from its developments.

“I am personally very bullish about the growth of the Johor property market. I wished I had gone there earlier. I was invited by Tan Sri Lim Kang Hoo (executive chairman of Ekovest Bhd) many years back to Johor development projects. I didn't. How I regret not doing so,” says Danny.

“I was so surprised that my Johor units sold out faster than some of our Klang Valley units. I truly believe that once the land links between Singapore and Malaysia is sorted out, there will be a whole new dynamic to Johor property,” said Danny.

By The Star

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