The Edge Online, 16 April 2014 - Warrants Update Asset disposal exercise may propel Trop-WA

The Edge Online, 16 April 2014

A number of analysts have picked Tropicana Corp Bhd as their top stock in the property sector, even as most developers brace for an earnings slowdown and thinner margins in the coming years.

This is because, further asset disposals are expected to strengthen the company’s balance sheet and its results.

The stock rebounded recently, after a prolonged downward trend, closing at an eight-month high of RM1.64 on April 01, which represented a 34% gain since Jan 01. The company’s warrant, Trop-WA, followed suit, rising 43% in the same period.

Trop-WA has a conversion ratio of one to one, and an exercise price of RM1. It is also a good proxy for the underlying share, as it only expires in December 2019.

At its closing price of 82 sen on April 01, Trop-WA was trading at a premium of nearly 11% to the mother share. It is worth noting that the premium had narrowed from 21% on Jan 01, indicating greater buying interest.

Formerly known as Dijaya Corp Bhd, Tropicana is a leading property player in the Klang Valley, and is known for its medium- to high-end developments. The group has 2,268 acres (918ha) of land in key regions in the country, with an estimated gross development value of RM81.8 billion.

For the financial year ended Dec 31, 2013, Tropicana’s net profit rose 112% year-on-year, to RM362.31 million.

Among the analysts covering the stock, RHB Research is the most bullish, with a fair value of RM2.27. The research house says, it likes Tropicana’s continuing degearing exercise, which entails selling part of its landbank for cash gains.

To recap, Tropicana announced on March 19, the disposal of 308.7 acres of land to Eco World Development Group Bhd, for a total consideration of RM471 million.
“The disposal will result in a significant RM170 million net gain. The company also sees this, as a way to accelerate the unlocking of its asset value,” says RHB, in a March 20 note.

Its RM2.27 target price implies a 38% upside potential for the mother share, which closed at RM1.64 on April 01. Assuming zero premiums, Trop-WA could theoretically be worth RM1.27 — an upside of 54% to its close of 82 sen on April 01 — if it reaches RHB’s target.

Affin IB Research has set a lower target price of RM1.80 for Tropicana, although it points out that the company is actively working towards improving its gearing ratio, which currently stands at a rather high 0.55 times. “We believe, the market has largely priced in its negatives (high net gearing, weak property market), but overlooked its positive attributes (strategic landbank, good assets),” it says, in a March 24 note.

This story first appeared in The Edge weekly edition of April 07-13, 2014.