L&G: Lucrative & Gorgeous?

"Cold Eye" has mentioned about L&G earlier this year. He said that the company successfully turned hilly forest into gold. At that time, I was not interested to have a deeper look into it. Now I regret.

Land & General (L&G), famous for its Bandar Sri Damansara township development, was previously a well-known developer but quickly vanished from the scene after being badly hit by the Asia financial crisis in 1997/98.

However, after a change in major shareholder and management, which saw Hong Kong based property tycoon David Chiu emerged as its largest shareholder through Mayland Parkview in Aug 2007, L&G is destined for a change to a better future.

Since 2007, Mayland's stake in L&G has increased from 8.35% to 17.3% now.

L&G's main business is still property development. It also has other businesses such as education (private kindergarten, primary & secondary schools in Bandar Sri Damansara), management of Sri Damansara club house and oil palm & rubber plantation.

For its FY13 ended Mac13, property development contributes 89% and 91% to L&G's revenue and PBT respectively.

L&G latest quarter FY14Q2 result

L&G	FY14Q2	FY14Q1	FY13Q2
Revenue	140.0	89.9	50.1
PBT	55.9	29.7	4.4
PBT%	39.9	33.0	8.8
PAT	23.1	10.4	2.2
Prop Rev	134.6	84.4	41.7
Prop OP	56.7	33.9	12.1
Edu Rev	3.2	3.2	2.9
Edu OP	1.3	1.5	1.3
Other Rev	2.3	2.3	5.5
Other OP	-1.0	-3.5	2.7

* PAT = net profit attributed to owners of company

For the first 6 months of FY2014 (Apr 2013 - Sep 2013), total revenue stands at RM230mil (133% increase YoY from RM98.6mil) while its PBT of RM85.6mil (375% increase YoY from RM18.0mil) already surpassed FY2013 full year PBT.

In this 6 months period, property development makes up 96% (RM219.0mil) of its revenue while its operating profit (OP) from property is RM90.6, which is actually higher than its overall operating profit affected by loss in other business segment.

Out of the RM219.0mil revenue and RM90.6mil OP in property development, approximately 90% is contributed by The Elements @ Ampang while the rest is from Damansara Foresta.

Currently L&G has only 2 on-going projects in Malaysia, which are the 2 stated above.

After the entry of Mayland into the company in Aug 2007, the "revived" L&G's first project was 8trium @ Bandar Sri Damansara in 2009, which is a commercial project with 276 office suites in two towers. It has a GDV of about RM160mil and was completed in 2012. It currently houses L&G corporate office.

The Elements @ Ampang is L&G's second project. It is a freehold service apartment consisting of 1,040 units in two 42-storey towers. The project which is a 50.01:49.99 JV between L&G and Mayland Group, has an estimated GDV of RM760mil. It was launched in April 2011 (FY12Q1) and will be completed by the second half of year 2014.

       The Elements @ Ampang

Damansara Foresta is L&G's third project. This development sits on a 42-acre hill side next to the Bukit Lanjan forest reserve in Bandar Sri Damansara where only half of it will be cleared for development. It has an estimated total GDV of RM2.5bil that spreads over 4 phases in 8-10 years.

Phase 1 of Damansara Foresta has been launched in Jan 2012. Until Sep 2013, more than 90% of total 928 units in 4 residential blocks have been sold. The estimated GDV of phase 1 is RM800mil. L&G plans to launch phase 2 which comprises 452 residential units with GDV of RM500mil in Q3 2014.

       Damansara Foresta

The Elements with GDV RM760mil which was launched in FY12Q1, only contributes significantly to its top & bottom lines in around FY14Q1, which is about 2 years after its launch. So I expect its phase 1 Foresta with GDV RM800mil which was launched in FY12Q4 to do the same very soon, as both achieved nearly 90% sales.

Furthermore, Foresta is 100% owned by L&G but Elements is only 50.01%, and the land cost of Foresta is far lower than Ampang. Thus, it is not a surprise if its profit attributed to owners improves significant in the next few quarters.

L&G's recent terrific financial results are surely going to sustain for the next 1-2 years, and may continue its impressive growth with 2 new launches next year.

L&G Past Financial Results

RM mil	FY13	FY12	FY11	FY10	FY09
Revenue	216.3	130.8	44.2	30.2	37.6
PBT	72.8	43.5	13.9	30.9	17.7
PAT	44.0	30.4	10.2	29.7	15.3
EPS	0.07	0.05	0.02	0.05	0.03
NTA	0.55	0.47	0.43	0.39	0.33
ROE	16.4	11.4	4.0	12.8	7.7

The Elements contributes since FY12, Foresta since FY13

* PAT = net profit attributed to owners of company

In the pipeline to be launched in the first half of 2014 includes high-end landed residential property at Tuanku Jaafar Golf & Country Resort in Seremban. This 200-acre development carries a GDV of RM550-600mil. This project is actually being delayed for more than a year due to some issue with local authority.

In Nov 2013, L&G tries to replicate its success of The Elements @ Ampang by entering into another 50:50 JV with Mayland again to develop a piece of leasehold land adjacent to The Elements into 4 blocks of 45-47 storeys serviced apartment with a total of 1,216 units. The estimated GDV for this project is RM788.7mil.

Besides the development mentioned above, L&G still has 36 acres of land in Sg Petani, Kedah and 13 acres of industrial land in Johor Bahru. It also has 2,500 acres of plantation land at Lembah Beringin.

L&G has a housing project in Australia "inherited" from the previous management, which is a 2,500 acres bungalow development in Hidden Valley north of Melbourne. This project seems to make loss in recent years.

       Hidden Valley, Australia

While its plantation business suffers due to low production & commodity price, its education segment consistently contributes about RM5mil of operating profit annually.

L&G is currently looking for a recurring income by acquiring a 13-storey office building with a net lettable area of 132,687 sf in Putrajaya for RM72.49mil. The building which is still under construction includes office suites, commercial space and a 7-storey 215-room hotel.

To fund the acquisition, L&G has offered its shareholders rights issue of ICULS at 13sen, which can be converted into common shares at 26sen. The ICULS were oversubscribed by 50% and were listed on 30 Sep 2013. .

Even before the ICULS, L&G has a strong net cash of RM109mil. At the end of FY14Q2 (Sep13), its NET cash has increased substantially to RM267.2mil or 42sen per share.

L&G's share price closed at 47.5sen last week, which is slightly above its net cash per share. Its latest NTA stands at 73sen. It is trading at a PE of 6.5x at the moment. 

If we annualize its 1HFY14 net profit, its projected EPS for FY14 will be 10sen (total shares 633.6mil on 13 Dec 2013), which will give it a projected PE of only 4.7x. If we give it a target PE of 10x for mid-cap developer, then L&G's target price will be RM1.00.

This annualized profit is very conservative as L&G's subsequent quarterly results are expected to be as strong as its FY14Q2.

With all these figures, L&G seems to be undervalued even though its share price has appreciated 35% in less than a month time.

       Mr Low, L&G MD from Mayland

However, investors should bear in mind that all those ICULS will be converted into common shares within 5 years (2018). This means that its total outstanding shares will double from 598.3mil before ICULS to 1,196.6mil shares after all ICULS are converted. This represents a massive earning dilution.

So far about 6% (35mil) ICULS have been converted into shares 2.5 months after listing.

L&G does not give dividend for a long long time, but with its strong cash position, it is likely that it will start to reward its shareholders with dividend soon.

L&G's profit for the next 1-2 years is almost guaranteed with its strong unbilled sales of Elements & Foresta phase 1. Its future growth will depend on the success or failure of new projects in Ampang, Foresta phase 2 and Seremban.

One can't be too optimistic as this type of project will be affected most by the property cooling measures which started next year.

Besides, the ICULS dilution factor also makes it slightly less attractive.

Since I already have 3.5 property-related stocks in my portfolio, and also inadequate fund, I can only watch L&G's share price going up day after day... But surely, it will be in my stock watch list.