The Star, 22 March 2014 - A clearer signal from Tropicana

The Star, 22 March 2014

Cashpile to increase after sale of Canal City land to Eco World

TROPICANA Corp Bhd is seeing a revival of interest following developments taking place in Selangor and Singapore.

The proposed sale of part of its land bank in Canal City in Selangor to Eco World Development Group Bhd and the speculated termination of a reverse takeover exercise of Singapore-listed Albedo Ltd by Tropicana’s group executive vice-chairman Tan Sri Danny Tan Chee Sing, suggest that the Malaysian listed property developer may finally aggresively sweat its assets .

A clear picture will emerge if Tan, who owns 42.73% of Tropicana, embarks on a second amalgamation exercise involving the listed company in Malaysia. The first that was done in March 2012 where Tan injected his private assets worth RM943mil into Tropicana that made it an asset heavy property company needing a strong team at the helm to work the assets.

After the March announcement, Tan took the market by surprise when he announced the proposed injection of 762 acres in Johor into Albedo in return for shares, an exercise that will make him a major shareholder of the Singapore listed property developer. The market was surprised because just five montsh earlier the family of Tan had already disclosed that all its private assets were parked into the Tropicana.

Since then, there has been little development on the corporate exercise between Tan and Albedo.

As of Dec 31, 2013, Tropicana has cash of RM446.65mil but long-term borrowings of RM1.57bil and short-term borrowings of RM350.8mil. But the cashpile will increase after the completion of the sale 128ha of its land in Canal City land near Kota Kemuning, Selangor to Eco World for RM470.67mil cash.

This land is part of the 474ha Tropicana Aman land (Canal City’s new name) which Tropicana acquired from the Selangor state government in April 2013 , a deal which drew much attention as it was concluded just before the May general election.

The sale and purchase agreement is targeted for completion by the second half of 2014, and is expected to generate a net gain of about RM170mil for the group.

Based on the net gain of RM170mil or RM12.64 per sq ft, Tropicana’s effective cost for the parcel is RM22.36 per sq ft. The exercise translates into a profit of 56.5% – not too bad a return considering the purchase was done less than a year ago.

This sale will enhance Tropicana’s net earnings per share by 12 sen.

On Albedo, news reports suggested that Tan is aborting plans to inject his Johor land into Singapore-listed Albedo, a loss making steel and raw materials company, after both parties could not agree on the terms of the sale.

While Albedo has denied this, analysts said that management had affirmed that the deal would be called off during a briefing last week. They cited corporate governance issues with elaborating further.

When first announced last September, the value of the Albedo transaction was tagged at around S$774mil (RM1.96bil). Albedo’s shares quadrupled to S$0.08 as a result of this.
Tan’s Johor land is made up of seven parcels with a total area of 762 acres in Gelang Patah.

Albedo had signed a memorandum of understanding with Tan’s private company, Temasya Cergas Sdn Bhd, for this deal.

Albedo was supposed to satisfy this purchase consideration through the allotment of new shares to Tan’s vehicle.

Based on a valuation by Knight Frank Malaysia, the total market value of the properties was about RM2.71bil (S$1.05bil) as at Aug 30 last year.

The gearing issue

Analysts generally view the sale of the land to Eco World favourably as it is in line with what the company has repeatedly said about lowering its debt position.

“Well I think the deal is in the right step as Tropicana gets to further reduce its land holding cost. As at end of the fourth quarter, the company’s gearing was 0.55 times, which is rather high for a property company,” said one property analyst.

He added that unfortunately the net gearing would stay at the 0.55x level, as Tropicana still needed to meet a cash commitment of about RM500mil for acquiring its various pieces of land in Johor in the past.

Isaac Chow of Affin Research is positive on the proposed land disposal for a myriad of reasons. Firstly, Tropicana will recognise a net gain on disposal of RM170mil. Secondly, the RM260mil estimated net proceeds from the disposal will help to reduce some of its borrowings.

“The disposal affirms management’s commitment to monetise assets and de-gear. The asset monetisation and de-gearing initiative is, in our view, a key re-rating catalyst for Tropicana’s share price,” says Chow.

The property analyst said that a gearing level of 0.5 times was still alright, but a level of 0.4 to 0.3 times would be more comforting and give the company some breathing space.
Tropicana’s current gearing level can be attributed to the land acquisitions it embarked on in the last two years.

If one recalls, back in 2012, Tropicana and Iskandar Waterfront jointly puchase 227 acres in Plentong Johor for RM220mil.

In April last year, Dijaya entered into an agreement to acquire the Canal City land measuring 1,172 acres from Permodalan Negeri Selangor Bhd for RM1.3bil via a deferred payment method.

Then a few months later in September, Tropicana bought 18 pieces of freehold land in Pulai, Johor, at a cost of RM366.55mil.

The analyst said that what he would only rerate the stock if Tropicana continued selling more land.

“Of course they will eventually need to deliver on their developments and earnings, but that will come later,” he said.

For the financial year ended Dec 31, 2013, Tropicana delivered a 111.8% increase in net profit to RM362.31mil on the back of a 134.08% jump in revenue to RM1.48bil.

The sale of the Tropicana Aman land to Eco World now allows Tropicana to leverage on Eco World’s strong branding and benefit from the spillover effects of being a premium developers neighbour.

Chow feels that the emergence of Eco World as its neighbour and development partner will raise the profile of the Tropicana Aman project.

Even after the disposal, Tropicana still owns 440 acres of net developable area in Tropicana Aman with a potential GDV of RM13bil.

Slated for launch in second half

“In that area, Tropicana will be neighbours to two premium developers – Eco World and IJM Land Bhd. This will keep all the developers on their toes. The pricing of Eco World’s properties will also automatically be used as a benchmark and this will help lift Tropicana Aman’s pricing,” said the property analyst.

Tropicana Aman is slated for launch in the second half of 2014.

The scheduled launches of Tropicana Aman this year will comprise landed properties with an estimated gross development value of RM770mil.

Tropicana has already guided that they will price their link houses in Tropicana Aman at about RM800,000, said the property analyst.

On the issue of Albedo, the analyst said his only concern would be if Tropicana were to be used as the vehicle to house Tan’s seven parcels of land.

“I would not be comfortable with that, as I think Tropicana may undergo some kind of indigestion. Tropicana will not have that kind of money to acquire the assets. At the same time, Tan will also want a fair price for his assets,” she said.

Nonetheless, the analyst felt that the termination of the deal was good as when first announced, it did confuse the market.

“The amalgamation exercise had been completed barely a year. So it did appear as if Tan was putting his prized land somehwere else,” said the analyst.

In 2012, Dijaya proposed an amalgamation exercise to streamline and rationalise the majority of the lands and properties held privately by Tan for RM943mil.

Tropicana is developing a portfolio of projects in the Klang Valley, Iskandar Malaysia and Penang with an estimated 907ha of land bank.