JV Project Will Create Value Greater Than Existing Market Cap
Publish date: Wed, 2 Apr 2014, 03:08 PM
I 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) major 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.
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) major 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.
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