Catch Them Young, Watch Them Grow
Publish date: Mon, 14 Apr 2014, 08:33 PM
Over the years, I noticed that one of the biggest creators of shareholders wealth in Bursa are small cap construction companies.
1. Construction is Tough Business
I have a chance to speak to the CEO of a listed construction company at the farewell ceremony for his retirement, hoping to hear something insightful and introspective.
Of all the things he could have said, he told me, "I can finally stop kissing asses".
Such cynicsm pretty much sums up the nature of the industry - it is a tough business, competition is intense, you need to continuosly bid for projects in order to survive.
Some ventured into concession businesses for recurrent income. However, it is still not sufficient to fundamentally change the nature of the business. Construction companies are susceptible to boom bust cycles.
That is why big construction firms such as Road Builders, IJM, Gamuda and WCT all have fragmented shareholdings.
All their founders pared down their stakes over the years to crystalize their wealth.
However, there is a new breed in town. This new generation does not focus entirely on construction or concession businesses. They found that property development can be a steady source of income, minus the headache of going around town to beg for contracts.
2. Property Development Came to the Rescue
What make this possible is the drastic changes that happened to the property development industry.
About five years ago, a reasonably good quality comndominium in PJ sells for RM200,000. A terrace house at Bukit Jelutong is probably priced at RM350,000.
However, something extraordinary happened three, four years ago. Property and land prices shot up substantially. A condo now in PJ is easily worth RM500,000. Landed properties are at least RM500,000 to > RM1 million, depends on location.
Property developers are no more viewed as second tier companies. Land is now very valuable, and property development has turned into something very lucrative.
Many of these small scale contractors has extensive experience doing construction works for developers. Naturally, many of them ventured into property development. Some of them did well and their market cap multiplied.
Some of the small cap construction firms that have done well are SBC Corp, Crest Builders, Mitrajaya, Gadang, WCT (has since grown into multi billion Ringgit market cap).
Due to the above observation, I have paid particular attention to smallish construction / property development companies.
Unlike their bigger counterparts such as IJM and Gamuda, these smallish companies had small earning base, and hence better potential to grow, provided they can find a niche for themselves.
I consider Ken to be in this category.
3. Background Info on Ken
Ken has 96 mil shares outstanding. Based on market price of RM2.20, existing market cap is RM211 mil.
The group has net assets of RM184 mil, RM9 mil cash and RM1.5 mil loan. As such, it is in net cash position.
Based on full year net profit of RM21 mil, PER now is 10 times.
Considered fairly valued for a small cap company.
4. Land Banks
Pursuant to FY2013 Annual Report, the group has 15 properties. However, not all of them are important (stores, bungalow lots in Pahang, land in Melaka and Perak, shop lots).
I have excluded all those properties. What was left was 63 acres at Penang, Selangor and Johor, with net book value of RM128 mil.
In my opinion, the land bank is not very huge size, but should be sufficient to keep a company with RM200 mil market cap busy for a while.
4. Existing Development Projects
(a) KEN Rimba Jimaran Residences Located at Shah Alam. Comprises 168 units of double storey terrace houses. Launched in early 2013, scheduled to be completed by 2015.
(b) KEN Rimba Condominium 1 Comrpises 679 units and villas. Will be launched in second quarter of 2014. To be followed by KEN Rimba Condominium 2.
(c) KEN TTDI 13 storey future corporate headquarter located at Taman Tun Dr Ismail. Open for leasing. Target completion by 2015.
(d) KEN JBCC Integrated development project located 2.5 km from Woodland Causeway. By far the biggest project to be undertaken by the group. Expect to commence in 2014.
(e) Genting Highland Hospitality and mixed development project at hilltop
5. Concluding Remarks
I find Ken interesting because of its small market cap, small revenue, small net profit and at the same time, has a reasonably decent management team and owner.
For the latest financial year, they reported net profit of RM21 mil only.
This level of profit is considered very small. Nowadays, a reasonable size property development project could easily generate hundreds of million of profit.
In addition, they have zero gearing. As such, there is potential to gear up in the future to acquire land bank and other income generating assets.
In my opinion, it shouldn't be difficult for them to double their net profit over next few years, thereby bringing market cap to a higher level.
Only for those who are patient and can wait for three, four years.
Have a nice evening.
1. Construction is Tough Business
I have a chance to speak to the CEO of a listed construction company at the farewell ceremony for his retirement, hoping to hear something insightful and introspective.
Of all the things he could have said, he told me, "I can finally stop kissing asses".
Such cynicsm pretty much sums up the nature of the industry - it is a tough business, competition is intense, you need to continuosly bid for projects in order to survive.
Some ventured into concession businesses for recurrent income. However, it is still not sufficient to fundamentally change the nature of the business. Construction companies are susceptible to boom bust cycles.
That is why big construction firms such as Road Builders, IJM, Gamuda and WCT all have fragmented shareholdings.
All their founders pared down their stakes over the years to crystalize their wealth.
However, there is a new breed in town. This new generation does not focus entirely on construction or concession businesses. They found that property development can be a steady source of income, minus the headache of going around town to beg for contracts.
2. Property Development Came to the Rescue
What make this possible is the drastic changes that happened to the property development industry.
About five years ago, a reasonably good quality comndominium in PJ sells for RM200,000. A terrace house at Bukit Jelutong is probably priced at RM350,000.
However, something extraordinary happened three, four years ago. Property and land prices shot up substantially. A condo now in PJ is easily worth RM500,000. Landed properties are at least RM500,000 to > RM1 million, depends on location.
Property developers are no more viewed as second tier companies. Land is now very valuable, and property development has turned into something very lucrative.
Many of these small scale contractors has extensive experience doing construction works for developers. Naturally, many of them ventured into property development. Some of them did well and their market cap multiplied.
Some of the small cap construction firms that have done well are SBC Corp, Crest Builders, Mitrajaya, Gadang, WCT (has since grown into multi billion Ringgit market cap).
Due to the above observation, I have paid particular attention to smallish construction / property development companies.
Unlike their bigger counterparts such as IJM and Gamuda, these smallish companies had small earning base, and hence better potential to grow, provided they can find a niche for themselves.
I consider Ken to be in this category.
3. Background Info on Ken
Ken has 96 mil shares outstanding. Based on market price of RM2.20, existing market cap is RM211 mil.
The group has net assets of RM184 mil, RM9 mil cash and RM1.5 mil loan. As such, it is in net cash position.
Based on full year net profit of RM21 mil, PER now is 10 times.
Considered fairly valued for a small cap company.
| (RM mil) | FY09 | FY10 | FY11 | FY12 | FY13 | |
| Revenue | 31 | 54 | 87 | 54 | 56 | |
| Net profit | 10 | 19 | 23 | 16 | 21 |
4. Land Banks
Pursuant to FY2013 Annual Report, the group has 15 properties. However, not all of them are important (stores, bungalow lots in Pahang, land in Melaka and Perak, shop lots).
I have excluded all those properties. What was left was 63 acres at Penang, Selangor and Johor, with net book value of RM128 mil.
| Net | Year of | ||||
| Location | Description | Area | Book Value | Acquisition | |
| (acres) | (RM mil) | ||||
| Batu Feringgi, Penang | beachfront land | 2.5 | 5.6 | 2005 | |
| for development | |||||
| Kapar, Klang | development land | 37.4 | 8.3 | 2003 | |
| District of KL | land for investment | 1.2 | 42.2 | 2007 | |
| JB Town, Johor | development land | 22.5 | 71.6 | 2012 | |
In my opinion, the land bank is not very huge size, but should be sufficient to keep a company with RM200 mil market cap busy for a while.
4. Existing Development Projects
(a) KEN Rimba Jimaran Residences Located at Shah Alam. Comprises 168 units of double storey terrace houses. Launched in early 2013, scheduled to be completed by 2015.
(b) KEN Rimba Condominium 1 Comrpises 679 units and villas. Will be launched in second quarter of 2014. To be followed by KEN Rimba Condominium 2.
(c) KEN TTDI 13 storey future corporate headquarter located at Taman Tun Dr Ismail. Open for leasing. Target completion by 2015.
(d) KEN JBCC Integrated development project located 2.5 km from Woodland Causeway. By far the biggest project to be undertaken by the group. Expect to commence in 2014.
(e) Genting Highland Hospitality and mixed development project at hilltop
5. Concluding Remarks
I find Ken interesting because of its small market cap, small revenue, small net profit and at the same time, has a reasonably decent management team and owner.
For the latest financial year, they reported net profit of RM21 mil only.
This level of profit is considered very small. Nowadays, a reasonable size property development project could easily generate hundreds of million of profit.
In addition, they have zero gearing. As such, there is potential to gear up in the future to acquire land bank and other income generating assets.
In my opinion, it shouldn't be difficult for them to double their net profit over next few years, thereby bringing market cap to a higher level.
Only for those who are patient and can wait for three, four years.
Have a nice evening.
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