Wednesday, 23 July 2014

Inari: Should I Subscribe To The Rights?

Inari's net profit for its FY14 (ends Jun14) will surely doubles the figures of FY13. 

Can it grow at the same pace in FY15? It is unlikely because FY14 results are contributed largely by newly acquired Amertron.

Anyway, Inari itself still registered impressive organic growth at 50%.

Currently its four Penang facilities which mainly cater for RF products are running at a utilization rate of 90%. Even if it does not expand the floor space, it probably still can expect a satisfactory growth from maiden contribution from 51%-owned Ceedtec & 100%-owned Inari South Key.

Forecast by Maybank KE shows that both ISK & Ceedtec may contribute about RM100mil revenue (10%) in FY15.

Inari South Key, which was established just in 2012, has its facilities in Johor which manufactures fiber optics products. It is expected to do well due to increasing popularity of high-speed internet and cloud computing.

Anyway, I still can't grab the concept of cloud computing...

It was a surprise to me that Inari announced a cash call (1-for-8 rights issue with 1 free warrant) in early July 2014, since it just did the same thing a year ago in May 2013.

The first thing that came to my mind was, earnings will be diluted again...

However, as Inari urgently needs to expand its highly-utilized facilities, this can be a positive move. Perhaps it is better than borrowing from financial institutions which charge interest. Better save the loan interest to distribute as dividends right?

The indicative rights issue price is at RM1.50 per rights share and the indicative new warrant exercise price is at RM2.00 (1:1).

At current share price of RM3.25, this represents a great discount though the ex-ed share price will be adjusted. Anyway, the price is just indicative only.

Investors who subscribed to previous rights and kept the warrants are surely laughing all the way. The old warrant exercise price is just 38sen.

The table below from Maybank investment shows the possible dilution after the rights issues & new warrants.

The proposed rights issue will raise about 80+mil new shares (about RM120mil). It is expected that most existing warrants (expires in June 2018) & ESOS will be converted to Inari shares in order to be eligible to subscribe to the attractive rights issues.

Almost two third of the fund raised will be used to expand its production (new land/factory/machinery). It might set up a new facility in Batu Kawan.

Inari's major shareholder Insas has said that it will subscribe fully to the rights issue. However, I'm not sure whether it will convert its existing warrants before this.

As at today, Inari's total shares stands at 541 million.

The rights issues exercise is expected to be completed in the final quarter of CY2014.

It's a way to force myself to add more Inari shares. So I think I will subscribe to the rights issues.

Saturday, 19 July 2014

Asiapac (Imago) Vs Hunza (Paragon)

Investors of Asiapac are surely anticipating the grand opening of Imago Mall which is scheduled to be in the end of this year.

Imago Mall is a grade A shopping mall in Kota Kinabalu with a net lettable area (NLA) of 800,000 sq ft. Asiapac expects it to contribute RM70mil of annual rental income once fully tenanted. 

       Imago Mall

Gurney Paragon Mall, a new mall at the prestigious Gurney Drive in Penang island, has been up and running since 23th July 2013, though it was officially launched later on 10th Oct 2013. The first phase which comprises 15% of NLA has been opened to public a year earlier.

This "luxury" mall which sits just next to CMMT's Gurney Plaza, has an NLA of 700,000 sq ft, also with condominiums above it like Imago Mall.

Hunza, the owner and constructor of Gurney Paragon Mall, is expected to enjoy good recurring rental income from it.

Its management targets an annual rental income of RM60mil from the mall once fully occupied.

So both Asiapac (Imago Mall) and Hunza (Gurney Paragon Mall) are quite similar.

       Gurney Paragon Mall

It has been exactly one year since the whole Gurney Paragon Mall was opened to public. How much rental profit has Hunza pocketed from it so far?

Hunza currently has 2 main business segments which are property development and property investment. Its construction & trading segments are negligible.

Its financial year ends at 30th June each year. So the financial impact of Gurney Paragon Mall will be included from FY14Q1 onward.

Hunza's FY14 Quarterly Results
RM mil FY14Q3 FY14Q2 FY14Q1
Revenue 37.7 33.0 31.3
Gross Profit 14.8 14.5 13.2
PBT 2.6 12.1 4.7
PATAMI 0.2 7.4 1.4
Core Net Profit 4.3 2.4 1.4

As FY14Q2 has a one-off fair value gain of RM6.7mil and FY14Q3 has a one-off payment of RM5.5mil as gratuity to retired director, it's better to look at its core net profit given by analyst.

After 9 months into FY14, its total core net profit stands at RM8.1mil which is far less than FY13's whole year core net profit of RM21.8mil.

Why does the profit drop while it is starting to receive rental income from the shopping mall? Is the property development segment affecting Hunza negatively?

Hunza currently only has one on-going project at Bertam but it has contributed quite consistently, though not much, to Hunza in FY14.

RM mil FY14Q3 FY14Q2 FY14Q1
Prop Dev Rev 26.4 22.9 23.7
Prop Dev EBIT 4.9 3.8 9.2

The problem lies in its property investment segment.

RM mil FY14Q3 FY14Q2 FY14Q1
Prop Inv Rev 10.9 9.6 7.1
Prop Inv EBIT 1.8 2.5 -0.3
Prop Inv Interest -1.3 -4.1 -3.5
Prop Inv PBT 0.5 -1.6 -3.8

Total revenue from rental income reaches RM27.6mil in 9 months, so it could give Hunza approximately RM40mil in the first year. This is not bad as it achieves 67% of management's target at 80% occupancy rate.

However, due to the high interest payment, this segment is still in red with a loss before tax of RM4.9mil for 9MFY14.

Hunza's finance cost at 9MFY14 is RM9.3mil, which is 365% more than RM2.0mil in the corresponding period of FY13.

Similarly, Asiapac has accumulated quite a lot of debts from constructing its mall. So I guess the high finance cost will also start to appear in Asiapac's income statement once the mall is completed?

Other things like promotional expenses and higher direct operating overhead seem inevitable too.

However, all these should not be too visible in Asiapac's income statement as the earnings can still be supported by its high unbilled sales.

So, it takes time for a new mall to generate expected recurring profit, as the mall needs time to mature.

       Gurney Paragom Mall, with Hunza Tower

Anyway, with a new investment property, the assets of both Hunza & Asiapac will increase significantly.

Hunza seems to be suffering at the moment in term of financial results. However, it is not wise to overlook this company, as it has a diamond in Bayan Baru, Penang.

Thursday, 17 July 2014

Keladi: From Kulim To KL

In early July 2014, Keladi Maju announced that it has entered into an SPA to acquire 9 parcels of land in Mukim Batu, Kuala Lumpur from Goh Ban Huat (GBH) for RM192.4mil.

The 13.93 acres of land in Segambut consists of 6 parcels of freehold and 3 parcels of leasehold land. GBH's office, factories and warehouses currently sit on the land.

The purchase price should be about RM317 per sq ft.

GBH is another listed company which mainly involves in ceramic products manufacturing and trading.

Both GBH and Keladi have similar major shareholder & chairman which is Tan Sri Dato Tan Hua Choon. The purpose of the land sale by GBH is to partly fund its reversed takeover of Dynac to venture into Oil & Gas sector.

As Keladi is mainly a property developer which has development projects only in Kulim, Kedah, the injection of land in the country's property hotspot is definitely very positive for the group.

However, Keladi can't develop the acquired land in the near future, as it houses GBH's current operating facilities. Keladi has entered into a tenancy agreement with GBH to lease back the land & buildings to GBH at a rental of RM350,000 per month. The tenure is 2+1 years.

So it will be RM4.2mil pre-tax rental profit for Keladi. This is equivalent to 14% of its previous FY's PBT which seems not bad indeed.

But, its FY14's interest income of RM4.1mil will be reduced substantially for sure, and it has to start to serve the loan interest afterwards. 

It's likely that GBH will retreat from its ceramic business gradually and concentrate on its O&G venture.

As for Keladi, it has approximately 1,400 acres of land in Kulim district, where 667 acres of them is currently planted with oil palms.

At the end of April 2014, Keladi's net assets per share stands at 35sen. Most of the land are not revalued since 1990s.


Mukim Acres Last Valued
Padang Cina 515 1996
Naga Lilit 102 1999
Sg Ular 18.36 2001
Padang Meha 65 1994
Sg Seluang 23.25 2006
Sg Seluang 9 2006
Lunas 13.6 2010

Naga Lilit 667 1999

Keladi recent projects are Taman Lagenda near Padang Serai and Taman Kulim Square Indah near Kulim town. As at 31 Jan 2014, it has sold a total of 3,825 units of properties from these 2 projects, with nearly 100% take-up rate.

I feel quite surprise because it's hard for me to imagine that the property demand in Padang Serai can be so high.

Anyway, Keladi builds mainly low & medium cost affordable houses.

For FY15, besides continue to launch new phases for Taman Lagenda, Keladi also plans to develop 455 units of single storey terrace and 152 units of shop houses in Mukim Padang Meha which was converted from its plantation land. It may also launch Taman Puteri in Padang Serai which comprises 1,585 units mixed development.

Thanks to its high take up rate in recent launch, Keladi's financial performance has been good for the past 2 years. 

Revenue in FY13 rose tremendously due to high property construction billing, while the rise in PBT in the same FY was partly due to a fair value gain of RM30.3mil (re-measurement of an associate under liquidation to other investments).

Its PATAMI in FY14 is lower at RM21.5mil compared to FY13's RM53mil due to the one-off gain in FY13.

It is noteworthy that Keladi's PBT margin is always high at 40-50%. Its gross profit for FY14 stands at an impressive 53.4%.

Property development is its main earning contributor with 93% of total revenue. Its oil palm cultivation business is declining as more land was converted for property development.

RM mil FY14 FY13 FY12 FY11
Property revenue 54.8 88.6 41.5 47.4
Property PBT 28.5 59.2 15.4

Plantation revenue 2.5 3.5 5.4 4.8

Base on FY14's PATAMI of RM21.5mil and total paid-up shares of 758.3mil, Keladi's FY14 EPS will be 2.84sen. Current share price of 35sen will give it a PE ratio of 12.3x.

Its latest FY15Q1 financial result (ended April 14) is not so good with poor revenue of RM7.9mil and lowest PATAMI (RM2.9mil) since FY11Q2.

Keladi has a strong cash flow & balance sheet with zero borrowing and RM152.7mil of cash (Apr14). Net cash per share is 20sen which is 57% of it net assets per share of 35sen. Its NAS will be much higher if its land are revalued.

Nevertheless, surely it will take loans to fund its KL land acquisition.

For me, I think it is more important to look at how well the company makes profit from its assets, not how many assets it owns.

Keladi is not too generous when it comes to dividend even though it is cash rich. It paid 0.5sen dividend per share for the last 3 years. For FY14, this will be about 18% payout from PATAMI, and a yield of only 1.4% at share price of 35sen.

So I don't expect it to pay more dividend when it turns into net debt after the land acquisition.

       Location of Kulim district

I'm not too sure about the property demand in Kulim but I'm not too optimistic. Furthermore most of Keladi's land are located far from Kulim town.

In the next 2-3 years, Keladi will not be able to develop its newly acquired land in KL.

However, there is one thing which may be very positive to Keladi - the proposed new Kedah International Airport.

In June 2014, Kedah's MB DS Mukhriz Mahathir has voiced his desire to build another International airport in Kulim.

The proposed 600ha site is located at Sidam, which is at the northern area of Kulim district close to Padang Serai town.

       Proposed new airport in circle; Kulim Hi-Tech Park in rectangle

As a major land owner in Kulim, the airport will surely benefit Keladi IF the plan materialized. Keladi's land in Mukim Naga Lilit, Padang Meha & Padang Cina are quite close but not too close to it.

The airport will certainly grow the population and business activities in southern Kedah and northern Penang. So it will benefit both states.

However, is it feasible to have another international airport so close to Penang International Airport (PIA) at Bayan Lepas?

It is reported that the necessity to build this new airport is because PIA is expected to reach its maximum capacity in 2 years. A lot of stress is given to PIA's reduction in cargo handling as passengers flights increase.

I get an impression from news report that the main reason is to make air freight more convenient to businesses in Kulim esp in Kulim Hi-Tech Park and even from southern Thailand. 

Can we build an international airport mainly to cater for air freight?

Who will take a flight from and to this proposed new airport? Probably it will serve the population in Sg Petani, Seberang Perai Utara & Kulim. Is the population huge enough to make an airport with 2 runways viable?

Anyway there are many things to consider and it should be left to those decision makers. If it will benefit the people more, then it is a good project.

If it ends up like Melaka international airport which is upgraded with RM240mil but has no plane landing there since Mac14, then it is a waste of tax payers' money.

Even an airport in International tourist city can't survive...

       Melaka International Airport: planeless

Keladi's share price is not undervalued at the moment and its near term prospect is a doubt. It will be more exciting if it is ready to develop its land in KL or the new airport gets a green light.