Tuesday, 8 April 2014

Asiapac: Now Pain, Later Gain?

At a first look at Asian Pac, I'm not too interested in it. First, it is a property counter which I do not wish to add more into my portfolio. 

Its earning are fluctuating over the years. It made quarterly loss here and there.

Its net profit for the last 2 years (FY13: RM17.6mil, FY12: RM15.7mil) are misleadingly magnified by tax gain from over provision of deferred tax in prior years. Without this, its PBT is just RM6.3mil and RM7.8mil for FY13 & FY12 respectively.

This represents a PBT margin of just 6-8%, much lower than we would expect from a property developer. 

Its true ROE for FY13 should be less than 2% and its gearing is very high with net Debt/Equity ratio of 0.65. It pays zero dividend as well.

Overall it is like a "goreng" stock with ultra high liquidity.

However, after the "strong recommendation" by fellow bloggers and investors, I decided to study more on Asian Pac.

Similar to L&G, Asiapac is one of the company which was badly hit by financial crisis in 1997-98.

During that time, Asiapac was involved in insurance and stock broking business. It struggled even after the financial crisis was over.

In year 2002-03, its management made an important decision which saw it sold all its finance-related business, restructured itself and moved into property development.

Asiapac's property development was kick-started with an 87-acre mixed development in Kepong from the year of 2003.

The line chart below shows Asiapac's revenue and PBT since financial year 2002 which ended in March 2002.

       Asiapac: Revenue & PBT from FY02

To study Asiapac's past from FY02, I'll divide it into 4 phases. First phase from FY02-04 (ended in Mac04), second phase FY05-08, third phase FY09-11 and fourth phase FY12-present.

In the first phase, Asiapac was in the process of disposing its core business and has just started its property venture. So it was loss-making, with its accumulated loss reaching a peak of RM513mil in FY2004. 

We can see that the property projects launched after 2003 only started to contribute significantly to its revenue and profit 2-3 years later in FY2005.

With the help from its aggressive property development, plus issuance of loan stocks and warrants, Asiapac started to register retained earnings again as soon as FY2006.

For its second phase from FY05-08, Asiapac enjoyed a surge in revenue and profit.

Projects that contribute to Asiapac from FY03 to FY08 are:
  • Fortune Square 1, GDV RM60mil (completed Feb05)
  • Fortune Park, GDV RM124mil (completed Nov05)
  • Fortune Court, GDV RM89mil (completed May06)
  • Fortune Square 2, GDV RM98mil (completed July06)
  • Fortune Central, GDV RM54mil (completed Sep06)
  • Sutera Bukit Tunku, GDV RM64mil (completed Sep06)
  • LeVenue I, GDV RM117mil (completed 06)
  • LeVenue II, GDV RM117mil (completed July07)
  • Fortune Avenue, GDV RM177mil (completed Sep07)
  • Signature Offiice KKTS1, GDV RM168mil (completed Feb08)

The projects above have a total combined GDV of approximately RM1bil, which turned into revenue from FY03 to FY08.

       Signature Office: Phase 1 KK Time Square

From FY09 to FY11 (third phase), due to another financial crisis in year 2007-08, Asiapac's revenue and profit plunged significantly especially in FY11 when all existing projects are almost completed and there is delay in new launches.

The projects that contributed to its FY09-FY11 revenue and profit are:
  • Karamunsing Capital, GDV RM51.6mil, (completed Nov09)
  • Prima Sri Gombak, GDV RM152.8mil (completed July10)

During the 2008 crisis, its phase 2 of Kota Kinabalu Time Square (KKTS) was put on hold and re-planned later. Its piling work resumed in end of year 2010 (FY11) and the whole project is expected to be completed in the end of year 2014.

The KKTS2 comprises a grade A shopping mall (Imago Mall) and 5 blocks of 9-10 storeys serviced residence called The Loft. It has a total of 631 units and GDV of RM558mil.

From FY12 (phase 4), it was like a brand new start after all old projects on hand were completed. Asiapac's revenue picked up again due to the launch of new projects after the hiccup in 2007-08. The on-going projects currently are:

  • The Loft KKTS2, GDV RM558mil (expected completion Dec14)
  • Dataran Larkin phase 1, GDV RM110mil (expected completion mid-14)
  • Fortune Perdana, GDV RM362mil (launched May13, expected completion 2H16)

       Fortune Perdana, Kepong

Note that these 3 projects above already have a similar combined GDV of RM1bil compared to all previous 10 projects between FY03-08, the period which produced Asiapac's highest revenue and profit so far.

I find that especially for a high-rise project, the sales recognition will usually increase tremendously 2-3 years after its launch. This happens to Fitters and L&G.

So it is not a surprise that currently at 9MFY14, Asiapac has already achieved revenue of RM202.4mil and PBT of RM30.4mil, much much higher than its full year figures for FY13 at RM103.2mil & RM6.3mil respectively.

I suspect that a big portion of The Loft's sales are still unbilled yet. The Unbilled sales at the end of each quarters look like this:

       Asiapac: Recent Unbilled Sales

The jump in unbilled sales in FY14Q1 is probably due to the launch of Fortune Perdana. So, prior to that, there is still close to RM300mil of unbilled sales from The Loft & Dataran Larkin.

Its latest unbilled sales at slightly over RM500mil is even higher than Tambun's RM455mil & Matrix's RM437mil.

I predict that Asiapac will produce an even better financial result in its upcoming FY14Q4, as well as its FY15.

       Asiapac's chairman & his new and young CEO

Similar to L&G and Fitters, the big question is, can Asiapac sustain its current earning level or even improve it?

It has to continue its launch of new projects to replenish its unbilled sales for sure. However, in this challenging property market, can Asiapac do that?

New project that is set to be launched soon include the 6-acre Parcel B3 of its flagship Kepong Entrepreneur Park. This is the last piece of the 87-acre mixed development acquired as early as 1988, and has an estimated GDV of RM250mil.

In March 2013, Asiapac also acquired 90% stake in a piece of 6-acre land in Sg Buloh near Damansara Damai. It seems like this project will be launched soon as well, as it already appears in its website for registration, named as Damansara 8.

The second phase of Dataran Larkin is planned to be launched in 2014 but I'm not sure whether it has been launched now. Its 30 units of 3-storey shop offices should carry a GDV of about RM50mil.

From its FY13 annual report, Asiapac also owns 400 acres of leasehold land in Labu, Negeri Sembilan and another 50 acres leasehold land in Bandar Kundang, Gombak. So there is a chance for another township development like its Kepong development.

Throughout the years from 2009 until now, Asiapac has made an important investment in a shopping mall called Imago Mall at KKTS. This could be a game changer for Asiapac.

       Imago Mall

During the construction of the mall, there is only expense and no income for Asiapac. The construction cost is RM700mil. That is why its borrowings increase tremendously while its cash diminishes. 

       Asiapac: Cash vs Debts

At 9MFY14, its net debt/equity ratio stands at an uncomfortable 0.65.

Imago Mall has 800,00 sq ft of retail space in 4 floors. It has Parkson as its anchor tenant. The retail space are not sold and Asiapac can control the tenants and collect recurring rental income.

       Imago Mall construction progress @ Feb14

It seems like there are many shopping malls in the vicinity of Imago Mall at Kota Kinabalu. However, Asiapac says that they are THE ONLY ONE in KK which does not sell the retail space to investors. I think this is a very important feature of a successful shopping mall.

There is another new mall called Oceanus Mall which is a waterfront mall just a stone throw away from Imago Mall. It will be opened almost at the same time as Imago so it seems to be a great competitor with a better location. However, the retail space in Oceanus Mall are sold to investors which I think is a great drawback.

I have never been to Sabah so I really don't know the supply & demand of shopping mall there.

       Oceanus Waterfront Mall by the sea

How much will Asiapac get from Imago Mall investment? According to its management, once fully tenanted, Imago Mall can give a rental income of RM70mil annually to Asiapac.

I don't know how much net profit it can generate from RM70mil. However, a blogger has done a great analysis on its potential profit (link here), which amounts to PAT of RM33mil a year. 

Base on outstanding shares of 975.3mil, the net profit of RM33mil will give an EPS of 3.4sen. 

IF Asiapac only relies on the rental income and no other income like it is a REIT, the fair value of its share price should be 27sen base on PE of 8x. Its current share price is around 25sen.

Its current property development is expected to contribute significantly for the next 1-2 years. So if its rental income starts to pour in early next year, it should have a very good-looking financial results from FY15Q4 (from Jan15) onward.

However, we have to bear in mind the risks such as lower than expected occupancy rate or higher maintenance for its mall and slower new project launch.

       Location of Imago Mall, KK

Early this year, Asiapac did guide that it has secured 65% tenants and is targeting to achieve 100% when the mall is set to open by the end of year 2014.

The job of finding and managing the lease and tenants are given to international professionals, so I think it has high chance to secure more prestigious tenants for this mall.

Asiapac does not give dividend for many years running. With the anticipated recurring income from its Imago Mall, I expect Asiapac to pare down its debts quickly and may start to give regular dividend to shareholders like REIT.

Its current NTA per share stands at 37sen, which is still 50% above its current share price of 25sen, even though the share price has advanced 40% YTD.

I guesstimate that Asiapac can achieve an annual PAT of RM40mil in FY15, even without full year contribution from its shopping mall income. This translates into an EPS of 41sen and a fair value of 33sen (PE 8x) for its FY15 that ends in Mac15. However, when it starts to enjoy full year rental income from Imago Mall, its fair value should be higher by then.

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