Gadang (Part 1) - Joint Venture Project Will Create Value Greater Than Existing Market Cap
Author: Icon8888 | Publish date: Wed, 2 Apr 15:08I first bought Gadang in 2007 (if remember correctly). However, their earnings turned out to be erratic. I lost patience, sold it off shortly at a loss.
Six years had passed. Things changed. Gadang is now on stronger footing. Its eanings stream had become more consistent. I took a scond look recently and discovered something interesting.
In December 2013, Gadang announced that it had entered into a joint venture with an external party called Capital City Property Sdn Bhd ("CCPSB").
Pursuant to the joint venture, Gadang will contribute a small piece of land worth RM58 mil, and CCPSB will develop it for GDV of RM1.8 billion. CCPSB will subsequently pay Gadang RM330 mil.
Gadang's current market cap is RM227 mil. The RM330 mil it will receive from the JV is 145% its market cap. Please read on.
1. Background Info on Gadang
Gadang is principally involved in construction and property development.
Based on 197 mil shares and market price of RM1.15, market cap is RM227 mil.
The group has net assets of RM270 mil, loans of RM120 mil and cash of RM155 mil. As such, it is in net cash position of RM35 mil.
For the half year ended 30 November 2013, the group reported net profit of RM15.4 mil, or EPS of 7.83 sen.
If annualised, EPS would be 15.7 sen. Current share price translates into PER of 7.3 times.
For a small cap stock, it is fairly valued now. (our market is spookily efficient)
2. The Joint Venture With CCPSB
On 26 December 2013, Gadang announced that it is entering into JV with CCPSB as follows :-
(a) Gadang will contribute 12 acres of freehold land located along Jalan Tampoi, Johor. The market value of the land is approximately RM58 mil
(b) CCPSB will undertake an integrated development project on the land with GDV of RM1.8 billion.
(c) The development will comprise of retail podium, office suites and hotel suites.
(d) All cost of the development project to be borne by CCPSB.
(e) the retail podium is to be completed within 36 months from commencement (lets' say by mid 2017)
(f) the entire project to be completed latest by 66 months from commencement date (let's say by end 2019)
IN RETURN FOR CONTRIBUTING THE LAND, GADANG SHALL BE ENTITLED TO RECEIVE 16.7% OF THE FINAL GDV, UP TO MAXIMUM OF RM330 MIL.
The RM330 mil is to be paid to Gadang by cash. However, Gadang has the right to elect to receive up to 20% by payment in kind (in the form of properties).
3. Other Relevant Information
The objective of this article is to highlight the windfall gain that Gadang can reap from 12 acres land with market value of RM58 mil.
I prefer not go too in depth into its other operational details so as not to overwhelm the readers.
Nevertheless, some of the relevant info is as follows :-
(a) sizeable order book of RM1.26 billion (3.5 x FY2013 revenue). Construction projects in hand include V2 Package of MRT (RM863 mil), Shah Alam Hospital (RM411 mil) and RAPID Phase 1 (RM323 mil). The group is bidding for RM6 billion worth of projects.
(b) majo property development projects are jentayu Residence in Tampoi, Johor (GDV RM369 mil), Residensi Vyne in Sungei Besi (GDV RM213 mil), Pokok Sena township in Kedah (GDV RM108 mil). Remaining GDV to be developed is RM2.2 billion.
(c) water treatment business in Indonesia (concession) contributed RM4.4 mil PBT in FY2013.
(d) planted 2,100 hectares of oil palms in Sabah, which will start yielding in 4 years time.
4. Concluding Remarks
(a) Gadang has strong fundmentals. Balance sheet is strong, and the group has grown into a size whereby it can deliver consistent earnings.
(b) The JV with CCPSB will deliver RM330 mil profit. Let's assume 25% tax rate, net profit would be RM248 mil.
Over a period of five years (target to be completed by end 2019), average contribution would be RM50 mil per annum.
Add that to Gadang's current profit of let's say RM31 mil (based on half year profit annualised), pro forma yearly earnings would be RM81 mil.
Based on 7.3 times PER, market cap would be RM591 mil, translates into share price of RM3.00 per share.
The abovementioned computation is of course purely hypotethical. We don't know in real life how the profit will be booked in. But it does illustrate how much impact it could potentially have on Gadang.
(c) however, one would question whether it is too early to invest in Gadang ? If my above analysis is correct, shouldn't we start investing in Gadang when we can smell the profit of the JV project, let's say in two years time ?
Not necessarily. Please don't forget the JV project is only one of the many things Gadang is pursuing. While we are waiting for the JV project to deliver value, the other operations are already yielding results and attracting investors attention.
As an early bird, I don't mind taking position now. Afterall, the fundanmental is good and existing valuation is cheap.
5. One Last Comment
Dear Gadang directors, if you are reading this article, can you please consider changing the name of the company ?
"Gadang Holdings Bhd" is totally not cool or sexy (shake my head).
Gadang (Part 2) - Encouraging News on the Joint Venture Project
Author: Icon8888 | Publish date: Thu, 3 Apr 11:31I googled for additional information on the Joint Venture Project between Gadang and Capital City Property Sdn Bhd ("CCPSB").
To my surprise, CCPSB is actually related to the Hatten Group, which owns the Hatten Hotel in Melaka.
Last year, I happened to have spent a few nights there (a brand new hotel). Overall, I was very impressed with the good value for money.
I would say that Gadang has a very capable JV partner.
According to The Star article below dated 28 February 2014, the JV Project has attracted strong interest after being launched. The very innovative idea of bringing various countries' attractions under one roof seemed to fire property investors' imagination, thereby allowing Capital 21 (the name of the project) to defy the slowing property market in Johor and generates enthusiastic response from potential buyers.
IN OTHER WORDS, THE WINDFALL GAIN OF RM330 MIL IS NO LONGER A FUZZY CONCEPT, IT IS FAST TAKING SHAPE AND TURNING INTO REALITY.
Please refer to article below
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MALL PROJECT IN JOHOR ATTRACTS STRONG INTEREST
The Star, 28 february 2014
Launched in December 2013, Capital 21 @ Capital City, a themed retail development located within Iskandar Malaysia development region in Johor has caught the attention of industry experts with its strong sales since its introduction into the Malaysian property market.
Two months after its official launch, Capital 21 has been drawing strong interest in Johor.
The new retail development comprising 1,200 retail units ranging from 120sq ft to 5,000sq ft, is said to be increasingly in demand among local and foreign investors.
As its name suggests, the themed floors of Capital 21 will feature 21 different “Capitals”. Some of which are country capitals, and others prominent and memorable cities or countries. The 21 capitals are Hawaii, Los Angeles, Switzerland, Las Vegas, Tokyo, Washington DC, Madrid, Paris, Milan, Amsterdam, Stockholm, Athens, Istanbul, Cairo, Dubai, New Delhi, Singapore, Hong Kong, Shanghai, Seoul and Sydney.
Now, not only will shoppers have access to renowned fashion brands and international cuisine, they will also be able to experience the excitement of world cultures in one locale. The ambitious new retail model is the first of its kind in Malaysia.
For an introduction to the development’s concept, visitors can go to the Capital City Show Gallery located at 1132, Jalan Tampoi, Kawasan Perindustrian Tampoi, Johor Baru.
The gallery offers a glimpse into the actual 360° view and 3D layout of the mall with five featured capitals. Visitors can experience first-hand the lifestyle in Tokyo, the life-size windmill feature from Amsterdam, Hong Kong’s famous street markets, the ski slopes in Switzerland and the vibrancy of Madrid.
As part of a joint-venture initiative between developers, Hatten Group Sdn Bhd, Sunbuild Development Sdn Bhd and contractor, Gadang Holdings Bhd, Capital 21 is just the first phase of the RM2.2bil integrated project named Capital City.
Spread across 14 acres in the increasingly developed area of Iskandar Malaysia, the vast mixed-use development will also house two international hotel blocks and three SOHO towers nestled atop Capital 21’s massive mall platform which offers over 1 million sq ft of retail space.
The unconventional marketing approach to Capital City is also drawing attention.
Instead of introducing the residential phase first to establish a population and consumer base for the retail element, the partners have launched the shopping mall — Capital 21 . The move was initially questioned by critics but the result speaks for itself with high sales figures recorded in just two months. When asked about the sales response achieved for Capital 21, Colin Tan, group managing director of Hatten Group Sdn Bhd, attributed the success to the passion and experience of the joint venture partners.
“With our combined expertise in the property industry, we have worked together to design and conceptualise this project and we have the utmost faith in the success of Capital City. We are pleased that the sales figures are reflecting such outstanding public trust and support,” he said.
Siow Chien Fu, group managing director of Sunbuild Development Sdn Bhd, said, “Investors are tapping into the high-potential of Capital 21 not only for its unique, multi-capital mall concept, but also due to its strategic location, its fully-integrated development layout and the surety of a guaranteed 15% rental yield for the first two years.”
Capital 21 is slated to be complete in 2018.
For more information go to www.capitalcity.com.my or call 017 309 1399.
(Capital 21 - Gadang and CCPSB's joint venture project)
Gadang (Part 3) - The Dawn of a New Era
Author: Icon8888 | Publish date: Tue, 8 Apr 22:12To be honest, the title of this article should be "Gadang Issues Circular to Shareholders". But who would pay attention to such an article ? For a blogger, the biggest thrill is to come up with a title that can tempt the readers to read on. So I decide to use a more catchy title as above.
Back to the topic. Gadang issued circular to shareholders today for the Joint Venture. EGM date has been fixed at 10 am on 23 April 2014 (Wednesday) at Sri Damansara. I might be there to listen to what management has to say.
The objective of this article is to supplement / update / correct some of the information as set out earlier in Part 1 and 2 of the article series.
(1) Composition of the Development Project
In Part 1, it was mentioned that the Project will comprise retail mall, office suites and hotel suites. However, information on the exact composition is not available.
According to page 19 of the Circular, out of GDV of RM1.8 billion, RM1.3 billion is retail mall, RM200 mil office suites and RM300 mil hotel suites, representing 72%, 11% and 17% of GDV respectively.
What is the implication ? It is actually good news.
As mentioned in Part 2 of the article series, the retail mall (Capital 21) has received favorable responses from property investors due to the innovative concept of bringing 21 capital cities' attractions under one roof. Due to the heavy weightage of the mall component, the fact that it is well received means that the residual risk for the entire project has been cut down substantially.
In addition, the massive mall component augurs well for payment to be recieved by Gadang. Please refer to section (2) below.
(2) Mode of Payment
Details of how Gadang will be paid are set out in page 12 of the Circular. It is quite a mouthful and not meaningful to be reproduced here. Fortunately, there is a table that can help us to understand the payment structure :-
| Payment to Gadang | ||
| Mall Progress Billing | RM mil | RM mil |
| 10% | 130 | - |
| 30% | 390 | 117 |
| 30% | 390 | 117 |
| 30% | 390 | 67 |
| TOTAL | 1,300 | 301 ^ |
^ the remaining of RM23 mil is to be booked in pursuant to construction of office and hotel suites
(note : if you read page 13 of the Circular, the payment structure is not as simplistic as set out in table above. However, I believe the concept is more or less there. Please don't hesitate to voice out if you identify any major errors)
What information from the table above is relevant ?
Out of RM324 mil to be received by Gadang, RM301 mil is mall related. It also happened that the mall will be the first to be constructed (target to be completed by 2017, while the entire project is to be completed by 2019 / 2020).
This means that Gadang will start receiving payment at relatively early phase of the project.
Based on assumption that construction work starts in 2014, Gadang might start booking in profit from as early as 2015 onwards
(shareholders please seek clarification with management during EGM)
(3) Wind Fall Gain
In Part 1 of the article, I wrote that the group could reap windfall gain of RM330 mil, and after tax deductions, the net profit should be RM248 mil. Apparently I had made a mistake by forgeting to factor in the land cost.
According to page 20 of the Circular,
"based on maximum entitllement sum of RM324 mil, the latest net book value of the land of RM31 mil, and tax of 25%, the JV is estimated to produce net profit of RM220 mil."
I was out by 13%. My apology.
(4) Utilisation of Proceeds
In page 23 of the Circular, the company states that the amount of RM324 mil shall be utilised as follows :-
| Purpose | RM mil | Comments |
| Acquisition of new land banks | 100 | yet to be identified |
| Part financing of existing projects | 65 | construction, property, utility, plantation |
| New investments of the group | 60 | to be identified |
| General working capital | 15 | day to day operation |
| Repayment of loans | 10 | based on 7% int rate, interest saving of RM0.7 mil |
| Cost related to the JV | 74 | mostly tax expenses |
| TOTAL | 324 |
(5) Pro forma Effects on Net Assets and Gearing
(note : based on FYE 31 May 2013 figures)
According to page 22 of the Circular, shareholders funds would be boasted by a massive 81% from RM263 mil to RM482 mil.
Net assets per share will increase from RM1.34 to RM2.45. Based on existing share price of RM1.27, Price to Book Ratio will drop from 0.95 times to 0.52 times.
Loans will drop by RM10 mil. However, due to spike in shareholders' funds, gearing will drop from 0.31 times to 0.15 times.
(6) Concluding Remarks
Based on the December 2013 announcement, we have already more or less known that the JV Project will create significant value for Gadang Group.
However, the release of the Circular today has shed more lights on the subject and allow us to have a better feel of the positive impacts.
In my opinion, it is an understatement to say that the JV project creates value for Gadang.
During the past 13 years (2000 to 2013), Gadang reported aggregate net profit of RM149 mil. The JV Project can single handedly deliver RM220 mil net profit over next three years, representing 150% of past 13 years' total net profit.
It will supercharge the balance sheets by boasting shareholders' funds by massive 81%.
The company has indicated that these additional resources will be further ploughed in to expand the group's operations, thereby bringing the group to a new level.
I have always tried to refrain from using promotional language to sensationalize my article. But this case simply blows my mind away.
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