The Edge Financial Daily, 13 January 2014 – Tropicana to continue monetising its assets

The Edge Financial Daily, 13 January 2014

Maintain buy at RM1.23 with a target price of RM1.60: While sentiment on the property market is generally weaker following the announcement of new tightening measures, the demand for prime landbank has remained strong, partly fuelled by the recent entrance of Singapore and China developers in a large way.

We believe that the relatively attractive land prices, higher Chinese/Singaporean interest in Malaysian properties and property tightening measures in their home countries will continue to drive Singapore and China developers to Malaysia.

There was much news flow on landbank acquisitions by foreign developers in recent months. Three China-based developers acquired landbank in Iskandar Malaysia in Johor at record-setting prices of up to RM998 per sq ft (psf) while two Singapore developers (Oxley Holdings and GSH Corp) acquired landbank in the KLCC area at high rates of up to RM2,100 to RM3,300 psf.

Generally, we opine that it is still a sellers market for prime landbank and the market is still conducive for Tropicana to unlock the value of some of its land.

The company sold RM506 million worth of landbank in 2013. Moving into 2014, management has identified RM1.8 billion worth of assets that has good potential to be monetised, including the Tropicana City Mall and Office, Dijaya Plaza, W KL Hotel & Residences and some landbank.

We understand that the monetisation plans are in various stages and some could materialise as early as the first half of 2014 (1H14). That said, we note that management has not provided any specific targets and the asset monetisation will depend on market conditions which, in our view, is still conducive.

Tropicana booked in RM1.9 billion worth of property sales in the first nine months of 2013 and is on track to achieve our financial year 2013 ended Dec 31 property sales forecast of RM2.1 billion. Moving into 2014 to 2015, we expect the group to achieve lower property sales of RM1.2 billion to RM1.3 billion due to weaker property market conditions.

Nonetheless, we project the group to attain respectable net profit of RM195 million to RM196 million for 2014 to 2015, anchored by its current high unbilled sales of RM2.2 billion.

Tropicana is currently trading at an undemanding valuation of 6.8 times calendar year 2014 earnings per share, 66% discount to its revised net asset value (RNAV). At its current valuation, we believe the market has largely priced in the negatives (high net gearing, weak property market, high concentration in integrated high rise project) but overlooked its positive attributes (strategic landbank, good assets).

We believe that timely execution of its degearing initiatives will rerate Tropicana’s share price in 2014. Maintain “buy” with an unchanged target price of RM1.60 based on a 55% discount to its RNAV. — Affin IB Research, Jan 10