L&G is a property development company. It also has an education division based in Sri Damansara and 1,000 hectares of oil palm estates in Kerling, Ulu Langat, Selangor (market value approximately RM60 mil, in my opinion). However, the bulk of its profit and resources are associated with its property development business. Hence this article will focus on discussing its core business of property development.
1. Background Info on L&G
Based on latest announcement, it is estimated that L&G has 636 mil shares and 523 mil ICULS outstanding.
As the ICULS is irredeemable, we need to factor in their value when computing the market cap.
Based on mother share and ICULS price of RM0.56 and RM0.435, market cap is RM356 mil and RM228 mil respectively.
Total market cap is hence RM584 mil.
(Note : according to item B12 of the latest quarterly report, the number of new shares to be issued pursuant to conversion of ICULS would be 168 mil shares, which implies 336 mil ICULS outstanding (instead of 523 mil as mentioned above). I am not sure how the company arrive at this figure, which would result in market cap of RM502 mil, approximately RM82 mil lower than RM584 mil. Readers please seek calrifiation with your brokers)
The ICULS, expiring in 2018, could be exercised in two ways. Either :
(a) 2 ICULS convert into 1 ordinary shares; or
(b) 1 ICULS plus RM0.13 cash to convert into 1 ordinary share.
In other word, pursuant to (b), the ICULS is functioning as a Warrant.
The market seemed to be treating the ICULS as (b).
L&G's latest market price for mother share is RM0.56. If ICULS is valued based on (a), its expected market price shall be RM0.56 / 2 = RM0.28. However, if valued based on (b), market price of ICULS = RM0.56 - RM0.13 = RM0.43, which is closed to latest closing price of ICULS of RM0.435.
L&G has strong balance sheet. As at 31 December 2013, it has loans of RM18 mil, cash of RM195 mil and net assets of RM465 mil. This works out to be net cash of RM177 mil.
For Q1, Q2, Q3 and Q4 of calender year 2013, the group reported net profit of RM20 mil, RM10 mil, RM23 mil and RM25 mil respectively. Total net profit is RM78 mil. Based on market cap of RM584 mil, PER is 7.4 times.
2. Landbanks
According to the company's annual report for the FYE March 2013, the following are some of the group's land bank (I have excluded the not so important properties such as office buildings, etc) :-
| Location | area | Description | Net book value | |
| (Hectares) | (RM mil) | |||
| Ulu Selangor | 1,010.0 | Rubber and oil palm estate | 48.0 | |
| Bandar Sri Damansara, | 12.0 | balance development land | 24.0 | |
| Gombak | ||||
| Tebrau, Johor | 5.6 | vacant freehold land | 12.0 | |
As shown in the table, the group's land bank is not that huge. However, as pointed out in one of my earlier article (OSK Property Part 2), I don't see lack of sizeable land bank as handicap. Instead, I see it as a matter of preference. Based on observations, there is no direct correlation between shareholders value creation and size of land bank. Companies like A&M is sitting on huge undervalued land bank yet their market cap is significantly lower then Mah Sing, a company famous for NOT hoarding land but only buy it when it needs to use it.
In actual fact, L&G seemed to be pursuing a strategy very similar to Mah Sing. It is asset light and put emphasis on fast turnaround. That is why it has high ROE of 17% (and the bulk of its asset is actually cash).
3. A Tradition of Related Party Transactions
I believe anybody who had studied L&G would have noticed that the group likes to enter into joint ventures with its major shareholder, Mayland.
This was also one of the first thing I picked up when I first studied the group recently.
To be honest, I wasn't impressed, especially their acquisition of an office building from Mayland in 2013 for approximately RM70 mil. Why would a developer buy a completed product from somebody else ? Isn't it the role of a developer to develop and sell to others ? Until now, I still haven't forgiven them on this transaction.
I could have forever banished this group from my list. However, over the years, I have learnt one important lesson - one of the biggest sin in investing is Self Righteousness. It clouds your judgement and shut down your mind before you have chance to evaluate something thoroughly. The world of business is dynamic and constantly evolving. Things do change and new opportunities will arise. NEVER SAY NEVER.
Based on my experience, major shareholder of PLC does sometime do certain things to enrich themselves. But very seldom they will keep on doing it to kill the goose that lays the golden eggs. Usually after one bad deed, they will stop and revert to normal and focus on creating value for everybody. After all, they hold stakes in the PLC.
It is against this backdrop that I scoured the company's previous circulars for details of their transactions with Mayland. Surprisingly, the findings are generally neutral and fair :-
(a) in 2010, L&G entered into a property development JV with Mayland. To my great relief, the JV did not involve L&G acquiring any assets from Mayland. It involved L&G and Mayland each taking up 50% stake in the JV company, which is the vehicle to be used for acquiring a piece of land in Ampang from external parties. Both L&G and Mayland is required to contribute financial and other resources proportionate to their equity stake. Neither party is required to provide financial assistance to the other. In my opinion, it was genuinely an arms length transaction and definitely fair.
(b) in 2014, L&G again entered into a JV with Mayland. The terms and conditions are exactly the same as (a) above. Again, in my opinion, the deal is fair and reasonable.
4. Existing Development Projects
By coincidence, MIDF recently issued a report on L&G. I will rely on that article for information of its development projects.
L&G recently acquired a piece of land in Ampang on JV basis with Mayland (as mentioned in item 3 above). The residential development has GDV of RM789 mil, out of which 50.1% belongs to L&G.
On top of that, the group is launching Phase 2 of Damansara Foresta Condominium in Sri Damansara with GDV of RM500 mil.
L&G currently has unbilled sale of RM600 mil, equivalent to 15 months revenue.
(Elements, Ampang. L&G and Mayland first JV)
(Damansara Foresta, existing project)
5. Concluding Remarks
(a) L&G has sound fundamentals. Valuation in terms of PE multiple is reasonable.
(b) The group has very strong balance sheet. With RM465 mil net assets, it has net cash of RM177 mil.
Different people has different way of looking at cash. For certain investors, they will deduct the cash from the market cap and calculate the adjusted PE multiples. In this case, its market cap net of cash would be RM584 mil less RM177 mil, is equal to RM407 mil. Based on net profit of RM78 mil, adjusted PE multiple would be 5.2 times.
For me, I view the cash holding as source of additional future profitability. If used to acquire further land bank or income generating assets, the cash can create significant value for the group going forward.
(c) Judging by the way deals are structured for JV between L&G and Mayland, it seemed that Mayland has benign long term intention and will not arbitrarily extract value from the PLC at the expense of minority shareholders.
L&G has the necessary platform to create value for shareholders going forward.
It has the financial resources, management expertise, right balance sheet structure, and correct corporate strategy to deliver value, if managed properly.
Akin to a sharp knife, it can creat wonders if it ends up in the hand of a good cook.
没有评论:
发表评论