Sin Chew Daily - Supplement, 16 June 2014 - Tropicana cannot be neglected

Sin Chew Daily - Supplement, 16 June 2014

Main Comment: CIMB researchers Tropicana Corporation Berhad was re-evaluated on key factors that include: 1) Continuous strong sales and profit growth, 2) sale of excess industrial investment and undeveloped landbank, and 3) the elimination of corporate governance concerns.

Tropicana Must Not Be Neglected

In the short span of 3-4 years, Tropicana Corporation Berhad (TROP, 5401) has accumulated a gross development value of 77 billion ringgit in undeveloped landbank, second only to the developers UEM Sunshine (UEMS, 5148). New sales in 2011 recorded only RM429 million ringgit, which surged to RM2.1 billion and 7 thousand ringgit in 2013, however market value was only 1.9 billion ringgit (as of March), reaching the market value ratio of about 41 times, this is the highest benchmark for the industry.

In order to maintain strong sales and earnings growth, Tropicana adds a number of experienced personnel to its key management level, building a transformation blueprint that includes: 1) Monetising of development and land bank, 2) gearing reduction and 3) strategic partnership, which will be a significant factor in the estimated potential. Tropicana's goal this year is to reach more than RM3 billion ringgit worth of developments, and more than RM2 billion ringgit in sales. They focused on 3 new project launches in Klang Valley, which represents 61% of the total new launches by the group. Penang is the second largest market, with two new launches, representing 28% of the total.

Tropicana Corporation Berhad has been more cautious with their plans in Iskandar with two new launches representing 11% of the total new projects. CIMB feels confident of two new real estate plans in the Klang Valley, namely Tropicana Heights in Kajang and Tropicana Aman, because there will be a high demand for these real estate, both in measuring 47% of the Group's total new launches.

Corporate Governance Issues

September last year, investors and analysts were surprised by Tan Sri Dato Danny Tan Chee Sing whom purchased 762 acres of land bank worth SGD 774 million from Singaporean company Albedo Ltd, because he previously added RM943 million from private assets to Tropicana Berhad, investors felt surprised by his aggressive gathering of land banks in the short period, and then injecting it into another public-listed company.

In this two public-listed companies, investors are confused as to which is the preferred acquisition vehicle. In May 2013, the stock reached a high of RM2.15, and then fell to a low of RM1.20, plunging 44%.

Recently, however, it was reported that the injection of the Albedo land bank deal could fall through, CIMB believes that Tropicana Corporation Berhad will become a major industry player moving towards positive progress. Another positive move is that Tan Sri Dato�Danny Tan Chee Sing will continue to make strategic acquisitions rather than through his own private vehicles. Tropicana Senior management have expressed interest to ensure that conflicts of interest and corporate governance issues do not reoccur, any action that incurs a major change in share price will require prior consultation.

Risks

The risks that are faced by Tropicana Corporation Berhad includes government cooling measures, industrial demands, unresolved conflict of interest issues, sustainability, executive manpower, and finally a relatively high gearing ratio.

The groups net gearing ratio was at 0.75 times the net gearing ratio of 0.55 times, which is relatively high. Because most developers maintain it at 0.3 to 0.4 times. Tropicana Berhad is committed to debt reduction, but the opportunity to purchase attractive land parcels are surfacing, so that the group cannot refuse but increase their gearing. Tropicana Berhad has invested more than 10 billion ringgit and hopes pending divestment will be able to reduce their net gearing ratio to about 0.4 times.

Maintaining strong sales growth

Last year was Tropicana's best year for sales, revenue and earnings performance, if the new sales continued its annual growth of more than 2 billion ringgit, with yet another major land-sale transaction, 2014 should be an even better year. 2013 earnings included a RM218 million ringgit in fair value adjustments. The company recently sold off 308 acres of land to the EcoWorld Development Group Berhad (ECOWLD, 8206), will be able to get RM471 million ringgit in cash and a net profit of RM170 million ringgit, keeping the debt ratio at about 0.5 times.

Evaluation

Tropicana Corporation Berhad has been pursuing rapid growth and expansion, including active land acquisition and hiring professionals for the proper implementation of development projects) through the internal mergers and acquisitions. CIMB Research believes that the acquisitions are a good way of execution, but may need more time and effort, but as long as there is a good incentive structure to build their human resource to achieve this goals, the results will be very fruitful.

From the perspective of analysts, Tropicana has attraction power. Its shares have a net asset value of up to 73% , after a comprehensive revaluation, PE ratio of only about 4 times. Total group has an estimated gross development value of nearly 10 billion ringgit in assets (land bank and industrial investment), more than five times its market value. The price is even more than its net asset of RM2.32 at 40%. Its gross development / market ratio is 41 times, the highest industrial shares that were studied , indicating its potential value.

Tropicana Berhad is still in its early stages of transition, short term backtracks are yet to be resolved, Therefore CIMB analysts will give the stock a re-evaluation of 30-40%, with other small developers close in comparison, even so, its more reasonable valuation reaches up from RM3.07 to RM3.58 ringgit; the the revaluation of its net asset value after full divestment will be up to RM5.11, this will bring investors of significant gains of between 121% - 158% margin (based on share price at the end of March).

Tropicana Corporation Berhad revaluation of its total net asset value has a good chance with being released under their restructuring plan, its current stock has gone up to 70%, in time for re-valuation of the stock which will be narrowed down to a few key catalytic factors include continued to show strong sales and earnings growth, 2) sell off excess industrial investment and basement, and 3) the elimination of corporate governance issues.

With higher risk for investors when choosing their coupon rate, and the price of RM1 that reaches full-term in December 2019, according to Bursa industry motherboard share price, a reasonable price range is between RM3.07 to RM3.58 ringgit, with the intrinsic value of their coupon rate at 2.07 to 2.58 ringgit to provide 209% to 285% for increment margins.