Rise of lower liner property stocks

By THE STAR

General Corp Bhd is a little-noticed property group in which its stake in its Singapore-listed subsidiary is worth more than its own total market value. With values such as this on Bursa Malaysia, it’s not surprising that companies are being taken private.

AFTER the rise and rise of a few large property stocks, attention has shifted to several erstwhile low-lying property stocks since last month.

In particular, Equine Capital Bhd rose 200% from around 60 sen last month to RM1.83 on Friday while DNP Holdings Bhd doubled from less than RM1.00 to RM2.16 in the same period of just over a month.

Both companies did not produce firm earnings in their latest quarter, but the interest was a combination of their potential, asset values and possibility of being taken private.

Other lower liner property stocks that climbed during this period included Eupe Corp Bhd (up 89%) and MK Land Holdings Bhd (85%).

It is not known if the buyers were punters or fund managers.

In the case of Equine, one of the buyers was Lion Capital Management Ltd which declared a substantial stake of 5.2% in the company, acquired on May 8.

MK Land found a substantial institutional shareholder in US-based Liberty Square Asset Management which served notice of its interest of 5.4% in the company.

While it is anticipated property prices here will rise, there is a lower liner group that is developing properties in Singapore where condominiums have reached record prices for several successive years.

Surprisingly, it is General Corp Bhd (GCB), not a large group, which offers the best exposure to the Singapore property market because it has a subsidiary – Low Keng Huat (S) Ltd (LKHS) – listed on the Singapore Exchange.

LKHS started as and continues to be a contractor but it successfully diversified into property development and investment.

Development projects that contributed to its current year earnings are the Twin Regency, Domain 21 and Regency Suites, all of which were fully sold.

LKHS will launch a luxury condominium project in Singapore later this year as well as a serviced apartment project in the Kuala Lumpur City Centre.

LKHS owns the Duxton hotels in Perth, Australia, and Ho Chi Minh City in Vietnam.

Both hotels are profitable, producing a pre-tax profit of S$12.9mil last year.

In addition, the Duxton in Ho Chi Minh City opened an electronic gaming centre in November last year and the company expects this to further boost its revenue this year.

GCB’s stake of 51.9% in LKHS is worth RM458mil, which is higher than GCB’s own market value of RM362mil on Friday.

That means that on paper, no value was given by the market for GCB’s other assets that include various investment properties in Malaysia such as Plaza Ampang City, GCB Court, Imbi Plaza and several pieces of vacant land in Kuala Lumpur.

LKHS’ share price has surged along with the multi-year property boom in Singapore, rising 10-fold from 20 cents in 2001 to S$2.39 on Friday.

The book value of GCB’s stake in LKHS was only RM80mil, a fraction of its current value, according to the former’s annual report last year.

Furthermore, GCB will get RM108mil cash from LKHS which will hold an AGM at the end of this month for shareholders to approve its proposal of a net special dividend of 73.8 cents a share.

This is expected to be booked into GCB’s profit and loss account for its first quarter ending April 30, 2007, and raise its net assets by 36 sen to just over RM2.00 a share.

If it marked to market its shares in LKHS, the book value would go over RM3.00. The stock closed at RM1.22 on Friday.

With stocks like this on Bursa, and investment banks keen to arrange financing, small wonder that there are several companies being taken private.

Take Petaling Garden Bhd, for instance, for which major shareholder Permodalan Nasional Bhd has made a takeover offer of RM2.50 cash a share.

The offer may look like a good premium over its net assets of RM1.68 a share but the company has properties not revalued since the early 1970s.

Petaling Garden has, for instance, 7.5 acres of land at Jalan Templer, Petaling Jaya, not revalued at its cost of RM15.1mil since 1981.

In addition, it still has over 60 acres of land at Bandar Sri Petaling, Kuala Lumpur that are booked at its 1972 cost of RM30.2mil.

It’s a good proposition for PNB, a value investor, to buy all of a company with assets at such historical costs.

Highlands windfall

Fitters Holdings Bhd, which manufactures and trades in fire safety products, is an unlikely company to make a “killing” in the property market.

It did so recently, with the sale of a property asset for RM30mil cash from which, it would net a profit of RM29.6mil, or a return on equity of almost 99%.

This must be one of the most profitable flips of property ownership in percentage terms.

It was less than two years ago when Fitters first proposed to buy 502 acres of freehold land near Ringlet town on the Cameron Highlands.

It was at that time when the company took a collateralised loan obligations or CLO facility of RM25mil.

The loan would be used to finance that land purchase of RM30mil cash and within the five-year loan period, it was planned that the land would be sold for a profit. The cost per acre was just RM60,000.

Under its original plan, Fitters would subdivide the land into affordable plots of two to 10 acres to be sold as individual farms. That would fit into the Government’s efforts to promote agriculture.

Fitters’ purchase of the land was only completed in February by a subsidiary in which its investment was still just RM220,000. A month later, it found a buyer for the whole piece of land.

The buyer is a company called Malaysian Agrifood Corp Bhd which operates an integrated food supply chain for fresh produce. The transaction is scheduled for completion this year.

Exchangeable

YTL Corp Bhd has been a laggard stock in the last 12 months, but it has started to catch up since March. The stock was only around RM5.00 in August last year.

That was when it announced a restricted offer for sale of shares in YTL Power International Bhd at RM1.00 a share on the basis of one YTL Power share for every 10 YTL Corp shares held. Even at that time, the offer was at a 48% discount from YTL Power’s market price of RM1.94.

That discount has since widened further as YTL Power was traded at RM2.38 on Friday. The offer has since been completed and YTL Corp shareholders who held on to their YTL Power shares have a profit on paper of RM1.38 a share, which substantially enhances the yield they have in YTL Corp.

This, coupled with YTL Corp’s history of distributing its own shares from its buy-back programme to shareholders, shows the company is attentive to the interests of its shareholders. That awareness may have been a factor for the stock’s rise to above RM7.00 early this year.

The news flow improved last week when a subsidiary of YTL Corp issued US$300mil worth of bonds exchangeable into YTL Corp shares at RM10 each. In spite of that exchangeable rate, the issue was reportedly over-subscribed. It was the first equity-linked bond issued out of Malaysia this year.

For shareholders, it shows the confidence of foreign investors that YTL Corp’s share price is likely to rise above RM10 over the next few years.

Although bondholders have an option for redemption, the yield to maturity coupon rate is only 2.8% a year, which is a very cheap financing cost for YTL Corp. It means that the group can go out to acquire assets with a yield above 2.8% and it would be profitable.

The group, however, has a record of acquiring assets with yields far above such rates, being a patient investor as it waits for a recession or distressed assets before it makes a major acquisition.

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