The Edge, 31 March 2014 - Deal flows may spur TROP-WA

The Edge, 31 March 2014

Tropicana Corp Bhd's share price had slipped 40% over eight months to reach a low of RMl.20 on Feb 7 before recovering. Over the past six weeks, the stock has risen 15.8% and closed at RM1.39 last Wednesday.

Among other things, analysts are encouraged by the property developer's move to monetise some of its assets to pare its gearing and bolster its balance sheet.

Tropicana recently sold a 308.7-acre parcel in Kota Kemuning - better known as the Canal City land - to Eco World Development Group Bhd for RM470.67 million.

While Tropicana will book a RM170 million gain from the deal, analysts see more transactions taking place. For one, the company's net gearing is likely to stay at the current level of 0.55 times even after the disposal, as it still needs to meet cash commitments of about RM500 million to acquire the Gelang Patah and Senibong Cove land, RHB Research says in a March 20 note.

Even so, RHB Research revised upwards its target price from RM2.19 to RM2.27, being a 25% discount to the RM3.02 per share the research house calculates Tropicana's assets to be worth.

TROP-WA vs mother share

Any further positive newsflow on the company could spur interest in Tropicana warrant, TROP-WA, which the company issued in 2009 to sweeten a rights issue. Closing at 67 sen last Wednesday,TROP-WA was trading at a 20.14% premium to the mother share.

TROP-WA is convertible to ordinary shares on a one-to-one basis at a RM1 strike price, any time before its expiry on Dec 8,2019.

At the time of writing, Bloomberg data shows all five analysts tracking Tropicana having "buy" calls on it.Target prices ranged from UOB Kay Hian's RM1.74 to RHB Research's RM2.27, implying a 25.2% to 63.3% upside potential from the share's RM1.39 close last Wednesday.

Using UOB Kay Hian's RM1.74 target price, there's only a 10.4% upside potential for TROP-WA, which should be worth 74 sen [RM1.74-RM1], assuming zero premium to the underlying share.

However, TROP-WA would theoretically be worth 89.6% more at RM1.27each [RM2.27-RM1], should the mother share reach RHB Research's more bullish target price of RM2.27, assuming zero premium to the underlying share.

As at Dec 3l,2013,Tropicana's net borrowings stood at RM1.47 billion against its shareholders' funds of RM2.73 billion and cash balance of RM497 million.

Affin Investment Bank Research opines that it is still a seller's market for prime land-bank. That's good as Tropicana may need to raise more cash.

Just last week, the Selangor government was said to be looking at revising its 2012 Canal City deal with Tropicana, which may result in Tropicana having to pay RM844.2 million upfront.