Bullish Technical Reading Warrants a Closer Look
Publish date: Mon, 7 Apr 2014, 10:59 AM
Encorp has done well lately. Its share price climbed from RM1.00 in early March 2014 to RM1.42 last Friday.
As the technical signals are very bullish, I decide to take a closer look.
(Note : please consult your own Technical experts to verify my above statement. I am not well versed in Technical Analysis and is merely relying on input from third parties)
(1) Background Info on Encorp
Encorp is principally involved in construction and property development. It also has a concession from the government to build living quarters for teachers.
Based on 225 mil shares, 60 mil RCSLS and share price of RM1.42, market cap is approximately RM405 mil.
Over the past three quarters, Encorp reported average net profit of RM9 mil per quarter.
(arrived at by taking the average of latest three quarters net profit without exceptional items, 11.5 + 8.0 + 7.9 / 3, and ignore Q1 losses under old management. Please refer to table below)
Based on assumed sustainable net profit of RM36 mil per annum, current market cap translates into PER of 11.3 times.
As at 31 December 2013, Encorp has cash of RM233 mil, debts of RM1,410 mil and net assets of RM359 mil. These figures looked alarming as debt of RM1.41 billion is many times of net assets.
However, out of RM1,410 mil debts, it is estimated that approximately RM1,200 mil is actually project debt associated with the concession, which is backed by future government payment.
Excluding the RM1,200 mil project debt and net asset of concession subsidiary of let's say, RM100 mil (estimated figure extracted from FY2012 annual report), Encorp will have cash of RM233 mil, debts of RM210 mil and net assets of RM259 mil.
This puts it in a slight net cash position.
(Note : if you feel that the balance sheet analysis above is flawed, please don't hesitate to point out the errors. It is not my intention to mislead readers into believing that the company is in better financial standing than it actually is)
(2) Management Buyout
In July 2013, Datuk Seri Dr Mohd Effendi Norwawi sold his 30.55% stake to Group CEO Yeoh Soo Ann and COO Mohd Ibrahim Masrukin.
Yeoh was an accountant and a turnaround expert. He was famous for turning around Great Wall Plastic and sold it to Scientex for RM258 mil.
(3) Historical Profitability
Encorp reported net profit of RM47 mil in Q4 FY2013. However, this figure is not reflective of its actual earnings potential as there is a revaluation surplus of RM65 mil, which should be treated as exceptional item.
To fully understand Encorp's actual earnings capacity, please refer to table below :-
Some key observations :-
(a) the concession division even though generates more than RM100 mil revenue per annum, either only broke even or incurred small losses of few million. This is because of the huge interest expenses of more than RM100 mil arising from the RM1.2 billion debts.
For this particular division, we should be happy if it doesn't become a big drag to the group. Going forward, it is reasonable to ignore any profit contribution, and assume it breaks even (by putting in place cost control measures).
(b) the construction division doesn't seem to contribute substantially to earnings either. It is possible that this division mostly carry out in house works. However, let's keep our mind open, as the final quarter of FY2013 saw a big jump in revenue and actually contributed RM2.8 mil to PBT.
According to Encorp's website, they have order book of approximately RM900 mil, comprises both in house and external jobs.
(c) the property development division is undoubtedly the core business of Encorp. Almost all the group's profit is contributed by this division. Due to the importance of this division, a seperate section will be dedicated to discuss its operations. (please refer below)
(4) Property Development Division
According to the company's website, the following are the major property development projects of the group :-
(a) Encorp Strand This is an integrated commercial township located on 45.6 acres of prime land in Kota Damansara, Selangor. It used to be the group's flagship project with GDV of RM1.4 billion. However, it is at its tail end and is expected to be completed in year 2014.
(b) Encorp Cahaya Alam in Shah Alam This residential property development project is located on 210 acres parcel of leasehold land. This development consists of 2,414 units of linked and semi-detached houses, shop offices, apartments and flats with an estimated gross development value of RM800 million. The expected date of completion is year 2016.
(c) The Enclave Hillside Villas in Batu Feringghi, Penang In 2008, Encorp acquired a 5.831 acres of freehold land located at Batu Feringghi, Penang. This future development is expected to be of a hillside villa development with the estimated gross development value of RM200 million. Launch is expected in year 2013.
(d) Encorp Marina Puteri Harbour in Nusajaya, Johor Encorp acquired a parcel of 3.3 acres freehold land in Nusjaya, Johor. Encorp plans to develop a first-rate commercial and serviced apartments development project on the land with an estimated gross development value of RM633 million. Completion date is expected in year 2016.
(e) Residences on McCallum Lane in Perth, Australia Estimated gross development value of RM80 million. Expected to be completed in year 2013.
Based on the above information, it is estimated that the Group has remaining GDV of approximately RM1 billion to RM1.5 billion.
(5) New Mall Will Contribute to Future Earnings
Encorp has built a new mall called Strand Mall at Kota Damansara as part of the Encorp Strand development project.
The mall has net lettable area of 435,000 sq ft and will be opened by April 2014.
Based on same financial model as OSK's Atria Mall and Asian Pac's Imago Mall (please refer to my previous articles), the Strand Mall is estimated to generate net profit of approximately RM18 mil per annum.
In March 2014, there were rumours that Encorp is in talk to dispose of the new mall for RM400 mil. However, the company has denied that.
(6) Potential Corporate Development
In March 2014, It was reported in the press that Felda Investment Corp ("FIC") is eyeing a 20% strategic stake in Encorp.
Management did not deny the rumour, but state that it is in "infancy stage".
It is not sure whether FIC will be acquiring the 20% stake from existing shareholder/s or through subscription of new shares.
(7) Concluding Remarks
(a) Encorp's technical signals are bullish. It is worth taking a closer look to see whether there is opportunity.
(b) Encorp is currently trading at 11 times PE Multiple, not exactly undervalued.
However, with the opening of the new mall, the additional income stream would propel the group's earnings to new level.
Based on assumption that the group's sustainable earnings going forward is RM54 mil (RM36 mil + RM18 mil), prospective PE Multiple based on market cap of RM405 mil would be 7.5 times.
I would leave it to the readers to decide whether the prospective earning is achievable and the stock is considered undervalued.
(c) If the balance sheet analysis as set out in item (1) above is correct, the Group's gearing doesn't seem to be a big problem.
(d) The potential entry of Felda has added speculative flavour to the stock. If materialize, Felda could be a valuable strategic partner.
(Note : Encorp-Wa currently trades at 76 sen. Its exercise price is RM1.00. Expiring in May 2016. Based on mother share price of RM1.42, conversion premium is 24%)
As the technical signals are very bullish, I decide to take a closer look.
(Note : please consult your own Technical experts to verify my above statement. I am not well versed in Technical Analysis and is merely relying on input from third parties)
(1) Background Info on Encorp
Encorp is principally involved in construction and property development. It also has a concession from the government to build living quarters for teachers.
Based on 225 mil shares, 60 mil RCSLS and share price of RM1.42, market cap is approximately RM405 mil.
Over the past three quarters, Encorp reported average net profit of RM9 mil per quarter.
(arrived at by taking the average of latest three quarters net profit without exceptional items, 11.5 + 8.0 + 7.9 / 3, and ignore Q1 losses under old management. Please refer to table below)
Based on assumed sustainable net profit of RM36 mil per annum, current market cap translates into PER of 11.3 times.
As at 31 December 2013, Encorp has cash of RM233 mil, debts of RM1,410 mil and net assets of RM359 mil. These figures looked alarming as debt of RM1.41 billion is many times of net assets.
However, out of RM1,410 mil debts, it is estimated that approximately RM1,200 mil is actually project debt associated with the concession, which is backed by future government payment.
Excluding the RM1,200 mil project debt and net asset of concession subsidiary of let's say, RM100 mil (estimated figure extracted from FY2012 annual report), Encorp will have cash of RM233 mil, debts of RM210 mil and net assets of RM259 mil.
This puts it in a slight net cash position.
(Note : if you feel that the balance sheet analysis above is flawed, please don't hesitate to point out the errors. It is not my intention to mislead readers into believing that the company is in better financial standing than it actually is)
(2) Management Buyout
In July 2013, Datuk Seri Dr Mohd Effendi Norwawi sold his 30.55% stake to Group CEO Yeoh Soo Ann and COO Mohd Ibrahim Masrukin.
Yeoh was an accountant and a turnaround expert. He was famous for turning around Great Wall Plastic and sold it to Scientex for RM258 mil.
(3) Historical Profitability
Encorp reported net profit of RM47 mil in Q4 FY2013. However, this figure is not reflective of its actual earnings potential as there is a revaluation surplus of RM65 mil, which should be treated as exceptional item.
To fully understand Encorp's actual earnings capacity, please refer to table below :-
| (RM mil) | Q1 FY13 | Q2 FY13 | Q3 FY13 | Q4 FY13 | Total | |
| Revenue | 72.1 | 161.6 | 168.6 | 136.4 | 538.7 | |
| > investment holding | 5.5 | 9.3 | 5.4 | 8.2 | ||
| > Concession | 26.5 | 26.3 | 26.2 | 25.9 | 104.9 | |
| > Construction | 28.8 | 44.1 | 24.7 | 103.6 | 201.2 | |
| > Property development | 219.5 | 124.9 | 136.1 | 49.5 | 530.0 | |
| > Eliminations | (211.1) | (47.2) | (25.7) | (52.0) | ||
| Exceptional Items | 0.0 | 0.0 | 0.0 | 62.5 | ||
| PBT | (1.4) | 24.9 | 14.9 | 77.2 | ||
| > investment holding | (5.6) | (3.7) | (2.7) | (3.8) | ||
| > Concession | 0.5 | (0.5) | (0.5) | (0.7) | (1.1) | |
| > Construction | (0.1) | 1.0 | (0.9) | 2.8 | 2.9 | |
| > Property development | 6.3 | 31.1 | 22.0 | 10.8 | 70.2 | |
| tax | (1.9) | (6.8) | (4.5) | (6.8) | ||
| PAT | (3.3) | 18.1 | 10.4 | 70.4 | ||
| MI | (1.8) | (6.6) | (2.4) | (23.7) | ||
| Net profit | (5.1) | 11.5 | 8.0 | 46.7 | ||
| tax rate (%) | n/a | 27.3 | 30.2 | 46.3 | ||
| shares (mil) | 225 | 225 | 225 | 225 | ||
| EPS (sen) | (2.3) | 5.1 | 3.6 | 20.8 | ||
| Net profit w/o EI | (5.1) | 11.5 | 8.0 | 7.9 | 22.3 | |
| EPS w/o EI (sen) | (2.3) | 5.1 | 3.6 | 3.5 | 9.9 | |
Some key observations :-
(a) the concession division even though generates more than RM100 mil revenue per annum, either only broke even or incurred small losses of few million. This is because of the huge interest expenses of more than RM100 mil arising from the RM1.2 billion debts.
For this particular division, we should be happy if it doesn't become a big drag to the group. Going forward, it is reasonable to ignore any profit contribution, and assume it breaks even (by putting in place cost control measures).
(b) the construction division doesn't seem to contribute substantially to earnings either. It is possible that this division mostly carry out in house works. However, let's keep our mind open, as the final quarter of FY2013 saw a big jump in revenue and actually contributed RM2.8 mil to PBT.
According to Encorp's website, they have order book of approximately RM900 mil, comprises both in house and external jobs.
(c) the property development division is undoubtedly the core business of Encorp. Almost all the group's profit is contributed by this division. Due to the importance of this division, a seperate section will be dedicated to discuss its operations. (please refer below)
(4) Property Development Division
According to the company's website, the following are the major property development projects of the group :-
(a) Encorp Strand This is an integrated commercial township located on 45.6 acres of prime land in Kota Damansara, Selangor. It used to be the group's flagship project with GDV of RM1.4 billion. However, it is at its tail end and is expected to be completed in year 2014.
(b) Encorp Cahaya Alam in Shah Alam This residential property development project is located on 210 acres parcel of leasehold land. This development consists of 2,414 units of linked and semi-detached houses, shop offices, apartments and flats with an estimated gross development value of RM800 million. The expected date of completion is year 2016.
(c) The Enclave Hillside Villas in Batu Feringghi, Penang In 2008, Encorp acquired a 5.831 acres of freehold land located at Batu Feringghi, Penang. This future development is expected to be of a hillside villa development with the estimated gross development value of RM200 million. Launch is expected in year 2013.
(d) Encorp Marina Puteri Harbour in Nusajaya, Johor Encorp acquired a parcel of 3.3 acres freehold land in Nusjaya, Johor. Encorp plans to develop a first-rate commercial and serviced apartments development project on the land with an estimated gross development value of RM633 million. Completion date is expected in year 2016.
(e) Residences on McCallum Lane in Perth, Australia Estimated gross development value of RM80 million. Expected to be completed in year 2013.
Based on the above information, it is estimated that the Group has remaining GDV of approximately RM1 billion to RM1.5 billion.
(5) New Mall Will Contribute to Future Earnings
Encorp has built a new mall called Strand Mall at Kota Damansara as part of the Encorp Strand development project.
The mall has net lettable area of 435,000 sq ft and will be opened by April 2014.
Based on same financial model as OSK's Atria Mall and Asian Pac's Imago Mall (please refer to my previous articles), the Strand Mall is estimated to generate net profit of approximately RM18 mil per annum.
In March 2014, there were rumours that Encorp is in talk to dispose of the new mall for RM400 mil. However, the company has denied that.
(6) Potential Corporate Development
In March 2014, It was reported in the press that Felda Investment Corp ("FIC") is eyeing a 20% strategic stake in Encorp.
Management did not deny the rumour, but state that it is in "infancy stage".
It is not sure whether FIC will be acquiring the 20% stake from existing shareholder/s or through subscription of new shares.
(7) Concluding Remarks
(a) Encorp's technical signals are bullish. It is worth taking a closer look to see whether there is opportunity.
(b) Encorp is currently trading at 11 times PE Multiple, not exactly undervalued.
However, with the opening of the new mall, the additional income stream would propel the group's earnings to new level.
Based on assumption that the group's sustainable earnings going forward is RM54 mil (RM36 mil + RM18 mil), prospective PE Multiple based on market cap of RM405 mil would be 7.5 times.
I would leave it to the readers to decide whether the prospective earning is achievable and the stock is considered undervalued.
(c) If the balance sheet analysis as set out in item (1) above is correct, the Group's gearing doesn't seem to be a big problem.
(d) The potential entry of Felda has added speculative flavour to the stock. If materialize, Felda could be a valuable strategic partner.
(Note : Encorp-Wa currently trades at 76 sen. Its exercise price is RM1.00. Expiring in May 2016. Based on mother share price of RM1.42, conversion premium is 24%)
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