Asian Pac (1)

Imago Mall Could Potentially Bring PE Multiple Down to 3 Times

Publish date: Fri, 28 Mar 2014, 11:31 AM 

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After I published the article about how the new Atria Mall would enhance OSK Property's earnings, I was suggested to take a look at Asian Pac Holdings Bhd ("Asian Pac") which has a similar concept in play.

Based on publicly available information and leads provided by fellow forum members, I came up with a big picture for Asian Pac.

The gist of the story is that Asian Pac is closed to completing its new mall (Imago Mall) in Kota Kinabalu, Sabah.  They target to open by end 2014.  Based on preliminary analysis, Imago Mall could potentially generate net income of > RM30 mil per annum.  

Based on Asian Pac annualised net profit of RM28 mil (9 months reported earnings of RM20 mil), the new mall could potentially propel its earnings to RM61 mil. 

Based on existing market cap, this translates into PER of 3 times only.

(1) Background info on Asian Pac

Asian Pac is a small cap property developer.  Based on 975m shares and market price of RM0.20 per share, its market cap is RM195 mil.

Based on net assets of RM361 mil, cash of RM50 mil and loans of RM284 mil, net gearing is 0.65 times.  

At first look, the gearing seemed to be a bit high. However, a significant portion of it is mall related project debts and is in the process of being pared down.  Please refer to item 3 below for further analysis.

For the 9 months ended December 2013, Asian Pac reported RM20 mil earnings. If annualised, net profit would be RM28 mil. The current market cap translates into PER of 7 times.

(2)  Imago Mall

Imago Mall is part of Asian Pac's project in Kota Kinabalu (Time Square 2).  Construction cost is approximately RM600 mil. 

The mall has net lettable area of 800,000 sq ft, out of which 700,000 sq ft is mall space and about 100,000 sq ft external retail shops.

As at December 2013, Imago Mall has secured 65% tenancy and is in negotiation to secure another 20% (altogether 85%). They target to secure 100% tenancy by the time the mall open in Q4 2014.

In 2013,the major shareholder and senior management of Asian Pac has told the press the following :-

(1) Imago Mall once fully tenanted, could generate rental income of RM70 mil per annum; and

(2) The rental yield of Imago Mall is 5%

In addition, according to rating report, Imago Mall will generate net rental of RM50 mil per annum.

Based on the abovementioned information, I have constructed a financial model for Imago Mall project to cross check the various figures. To my pleasant surprise, the figures fit in seamlessly (please refer to table below).

(Imago Mall P&L model)	(RM mil)	Comments
Rental income	70	as per management guidance  *
less : epxenses	(20)	assumption of 70% margin ^
net rental income	50	as per rating report
less : interest expenses	(5)	assumption : RM80 mil x 6% #
PBT	45
less tax	(12)	25% tax
Net profit	33
divided by : project cost	600	as per management guidance
yield	5%	as per management guidance

*  translates into yearly rental rate of RM88 per sq ft.  Sunway Pyramid and IGB average yearly rental rate is RM150+ per sq ft

^  based on Sunway Pyramid and Mid Valley average profit margin 

#  estimated project debt by 2015

Caution :  Please note that the above financial model is arrived at based on various estimates and assumptions by the author for the purpose of illustrating a hypothetical scenario. It might not be reflective of the actual earnings potential. Please do not base your investment decision solely on this piece of information

(3)  Gearing analysis

As at December 2013, Asian Pac has RM284 mil loans outstanding, out of which RM150 mil are project debts related to Imago Mall ("Project Debt").

RM70 mil of the Project Debt is due by June 2014, which is likely to be repaid by internal cash (they have RM50 mil cash as at December 2013).

Another RM80 mil of the Project Debt is due by June 2015, which is likely to be repaid through a combination of mall net rental income and / or refinancing. 

Upon full repayment of Project Debt, loans outstanding will drop to RM134 mil (on pro forma basis), representing gearing of 0.37 times only, which is considered low as it is backed by recurrent income from the mall. 

(4) Land Bank and Development Projects

As the main objective of this article is to highlight the potential impact of Imago Mall on Asian Pac's earnings, I would not go into full details on Asian Pac's land banks and various development projects, so as not to overwhelm everybody with too much details.

Nevertheless some of the relevant info is as follows :-

(a) as at December 2013, unbilled sale is RM508 million with projects in KK, Johor and KL. The unbilled sale could potentially last the group 18 months.  Another RM150 mil sale to be launched in Q1 2014.

(b) brief information on Asian Pac's land bank :

Location	Description	Area (acres)	Net book value (RM mil)	year acquired
KK, Sabah	land under development (KK Time Square 2)	15.5	418	1997
JB, Johor	land under development	11.7	69	2006
Seremban	vacant land	399.8	54	2006
Gombak, Selangor	vacant land	50.0	26.6	2002
KK, Sabah	car park	114k sq ft	20.1	2008
Sungai Buloh, Selangor	vacant land	6.5	18.0	2013
Mukim Batu, KL	vacant land	6.2	12.6	1988
Mukim Batu, KL	land under development	6	11.8	1988
Mukim Batu, KL	land under development	3	8.9	1988
KK, Sabah	car park	52k sq ft	6.8	2010
TOTAL		499	646

(5) Concluding Remarks

Asian Pac is on the verge of a major transformation.  Completion of Imago Mall by end 2014 will create significant value for the group.   Net profit could potentially double to RM61 mil, translate into low PER of approxiately 3 times based on current market price.

Gearing is relatively high at this juncture but is being gradually pared down.  

Recurrent income from the mall provides strong visibility to future cash flow, which augurs well for servicing debt obligations and funding the group's growth and expansion going forward.

As usual, no harm keeping it in your watchlist. 

Have a nice day.