Lien Hoe Corp

Interesting Little Fellow

Publish date: Wed, 30 Apr 2014, 09:42 PM

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Lien Hoe is a small cap stock. It attracted my attention last week because it showed signs of moving up amid active trading.

 

However, I would like to qualify that I do not necessarily invest in every stock that I write about. Due to lack of consistent profit track record, Lien Hoe's fundamentals are not considered strong. I would suggest only take position in the future when share price has dropped to a more attractive level. 

1. Background Information on the Company

Lien Hoe is principally involved in property development, hotels & leisure and construction.

Based on 362 mil shares outstanding and share price of RM0.37, market cap is RM134 mil.

The group has net assets of RM267 mil, loans of RM61 mil and cash of RM10.9 mil. Net gearing works out to be 0.18 times.

In FY2013, the group reported net profit of RM2.2mil. PE multiple is hence 64 times.

Out of operating profit of RM8.9 mil, construction contributed RM11.6 mil, hotel RM4 mil and property development RM1.3 mil only. 

2. The Group's Properties

The gorup has 230 acrtes of land with net book value of RM175 mil.

All the land are located at prime location in Petaling Jaya and Johor.

Location		Description	area	NBV	Year
			(acres)	(RM mil)	acquired
PJ, Selangor		Hotel Armada	2.4	99.1	1993
Plentong, Johor		Golf resort	182.0	55.8	2010
Mukim Senai-Kulai, Johor		Land	34.5	9.6	1992
Mukim of Tebrau, Johor		Land	4.8	6.6	1996
Mukim of Tebrau, Johor		Land	4.1	3.1	1994
District of Petaling, Selangor		Land	2.4	1.0	2002
Total			230.0	175.0

Most of the land bank are still booked in based on valuation as at 1990s and early 2000s.

Excluding Hotel Armada land (which has net book value of RM99 mil due to the hotel erected thereon), the 228 acres of land has net book value of RM76 mil only, translating into RM334,000 per acre, or RM8 per sq ft.

3. Joint Venture With Developer

In 2012, the company entered into JV agreement with a third party developer ("Developer") to jointly develop 5.4 acres of land in Tebrau, Johor.

Lien Hoe will contribute the land and the Developer will build two blocks of 38 storey high end condominiums with GDV of RM450 mil. The project commenced in mid 2012 and target to complete by mid 2015. 

The project, The Peak, received favorable take up rate after being launched.

(The Peak)

In return for contributing the land, Lien Hoe will be entitled to cash payment of RM114 mil as follows :-

Timing			Amount payable
			(RM mil)
Signing of agreement			2
3 months from agreement			3
2012			7
2013			25
2014			30 ^
2015 (estimate)			47 ^
TOTAL			114

^ amount to be received in 2014 and 2015 is RM77 mil, or RM21 sen per share

The land sale was completed in 2012 and the gain on disposal of RM96 mil was recognized in FY2012 P&L statement. 

However, due to the defer payment structure, the bulk of the cash inflow has yet to happen. According to Fy2012 annual report :

"   It should be noted that the profit of RM96 mil from the land sale is not due for payment and as such is accounted for as receivable in our books. According to the terms of the development agreement, our company is scheduled to receive this amount progressively from 2012 to 2015, with the majority of it in the final two years. The Board is determined to return part of this RM96 mil to shareholders through payment of dividends when the proceeds are recieved   ".

In other words, shareholders can expect good dividend in next two years.

4. Christine Golf Resort

On 20 February 2009, Lien Hoe entered into an SPA to acquire Octowers Resort Berhad from its owners. Octowers is the owner of Octville Golf & Country Club located at Bandar Seri Alam, Mukim pf Plentong, Johor. According to the announcement :

"Octville is a premier golf course with clubhouse facilities strategically located near JB. The acquisition is undertaken with near term objective of expanding the group's business into leisure and hotel segment. The long term objective is based on the potential future development of the land given its size of 182 acres. The land's prominent location in the rapidly growing Masai-Pasir Gudang corridor on the eastern front of JB, makes the land an ideal site for housing and commercial as well as resort development."

It seemed that from day one of the acquisition, Lien Hoe has set its eye on the development potential of gofl resort and its land.

The acquisition was completed in 2010 at cost of RM55 mil. The golf resort's name was changed to "Christine Golf Resort" and is still in operation today.

(Christine Resort is located at Bandar Seri Alam, which is strategically located in Iskandar Development Region)

(Christine Resort)

To get a feel of the potential valuation of the land, in 2011, Tropicana Corp acquired 227 acres of land in Plentong for RM220 mil, or RM22 per sq ft.

If the same pricing is applied to Lien Hoe's 182 acres land in Plentong, open market value would be RM174 mil.

After deducting net book value of RM55 mil, revaluation surplus would be RM119 mil. After factoring in 25% deferred tax, net surplus would be RM89 mil, or 25 sen per share. 

5. Hotel Armada

Hotel Armada is located right next to the Federal Highway and is within short traveling distance to KL. It has 257 rooms and sits on top of a 4 storey retail podium, which does not seem to have high occupancy rate. In fact, the place is relatively quiet with not much business activities.

(Hotel Armada location)

(Hotel Armada, fronting the Federal Highway)

Hotel Armada is currently booked into the account at RM99 mil, which translates into RM931 per square feet on bare land basis. In my opinion, to extract maximum economic benefit, Lien Hoe might need to tear down the hotel and develop the land.

6. Concluding Remarks

(a) Lien Hoe is an interesting company. It has limited gesring. However, it lacks proper profit track record. As a result, its share price is depressed and market cap is very small.

(b) However, behind this mediocrity are solid assets in the form of land bank in Johor and Petaling Jaya, all of which are reflected in the book based on 1990s and early 2000s valuation.

(c) The company also looked interesting from cash flow point of view as two tranches of defer payment amounting to RM77 mil will flow in during 2014 and 2015. The Board has indicated that they will distribute part of it as dividend.

(d) A company like Lien Hoe usually ends up in two ways. 

If you are lucky, the company wakes up over the immediate term, launch projects, book in profit and market cap will balloon.

If you are not lucky, major shareholder will treat minority shareholders as source of cheap equity funding. He will keep the company underperform to suppress market cap growth, while waiting for assets value to grow over time.

When the time is ripe, he will launch a take-over to privartize the company by paying let's say, 30% premium to shareholders (who usually will happily accept the offer).

If that is all you will get for holding the stocks for so many years, you probably won't feel good.

Have a nice evening.