Friday, 8 August 2014

Euro: To Add Some Pepper?

I first encountered this company EURO (not Europlus) last year when I did a brief study on furniture stocks.

When I saw its earning track record, straight away I lost interest to study it in more detail.


       Euro financial results 2009-2013


Recently Euro was mentioned in Bone's blog and of course its share price has surged. It draws my interest because it is related to property development in Penang.

Euro's main business is office furniture manufacturing & trading. It is led by group MD Mr Lew Fatt Sin.

In May 2011, Euro announced its intention to diversify into property development with the acquisition of 4.03 acres freehold land for RM7mil in Mukim Cheras Kuala Lumpur.

In the same year, it set up a wholly owned subsidiary Euroland & Development, and Dato Sri Choong Yuen Keong @ Tong Yuen Keong was "promoted" from Non-executive director to Executive director & Managing director of its property division.

Mr Chong Yuen Keong has experience in civil engineering, construction & property development. He is said to spearhead the luxury Beverly Height project in KL since 2003.

Nevertheless, until today which is 3 years after the Cheras land acquisition, there is no news regarding Euro's first property project. It seems like it has encountered unforeseen delay related to authority's approval.

Does Mr Choong Yuen Keong just receives "gaji buta" for 3 years? I'm not sure. Should he give something back to the company? I don't know.




Meanwhile, in May 23, 2012, a piece of 30-acre freehold hilly land at Tanjung Bungah, Penang island, was sold to Beverly Heights Properties Sdn Bhd (BHP).

The site is known as Pepper Estate (though no pepper is/was planted there), which was earlier belonged to Lim Eow Thoon where the kind owner allowed the poor the set up their homes there since 1960s, with a monthly rental of just RM40.

Currently there are over 300 households & 1,000 residents in Pepper Estate.

       Location of Pepper Estate


BHP plans to build a luxury township worth billions in this strategic area.

On 21st June 2013, BHP went into a JV with Oxley Star Sdn Bhd, a wholly owned subsidiary of Singapore-listed property developer Oxley Holdings.

In the agreement, Oxley has an "absolute, exclusive & irrevocable authority, power & right in, over & to the development of land owned by BHP". It will carry out all the construction of the project according to BHP's plan.

In return, Oxley will be entitled to "all income from project, and 70% gross total sales of BHP's land saleable area".

In other words, BHP will get the remaining 30% of gross total sales, which is written black & white as minimum RM500mil and maximum RM900mil.

Is gross total sales equivalent to gross development value? I'm not sure. If it is, then the overall GDV could worth RM1.7bil to RM3bil.

Who owns BHP?



So, the managing director of Euro's property division is the major owner of BHP. I wonder whether Euro can allow its MD to develop his own project which has conflict of interest with the company.

However, if this Penang project is injected into Euro, then it is another story. Euro has been waiting for 3 years to get its property division started and now here is the chance.

Personally I think it is highly likely that part or the whole of BHP will be acquired by Euro in the near future.

Why?



On 14th May 2014, Choong Yuen Keong has acquired 8.5 million Euro's shares from Euro's big boss & his spouse, Lew Fatt Sin & Law Sim Shee. As a result, Choong YK's shareholding in Euro jumps from 10.4% to 20.9%, making him the single largest shareholder of Euro.

One week later, another shareholder of BHP Tong Yun Mong, also acquired 6.6 million Euro shares from the same two persons, significantly increases his stake to 10.49%.

Is it possible that both Choong YK & Tong YM (are they brothers anyway?) want to share the profit of BHP with Euro shareholders instead of between only two of them?

May be they just want to get this mega project a listing entity? May be they can't swallow the debt of land purchase by themselves? May be they have ambition to turn Euro into a prominent property player?


       Pepper Estate, part of history soon...


If BHP is really injected into Euro, is it a good news to Euro shareholders?

Can a company with market cap less than RM50mil handle a project worth RM2-3bil? Euro has only 81 million issued shares at the moment at price of 58sen per share.

Currently Euro's cash is less than its bank overdraft, though its net gearing is still low at 0.14. Its earning has been fluctuating every quarters lately but some positive can be seen from recent improvement in revenue.

Of course Euro will need lots of cash if it were to acquire BHP. So it might be new issue of shares & warrants etc which will dilute the EPS. The amount may depend on how much BHP paid for the Pepper Estate land in 2012 which is not known by the public.

BHP can get a revenue of RM500-900mil from the development of Pepper Estate. If the net margin is 20% (high-end products), then it could be at least RM75mil - RM135mil throughout the years of development. If we take average RM105mil, it is a huge amount for a small company like Euro.

It is learnt that the residents of Pepper Estate have received eviction notice in April this year and phase 1 may be kicked off soon.

Nonetheless, we can expect some sort of protest from residents if the compensation amount is not right. The compensation is reported to be RM25k cash or RM30k discount in low cost flat per household. Protest will surely delay the project.



It is hard for me to predict the fair value of Euro if BHP is injected into it. Its outstanding shares and debts will go up almost instantly but it takes time to reap the profit from development of Pepper Estate. It depends on how fast the project are rolled out in phases and the take-up rate.

Anyway, if the asset injection is true, I guess Euro's share price will shoot up first no matter what until the fair value is sorted out later.

But please take note that BHP might NOT be injected into Euro in the first place.

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