BHS Industries - Tapping into biomass wastes

BHS INDUSTRIES BHD
Tapping into biomass wastes

Price: 51.5 sen
Market cap: RM202m
Net gearing: (net cash)


BHS Industries shares have been ticking up on good volume recently. I guess this is due to expectations that its “green” venture would drive profit margins up and expand its income base.

“The Board of Directors and management are confident that once the diversification measure using biotechnology Pre Conditioning Refiner Chemical Recycled Bleached Mechanised Pulp [PRC RBMP] has materialised, it will greatly expand the income stream of the Group and at the same time enhance and value add our printing business as we would have our own ample supply and cheaper Empty Fruit Bunches pulp and paper source to cater to our needs and to expand to new markets.” – BHS Industries annual report 2015

With the completion of its rights issue in Oct 2015, BHS should be now in the process of looking for a land to acquire to set up a plant which will use empty fruit bunches (EFB), the by-product or “waste” of palm oil mills, to produce 10,000 tons of wood-free paper. BHS used approximately 9,000 tons of paper in FY14.

With FELDA emerging as a shareholder last year, some believe there will be a collaboration between the two. For example, BHS could source EFB from FELDA’s FGV and build the plant next to the latter’s palm oil mills.

Impact on profit margins

According to BHS’ IPO prospectus, paper is the largest cost component, accounting for about 56% of BHS total purchases in 2007.

In a newsletter article by FRIM in 2002 (link to download), it mentioned using EFB to produce pulp could cost US$120-150 per tonne vs. conventional costs of US$200-300 per ton. In a news article in 2011 (link), there was a mention it could cost as low as RM350 per ton.

The type of pulp that’s related to BHS’ paper cost is the bleached hardwood kraft from Brazil and Chile which fetched approximately US$640 to US$660 per ton in Jun 2015, according to BHS’ abridged prospectus (dated 9 Sep 2015).

If we assume the new plant will cater to all of BHS' paper needs, what kind of impact could it have on earnings? To gauge, let’s make some simple assumptions:

1. Paper cost accounts for 50% of cost of sales.
2. Paper cost will be 60% lower.


BHS P&L FY12 to FY15

Source: Company annual reports

Let’s use FY14 and FY13 financials as a reference. In this two FYs, revenue was around RM65m and cost of sales in the RM48m range (accounting for 74%-75% of revenue).

1. Paper cost accounts for 50% of cost of sales. Based on COS of RM48m, paper cost is RM24m.
2. Paper cost will be 60% lower. Then, paper cost will RM9.6m, or a cost savings of RM14.4m.

If we added this RM14.4m savings back to FY14’s PBT, net profit (after applying a tax rate 24%) would have jumped to RM17.5m.

Earnings wildcard

The wildcard is BHS being able to sell this technology to palm oil companies. In Malaysia, the target market size is more than 400 palm oil mills. FELDA’s FGV has 71 palm oil mills (not all are located in Malaysia).

BHS is expecting to spend around RM35m for its machinery and equipment. If we assume this is the amount BHS will be selling its technology (along with the machinery, equipment, etc.) to palm oil mills, and assume net margins of 10%, BHS could be looking at RM3.5m per customer/contract. If BHS is able to secure 10% of those 400 mills as customers, it would be seeing relatively huge profits in the future.

Source: BHS abridged prospectus (dated 9 Sep 2015)

Source: BHS abridged prospectus (dated 9 Sep 2015)


Expecting a recovery in orders

BHS’ financial performance in FY15 was not up to par to that of FY14 and FY13.

This was due to lower print orders received from its major overseas customers in Africa who were affected by the Ebola outbreak, depressed oil prices and a stronger US currency. Customers from Africa accounted for 68% of sales in FY14. The lower production volume and sales in FY15 resulted in lower profit margins as BHS was unable to benefit from economies of scale.

But BHS is expecting things to get better in 2016:

“We would expect the printing orders from our major customers in Africa to resume after the first quarter of 2016 as the Ebola outbreak has subsided and the oil prices have stabilised to a level where their economies are in the process of recovering. The past nine months of low print orders would mean that the customers had relied on their local small printers and their existing stock to meet the demands. They will have to replenish their stock in months ahead and these will generate print orders for us.”

The key factor now is how fast BHS can get its plant up and running. Once done, and everything goes well, it should see potential buyers for its technology. How well BHS’ technology stacks up against competitors out there is unknown to me.

TSH Resources, in collaboration with FRIM and MPOB, had already embarked on a similar venture of using EFB to produce pulp and paper. TSH received a RM50m grant from FRIM for this.


* * * * * * * * * 

ENDNOTES

Rights issue with warrants
- Completed 22 Oct 2015
- Rights shares 99,145,199 (RM0.42 issue price). Oversubscribed by 34.22%.
- Warrants 198,290,398 (exercise price: RM0.60, maturity: 18 Oct 2020)

Treasury shares: 26,920,000 (as at 23 Nov 2015)

Issued and paid up shares before rights issue: 320,000,000

Shares outstanding = 320,000,000 + 99,145,199 – 26,920,000 = 392,225,199

Fully diluted shares: 590,515,597

Dutaland – Waiting to unlock the value of its assets

DUTALAND BHD

Waiting to unlock the value of its assets

Price: RM0.43

Market cap: RM363.8m (shares outstanding: 846.12m)
Book value: RM932.5m / RM1.10 per share
Enterprise value: RM347.7m (cash RM17.9m, borrowings RM1.8m)


Summary:

• With most of its debts cleared off, Dutaland could now be in a better position to resume its property projects, namely the Kenny Heights development and Duta Grand Hotel. 
• Over the past few months, Dutaland has submitted revised/new plans for those projects.
• Its three main assets could be worth RM1.392bn or RM1.65 per share: (i) Kenny Heights development. Remaining development land of 69.7 acres could be worth RM1.214bn at RM400psf. Dutaland’s 58% stake is then worth RM704m. (ii) Duta Grand Hotel project. Dutaland’s 76% interest in the project could be worth RM335m. (iii) Oil palm plantation. Book value of RM352m after recent revaluation. Dutaland currently trading at an EV/ha of about RM29k. 

The current subdued property market and weak CPO prices are obviously not a boon to Dutaland.

Nevertheless, it could still be an interesting asset/RNAV play to watch, now that its balance sheet has turned around.

Dutaland’s total borrowings vs. cash & cash equivalents

It has been in a net cash position for the past two quarters. Over the years, the bulk of its debts had been pared down mainly from:

• 6-year restructuring scheme which was completed in 2013. Implemented in Apr 2007 to address indebtedness which totaled RM769.1m initially.
• Major asset disposals in recent years including: Olympia Plaza Sdn Bhd (netted cash proceeds of RM35m) and 5-acre land in Kota Kinabalu (compulsory acquisition by Sabah State Government, RM49.5m).
• RM85m settlement sum received in Feb 2015 (from long standing legal suit brought by its 92%-owned subsidiary, UNP Plywood Sdn Bhd against Sabah Forest Industries Sdn Bhd since 1997).

With an improved liquidity position, could Dutaland be planning to recommence its property projects soon? 

Over the past few months, it has submitted revised/new plans for its projects, namely the Kenny Heights development and Duta Grand Hotel.

Ideally, it would be best if Dutaland manages to find a buyer (at the right price) for its oil palm plantation and use the proceeds to fund its projects.

Potentially, it could secure alliances with strategic investors or JV partners to help fund those projects. Perhaps property developers from China would be interested? 

The recent plans to revive the Plaza Rakyat project involved a property developer from China. We also saw Agile Property Holdings Ltd partnering with PJ Development Holdings Bhd to develop a residential project on a 10.16-acre land in Mont Kiara. The land of this project (which is close to Dutaland's Kenny Heights land) was sold by PJD to Agile for RM186m or RM420psf.

It will be interesting to see what Dutaland’s next move will be.

Let’s take a look at Dutaland’s three main assets.


1. DUTA GRAND HOTEL (DGH) PROJECT

Current physical state of DGH project


Artist’s impression of DGH project (not dated, intended for visualization purposes only)


Source: http://www.dcmstudios.com.hk/work/main/hotels_and_hospitality/duta_grand_hotel/en/

DGH project details:

• Consists of 5-star hotel, offices and service apartments on a 2.8 acre site at intersection of Jalan Ampang and Jalan Sultan Ismail (Google Maps: https://goo.gl/maps/BmeJYWkPDkv).
• Started in 1994 but was suspended in 1998 due to Asian economic crisis.
• Structural work for 33 storeys out of the 52-storey building was completed before suspension.
• Undertaken by Dutaland’s 76% owned subsidiary, Duta Grand Hotels Sdn Bhd.
• Total development cost RM790m, cost to completion RM460m (estimation as of 2009).
• Previous indicative GDV of RM1.15m (a news report stated in 2006)
• Est. GFA around 1.8 mil sq ft.
• Book value RM332.8m.

Previous development plans

Source: Dutaland circular dated 8 Sep 2009

Current development plans?
The DGH project could now be a 64-storey high building, with about 700 service apartments.

Based on a planning permission application submitted a few months back (see figure below), the revised plans are:

• Retail podium (Basement 2 – Level 3)
• Recreational facilities (Level 4)
• Offices (Level 5 – Level 19)
• M&E floor (Level 20)
• 350 units of service apartments (Level 21 – Level 34)
• 325 units of 5-star hotel rooms (Level 35 – Level 47)
• 351 units of service apartments (Level 48 – Level 62)

DGH project planning permission application, submitted 28 Sep 2015

Link: http://www.epbt.gov.my/osc/Proj1_Info.cfm?Name=605645&S=S

Previous applications show that DGH involved land Lot 10, 30, 33, 34, 35 and 36. But interestingly the latest application included Lot 64, 65 and 66 (see endnotes at bottom).

DGH potential value
If we assume:
- GDV of RM1.3bn
- Cost to completion of RM600m
- Whole development (including hotel and retail) is sold

Then the profit from the project is RM700m. After tax of 24%, this leads to a net profit of RM532m. If we spread the net profit over a three year development period and discount back at a 10% rate, we get RM441m. Dutaland’s 76% interest could then be worth RM335.2m.


2. KENNY HEIGHTS DEVELOPMENT (KHD)



KHD details:

• 73.44 acres of prime land in Mont Kiara/Sri Hartamas area (Google Maps: https://goo.gl/maps/mEzkRW7rbv22).
• Development period of 10-15 years, est. GDV of about RM20bn. Expected GFA est. 23mil sq ft.
• Phase 1, Kenny Heights Estate, launched Nov 2008, GDV of RM216m. Completed and handed over in Apr 2011. Comprised of 49 town villas on 3.7 acres of land.
• Phase 2, Kenny Heights Sanctuary, previous GDV est. RM1.5bn, GDC est. RM900m. Previous plans were for 4 blocks of condominiums (709 total units) on 9 acres of land. Construction delayed and original development plans have been revised.
• JV development with sister company Olympia Industries Bhd.
• Dutaland’s wholly-owned subsidiary KH Land Sdn Bhd will take on the role of developer, while OIB will be a passive investor.
• Under the restructuring scheme, Dutaland acquired 41.14 acres for RM261m (by issuance of new shares) or about RM146psf. OIB acquired 32.3 acres for RM189m (by issuance of new shares) or about RM134psf.
• Under their consortium agreement, Dutaland and OIB to derive all profits from the development in the ratio of 58:42

KHD potential value
Total land area 73.44 acres. The remaining land area (removing 3.7 acres of Phase 1) is about 69.74 acres.

With a 58% interest in the JV consortium, Dutaland’s stake of the remaining land area is about 40.4 acres, which could be worth RM704.8m if valued at RM400psf.

Note: The KHD land is not listed among Dutaland’s “properties held by the group” in the annual report, but nonetheless it’s still carried in the books. The land was recorded under “property development costs” (refer to annual report 2007), then a bulk of it was transferred to “land held for property development” in 2013.

Some planning permission applications for KHD have been submitted recently (see endnotes at bottom).


3. OIL PALM PLANTATION

Plantation details:

• About 29,600 acres (12,000 ha) in Sandakan, Sabah.
• Planted mature area of 24,790 acres (10,032 ha) or 95.2% of total planted area of 26,034 acres (10,536 ha).
• FFB production of 101,587 MT in FY15, about 10% yield per mature hectare.
• In 2011, IOI Corp offered RM830m cash or about RM69k/ha for Dutaland’s plantation estates. However the deal fell through.
• Biological assets revalued in Sep 2015, giving rise to a surplus of about RM33m and increased BV to RM352.42m (RM29,421/ha).

Plantation potential value
I will use the book value of RM352m or about RM29k/ha.

Dutaland’s FFB yields are relatively low vs. the industry average. As a small plantation player, I think Dutaland is not be able to reap the full potential of its oil palm estates due to having less resources for labour, fertilizer, etc., and expertise. If a larger plantation player decides to acquire Dutaland’s estates, a much higher FFB yield would be achieved from the plantation.

With an enterprise value of RM348m, Dutaland is trading at an EV/ha of RM31,083 and EV/planted ha of RM34,655.


SUM OF PARTS

Dutaland's book value of RM1.10 per share doesn't reflect its true value. Taking the values of its three main assets and deducting total liabilities gives rise to a value of RM1.55 per share.

RNAV based on three main assets (excluding other assets, but including all liabilities)
Source: Based on my own assumptions and estimates


* * * * * * * * * 
ENDNOTES

1) DGH project

Lands involving DGH project highlighted green
Source: Dutaland annual report 2015

Potential GDV, rough estimation:
Floor space assumption: 2009 circular stated 290,00 sq ft of office space over 15 floors (Level 5–19), assume each floor has net floor area of 19,333 sq ft.

I. Offices
- Floor area: 290,000 sq ft
- Value = 290,000 sq ft × RM1,100 psf = RM319m

II. Service apartments
- 701 units over 29 floors.
- Floor area: 19,333 sq ft × 29 floors = 560,657 sq ft.
- Value = 560,657 sq ft × RM1,100 psf = RM617m

III. Shopping mall
- 6 floors of retail
- Assume gross floor area (GFA) per floor is 1.7x office’s floor area
- GFA = 6 floors × 1.7 × 19,333 sq ft = 197,197 sq ft
- Assume 70% of that is net leasable area. NLA = 70% × 197,197 sq ft = 138,038 sq ft.
- Value = 138,038 sq ft × RM1,100psf = RM152m

IV. 5-star hotel
- 325 rooms
- RM700k per room
- Value: RM700k × 325 rooms = RM228m

KL hotels benchmarks: IGB Corp Bhd's 910-room Renaissance Hotel, right opposite of the DGH project, has a book value of RM652m, translating to a BV of RM716k per room. KLCC Holdings Bhd’s The Mandarin Oriental with 632 rooms (571 rooms, 21 suites and 40 executive apartments), has a BV of RM538.9m or RM850k per room. The Westin KL was sold for approximately RM1m per room, back in 2007. 540-room DoubleTree by Hilton hotel was sold for RM388m, translating to RM718k per room.

I + II + III + IV = RM1.32bn

or

GFA should be about 2 mil sq ft now with the additional floors. Say net floor area is 60% of GFA or 1.2 mil sq ft. At RM1,100psf, GDV is RM1.32bn.

or

GDC should be about 60% of GDV. Previous GDC estimated at RM790mil, which is around 60% of RM1.3bn


2) KHD lands

Layout plan of KHD lands (could have since changed)
Source: Dutaland circular dated 8 Sep 2009

Planning permission applications involving KHD (not exhaustive):

Parcel 4?
Lot 21767 and 21768 
Submitted: 11 Nov 2015
Status: Conditional approval
Link: http://www.epbt.gov.my/osc/Borang_info.cfm?ID=369604&NoForm=Form2
Based on the application, the proposed development plan consists:
- Offices (2 tower blocks, 38 floors) above mall
- Shopping mall (3 storey)
- Service apartments, 3 blocks, 584 total units


Parcel 1 (Kenny Heights Sanctuary)
Lot 25167, 25168 & 25169
Submitted: 21 Oct 2015
Status: Approved
Link: http://www.epbt.gov.my/osc/Borang_info.cfm?ID=368762&NoForm=Form2
Plans involve: 
- Apartments, 4 blocks, 1,017 total units.


Applications submitted earlier this year:

Parcel 6, 7 & 9?
Lot 21762, 21763, 21764, 21765 & 57487
Submitted: 16 Jan 2015
Status: Conditional approval
Link: http://www.epbt.gov.my/osc/Borang_info.cfm?ID=357820&NoForm=Form2

Plans involve:
- Shopping complex, 8-storey
- Service apartments, 6 blocks, 31 floors, 432 total units
- Offices, 3 blocks, 31 floors


Parcel 3?
Lot 25177, 25178 & part of 21762
Submitted: 23 Jan 2015
Status: Delayed?
Link: http://www.epbt.gov.my/osc/Borang_info.cfm?ID=358255&NoForm=Form2
Plans involve:
- Service apartments; 3 blocks (18, 23 & 28 floors), 230 total units
- Retail podium, 6 floors
- Service apartments, 3 blocks, 450 total units, 39 floors
- Hotel, 39 floors, 300 + 150 rooms

* * * * * * * * *
“In the meantime, the Company will continue to explore other means of unlocking the value of its sizeable landbank such as joint development and/or sale of land.”
- Dutaland annual report 2015

Symphony Life - A deeper look into its deep value

SYMPHONY LIFE BHD
A deeper look into its deep value


Main highlights:

• Based on my assumptions and rough estimates, fully diluted RNAV is RM4.34. Applying a conservative 50% discount, the stock has a fair value of RM2.17.
• Symlife should start to progressively reflect its true value after FY16 in view of two positive catalysts in 2017-18.
• Main catalyst will be the announcement of the Sg. Long land development's launch (slated for 2017/18). If valued at RM50 psf, the Sg. Long land is worth RM900mil (3.9x market cap). GDV for this development was previously estimated at RM8bn (>30x market cap).
• The other catalyst will be a jump in profits (and as a result probably higher dividends) driven by its record high unbilled sales of over RM700mil (about 2.5x FY15 revenue). Upcoming/future launches of around RM2bn in GDV (excluding Sg. Long development and ongoing projects) to support earnings.
• Despite the subdued property market, Symlife's high-end projects (first phase of Star Residences and TWY) achieved high take-up rates of more than 80%. 

The delay of the Sungai Long development and management's guidance for lower sales in FY16 may come as a disappointment to some who follow Symphony Life (Symlife) closely.

But for some investors who are more forward looking, Symlife still remains an attractive property stock to be invested in.

After FYE Mar 2016, about 7 months from now, the stock could start to progressively reflect its true/intrinsic value, in view of the positive catalysts that's about to come in 2017-18.

The main catalyst would be the announcement of the Sg. Long development's launch (which should draw interest of institutional investors to the stock). 

The other catalyst would be a jump in profits (and as a result, probably higher dividends) driven by unbilled sales of over RM700mil (the highest ever recorded by Symlife; ~2.5x FY15 revenue).

Much of this sales weren’t reflected in recent quarters and won’t be in the remaining ones of FY16 because Symlife’s recent launches were mostly high rise developments which construction works are now only at the foundation level.

As profits are recognized using the stage of completion method, the bulk of the unbilled sales will only be recognized at further stages of the developments' construction, from FY17 onwards.

Sg. Long development – the main catalyst

The Sg. Long development is now slated to be launched in 2017/2018. The land area for development has now been reduced to 400 acres after around 20 acres was acquired for the EKVE.

With less land, the previously estimated GDV of RM8bn should also be lower now. If we assume a proportional GDV to land area decrease, the GDV would be roughly 5% (20/420 acres) lower at RM7.6bn (but still over 30x Symlife's current market cap)

On the bright side, the EKVE cutting through the development could serve as a positive due to better accessibility/connectivity

Figure 1: Information on the Sg. Long land

Source: Symlife’s IMTN Programme Information Memorandum (dated 16 May 2013)

Location of the Sg. Long land

From the info memo (Figure 1), location details are:

To the south of the Sg. Long land:
- Bandar Mahkota Cheras
- Bandar Sungai Long
- Taman Cheras Vista
- Taman Vista
- Taman Desa Budiman

To the north of the Sg. Long land:
- Taman Bukit Sekawan
- Taman Sri Nanding
- Taman Cempaka
- Taman Perkasa
- Taman Dusun Nanding
- Kampung Sungai Serai

Based on this info, I believe the land is located somewhere inside the orange circle in Figure 2. Google Maps link: https://goo.gl/maps/twA50

Figure 2: Sg. Long land indicative locationSource: Google Maps, www.mapcustomizer.com

The location looks about right judging from the quarry terrain (currently the land is being used for quarry operations, Symlife in FY12 paid about RM143mil to extend the lease of the land to 99 years and to convert the land status to make it ready for property development).

Potential value

Since the land is close to Bandar Sungai Long, which was developed by SHL Consolidated Bhd, land prices in that area could serve as a good indication to what Symlife's Sg. Long land is worth.

PublicInvest Research, in a non-rated report on SHL, indicated the market value/price of land in Bandar Sg. Long was RM130 per sq ft. (The report can be found here on bursamarketplace.com)

Figure 3: Extracts from PublicInvest Research report on SHL
Source: PublicInvest Research non-rated report on SHL (dated 22 Jul 2014)

If we use the RM130 psf as guidance, Symlife’s 400-acre (17,424,000 sq ft) land could be worth RM2.27bn, or about RM7.30 per share.

In a July 2015 article by The Edge Property on Bandar Sungai Long (link to article), there was a mention that “the value of residential land in the township is between RM150 and RM300 psf now.”

Another way I would value the land is to use the NPV method.

As a rough estimate, if we evenly spread out the RM7.6bn GDV over a 10 year development period (RM760mil/year), assume net margins of 20% (net profit of RM152mil/year), use a WACC of 11%, we would get an NPV of RM895mil, which comes to about RM51 psf. Based on this, the land is worth RM2.89 per share.

Potential value of Symlife stock

Many of Symlife's properties have not been revalued for some time and hence are carried at low net book values (see Figure 4).

Figure 4: Properties owned by Symphony Life

Source: Company annual report

What could Symlife's RNAV be if we were to value the properties at current market prices?

For my own entertainment, I made some guesstimates to the values of the properties to see what RNAV Symlife could potentially have (see Figure 5). Note that these are just my own estimates and not the market prices. I feel my estimates are conservative, but actual market prices could be lower or higher.

Figure 5: Hypothetical revaluation of Symphony Life properties
*Based on my own assumptions/estimates.

**Based on my own assumptions/estimates.

Assuming full conversion of the warrants, I arrived at a fully diluted RNAV per share of RM4.34***. Based on this figure, Symlife shares (at RM0.755) are trading at a discount of 83% to its FD RNAV.

(***Updated 13 Sep 2015: lowered from RM4.75 after some tweaking – no surplus for properties not for development) 

Note: For recently added properties, I used back the same net book values. Some of the properties could be under a subsidiary which is not wholly-owned, so Symlife's effective ownership of the properties could be less than 100% and if so should account for less in the RNAV. But most importantly, the Sg. Long land is definitely 100%-owned by Symlife. For the Sg. Long land, I should be using 400 acres instead of 420 acres (I don't know what price the 20 acres will be acquired for), but for the sake of convenience, I'm following the acreage as per annual report. 

I also have not included some active developments which lands are not owned by Symlife. Including the DCFs from these projects would increase the RNAV. E.g., Star Residences was not included in the RNAV. This 50:50 JV project has a GDV of RM2.8bn and a 6-year development period. As a rough estimate, if we assume net margins of 20%, use a discount rate of 11%, the NPV would be about RM395mil. Symlife's 50% stake of this would then be worth RM197.5mil or RM0.47 per share (fully diluted).  

What would be an appropriate discount to RNAV?

I believe Symlife should trade at a discount to RNAV similar to smaller cap property stocks that are more toward the affordable to mid-market segment. Property players in this segment are less affected by the current property market slowdown.

My rationale for this is that the Sg. Long development, once launched, will be more toward the mid-market segment; the development should also make up most of Symlife’s GDV in the future.

Given the location and target market of the Sg. Long development, there shouldn’t be concerns of oversupply or over competition, unlike regions such as Iskandar Malaysia now.

Market sentiment toward affordable to mid-market housing developers that don’t have heavy exposure to the Johor market seems to be relatively more favourable (in terms of discount to RNAV) than those that do.

As a benchmark, Hua Yang, with a market cap of about RM486mil, is currently trading at 48% discount to RNAV*. Hua Yang's dividend yields are close to 7% and its net gearing levels are ~0.6x. Matrix Concepts (~RM1.3bn market cap) is trading at 34% discount to its FD RNAV*. Matrix's DY is ~6%, while net gearing is relatively lower at ~0.1x. (*based on Kenanga Research's RNAV estimates). Both trade above book value.

Symlife has a market cap of ~RM230mil. Its net gearing is 0.4x, DY ~6.6%, and its stock trades at less than 0.4x P/BV currently.

It is also worth noting that while many developer’s high-end projects are experiencing poor take up rates, Symlife’s higher-end projects such as its TWY@Mont Kiara and Star Residences in the KLCC area have achieved good take-up rates of more than 80%.

In my view, for Symlife shares to trade at 50% discount or less to its RNAV would be fair and reasonable.

Future/upcoming launches

Tijani Signal Hill, Kota Kinabalu (est. GDV RM450mil)

• 10-acre JV development located in the prestigious Signal Hill area of Kota Kinabalu
• Two towers of condominiums of various sizes and 12 units of 3-storey landed luxury villas.
• Expect to be able to launch in 1H16. Phase 1 GDV RM150mil.
• 51% stake via Brilliant Armada Sdn Bhd.

Sunway (est. GDV RM400mil)

• On a 2-acre land adjacent to the Sunway South Quay development.
• About 600 mainly small unit apartments targeted for students, parents of students and investors due to its proximity to several established universities and medical centres.

Subang Airport Road, Subang (est. GDV RM200mil)

• JV project arising from the purchase of 3.2-acre land from Kwasaland by the landowner and is part of the huge RRI land development. 
• Mixed development concept with retail and residential components that is expected to do well due to its visibility along Jalan Lapangan Terbang Subang.
• 51% stake via Vital Capacity Sdn Bhd.

Mont Kiara 2, Kuala Lumpur (est. GDV RM400mil)

• On 2.2-acre of land located across Jalan Segambut from TWY@Mont Kiara. 
• Concept will be different from TWY@Mont Kiara but will continue to include innovative features that would differentiate its product in this mature location.

Section U10, Shah Alam (est. GDV RM300mil)

• JV project located within a rapidly growing corridor along the Shah Alam-Batu Arang highway with notable developments such as Sunway Alam Suria, Cahaya SPK and Nusa Rhu in its immediate vicinity. 
• The 25-acre residential development will consist of 444 units of townhouses and terrace houses.
• 3 years development period.

51G, Kuala Lumpur (est. GDV RM360mil)

• On 1-acre land at Persiaran Gurney.
• Luxurious condominium project with a private car port in each of its 71 units and a 26-feet wide driveway on each floor which enables residents to drive into their units. 
• 50% stake via 51G Development Sdn Bhd.

* * * * * * * * *

"Despite the challenges, through a combination of innovative products that created some excitement in an otherwise subdued market and competitive pricing, we recorded our highest ever sales of just over RM700 million for the financial year ended 31 March 2015 (FY2015). This has built a solid foundation of unbilled sales that will contribute positively to future earnings of the Group."
– Symphony Life 2015 Annual Report 

Success Transformer - Profits shine through

SUCCESS TRANSFORMER CORP BHD
Profits shine through

By the looks of things, profits of Success Transformer Corp (STC) being clouded by its subsidiary has come to an end.

With promising 2Q15 results released yesterday, this low P/E stock of decent quality looks like it’s on its way for a rerating.

Based on yesterday’s closing price of RM1.38 and an annualized 2Q15 EPS of 40.64 sen, the stock is trading at a prospective P/E of just 3.4x. If we apply a P/E of 6x to that annualized EPS, it would give the stock a value of RM2.44, or an upside of 77% to its last traded price.

To recap, STC’s 65% owned subsidiary, Seremban Engineering Bhd (SEB) posted heavy losses in 4Q14 and 1Q15 due to cost overruns of the Sabah Ammonia Urea project (which is more than 90% complete now). This clouded STC’s transformer and lighting profits as they were consolidated with SEB’s (see Figures 1, 2 and 3, highlighted in red).

Based on SEB’s 2Q15 report, it appears like the cost overruns had mostly been provided for in 1Q15 and will no longer be seen in SEB’s future financials.

Figure 1: SEB quarterly P&L

Source: Company quarterly reports

Figure 2: STC quarterly P&L

Source: Company quarterly reports

Figure 3: STC quaterly segmental profit

Source: Company quarterly reports. 
Note: Segmental profits here are approximations as the company does not provide profit breakdown by segment in quarterly reports.
^a Derived by subtracting ^b from ^c
b Operating profit/loss taken from SEB’s income statement.
^c Operating profit/loss taken from STC’s income statement.

The latest 2Q15 results show SEB’s profit levels to be back in the normal range (albeit at the lower range due to a drop in sales), and as a result, STC’s transformer and lighting segment's profits are now shining through again.

The transformer and lighting segment showed decent margin expansion vs. in most recent quarters; revenue grew about 3% yoy while operating profit climbed 13%.

For the process equipment segment, sales dipped 32% yoy, but this didn’t affect STC’s overall profits much. Even if we stripped out or assume zero profits for this segment, STC’s net profit would have still been around RM10.5m or 9 sen EPS in 2Q15.

I have read some articles on STC’s business outlook especially on its LED lighting and I’m quite convinced. Could 2Q15 be a precursor to STC’s continuation in growth?

Figure 4: STC’s segmental results, 2010-2014

Source: Company annual reports.

Figure 5: STC’s transformer, lighting and related products segment revenue, 2010-2014


Figure 6: STC’s process equipment segment revenue, 2010-2014


I'm not too concerned about Success' capex levels as the company is in expansion/growth mode. I believe Success is taking the opportunity to expand fast while they can. If they're spending to expand an unprofitable business then that would obviously be bad, but this isn't the case for Success.

Once they've taken expansion to a good enough level, they would cut down on capex, and now with the higher profits levels from the expansion, the effect would be: strong cash flows, which would lead to debts going down and cash going up.

A good company from a long-term investor's point of view. 

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“Currently we are actively exporting our lighting range to more than 40 countries, tapping the global market.”
– STC Annual Report 2014

Mieco - Particleboard pioneer finally turning around?

MIECO CHIPBOARD BHD
Particleboard pioneer finally turning around?

In the fibreboard and particleboard space, Evergreen and Heveaboard may be names that come to mind as both companies are currently being promoted by at least one research house; both have also performed well along with Malaysian furniture companies.

But investors could now be starting to take a closer look at Mieco Chipboard after its 2Q15 results (see figure 1) was released last Friday, 21 Aug 2015. 

Figure 1: Mieco’s 2Q15 year-on-year and quarter-on-quarter results comparison
Source: Mieco quaterly reports

Profit margin expansion was notable. Mieco attributed the improved performance to:

1. Better selling prices
2. More value added sales
3. Favourable raw material costs (particularly for glue and raw wood – two major raw materials)
4. Improved plant operations

These are in line with what Hevea and Evergreen have been saying, except Mieco didn’t mention it had directly benefited from the USD strengthening. It seems Mieco’s sales are more domestic oriented: “The Group targets to grow its domestic export-oriented market with the strengthening of the US dollar.” 

Another factor for margins improving were declining finance costs, a positive trend I see continuing as Mieco deleverages (see figure 2).

Figure 2: Mieco’s debt levels, 2Q13-2Q15
Source: Mieco quarterly reports

But note that Mieco also has about RM50m (RM45.8m + RM4.1m) due to its immediate holding company.

Peer valuation comparison

Figure 3: Evergreen snapshot

Source: CIMB estimates/forecast, company annual & quarterly reports

Figure 4: Heveaboard snapshot

Source: CIMB estimates/forecast, company annual & quarterly reports

Figure 5: Mieco snapshot

Source: Company annual & quarterly reports

Based on CIMB’s estimates/forecast (which are used in the figures above) and last Friday’s closing prices, Evergreen is trading at a forward FY16 P/E of 8.2x, while Hevea at 8.1x (fully diluted basis).

For Mieco, I couldn’t find any profit guidance from management in news or company reports, so there are no clues as to what FY16 net profit could arrive at. We don’t know what the plant utilisation rates are and how many shifts the lines are on, the order trend, if it will now emphasize on export sales, product mix, etc.

But let’s just make a simple earnings assumption to see what upside potential the stock has.

If we annualize Mieco’s 2Q15 net profit of RM6.735m, we get RM26.94m or EPS of 12.83 sen. Based on last Friday’s closing price of RM0.835, this would value Mieco’s stock at a P/E of 6.5x, which is below the 8.1-8.2x forward P/E Evergreen and Hevea is currently trading at.

If Mieco gets rerated to Evergreen's and Hevea's current forward P/E of about 8x, then Mieco could trade at RM1.03, an upside of 23%. 

From a P/BV standpoint, Evergreen and Hevea are both trading above 1x P/BV, whereas Mieco is trading at 0.62x P/BV (based on its book value per share of RM1.35 as at end-Jun 15).

Is Mieco’s 2Q15 earnings level sustainable? Evergreen’s and Hevea’s earnings are projected to grow by 43% and 18% respectively from FY15-16, so I believe given the overall pickup in demand in the sector, it is not unreasonable to assume that Mieco can sustain its 2Q15 earnings levels.

Some might have noticed that Mieco’s effective tax rate is lower than the statutory income tax rate of 25%.

“The Group’s effective tax rate for the current quarter and the year under review were lower than statutory tax rate mainly due to utilisation of previously unrecognised deferred tax assets.”

Mieco could continue to enjoy low tax rates for some time. According to a write-up by i Capital on Mieco, the company’s factory at Kechau Tui, Kuala Lipis has 100% Investment Tax Allowances which could be used to set off statutory income tax. Mieco’s 2014 annual report shows RM432.7m of unutilised investment tax allowance. i Capital also mentioned that Mieco's manufacturing subsidiary is tax-exempted for 10 years from 2005, with extension for another 5 years.

Ready capacity

After selling the land and buildings where its Semambu plant was located in 2014, Mieco is now relocating the Semambu plant to its Gebeng plant. Mieco's rationale for the disposal:

“The disposal was initiated and undertaken with a view of optimising operational efficiency and integrating the Semambu and Gebeng plant operations for longer term cost savings; a key part of our efforts to improve cost efficiencies and strengthen our bottom line. Whilst this was not an easy decision to make, we are confident that we have made the right one, and that the disposal of this asset will benefit MIECO over the longer term.”

The combined capacity of the Semambu and Gebeng plants is 300,000 cubic meters per annum.

Mieco in its 2Q15 financial notes said that the ground work for the Semambu plant's relocation had already started.

Mieco’s other plant is in Kechau Tui, Kuala Lipis. This RM400m “state-of-the-art technology” plant has one of the single largest particleboard production lines in Asia-Pacific with a capacity of 640,000 cu m per annum.

By comparison, Hevea’s particleboard manufacturing lines have an annual capacity of 525,000 cu m (but a CIMB report said only the 2nd line with a capacity of 405,000 cu m is used to manufacture particleboards, while the 1st line with a capacity of 120,000 cu m is used to produce packaging material). Revenue from Hevea’s particleboard segment was about RM181m in FY14.

Mieco’s Kechau Tui plant isn’t running at full capacity. This means it has ready capacity to pick up any rise in demand. New capacity will also be ready once the relocation of the Semambu plant to Gebeng is done. 

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“…we continue to expect local particleboard demand to be driven by stronger furniture exports. This, coupled with the expected increase in production output arising from plant efficiency, is expected to spur the growth of Group revenue in 2015.”
– Mieco Annual Report 2014