OSK Property (1)

Opening of Atria Mall by End 2014 Will Trigger Re-Rating

Publish date: Sat, 22 Mar 2014, 12:10 AM

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The reason this company attracted my attention was because everyday I drive past Damansara Jaya, I saw its mixed development project, Atria (under construction) goes up like a bamboo shoot, each day higher than the previous day.   

Lately they added a sign board to say "Shopping Gallery will be opened by end 2014".  I did some research and found out that the entire mixed development project (office suites + mall) is targeted to be completed by 2016.  However, it seemed that they want to complete and open the mall first (why not ? can start collecting rental, after all it is located at a matured neighbourhood).  

As I dug more into the Atria project, I uncovered more pleasant surprises.  I am happy to share my findings with everybody here.

(1)  The OSKP Group

Small cap  -  Based on 241m shares and market price of RM1.57, market cap is only RM378m.

Strong balance sheet -  Loans of RM180m, cash of RM150m, net assets of RM412m.  Net gearing of 0.1 times only.

Historical PER -  The group reported 23 sen EPS.  Based on RM1.57, PER of 6.8 times (fairly valued). 

(2) The Atria Project

OSKP acquired Atria Shopping Centre (situated on 5.8 acres of land) in 2007 from Lien Hoe for RM75m (cheap). They subsequently demolished the shopping centre so as to redevelop the entire plot of land. 

In 2011, they launched the mixed development project comprises 392 Small Office Flexible Offices ("SOFO") suites and a retail mall with 470,000  square feet Net Lettable Area ("NLA").  

The SOFO suites priced at RM1,100 psf was sold out within seven hours.  OSKP is keeping the retail mall for recurrent income. 

In order to figure out the economics of the new Atria Mall, I made use of Sunway Pyramid and IGB's assets as reference. 

	Sunway Pyramid	Mid Valley + Gardens	New Atria Mall
NLA (square ft)	1,700,000	2,572,000	470,000
Rental rate	RM152 psf	RM168 psf	RM80 psf  ^
Revenue	RM259 mil	RM431 mil	RM37.6 mil
Net Property Income ("NPI")	RM181 mil	RM285 mil	RM25.6 mil
Implied NPI margin	70%	66%	68% ^
tax	tax free	tax free	25%
PAT	RM181 mil	RM285 mil	RM19 mil

^  repesenting 50% of average rental per sq ft of Pyramid and IGB assets (to be conservative)

Based on high level calculation as set out above, upon being fully tenanted, the new Atria Mall could potentially generate net income of RM19 mil per annum.  This is quite a sigificant amount bearing in mind that OSKP reported only RM56 mil net profit in latest fiancial year.

What is the implied valuation of the Mall ?  Based on rental yield of 6%, the Mall is valued at RM317 mil.

Based on 241m shares, the market value of the Mall is equivalent to RM1.30 per share (market price now is only RM1.57).   

Is this realistic ? Is this too good to be true ?

Tropicana City Mall in PJ (about 2 minutes drive from OSKP's Atria  project) has NLA of 450,000 sq ft.  The mall generated approxiamtely RM15 mil to RM20 mil net profit per annum. Since Atria mall has NLA of 470,000 sq ft, profit forecast of RM19 mil per annum does seem reasonable.

Tropicana has been trying to sell its mall for RM650 mil.  However, that was based on rental yield of approxiamtely 3%.  So far they are not successful in securing a buyer.  However, if rental yield is adjusted from 3% to 6%, valuation will be approxiamtely RM325 mil, closed to Atria mall's valuation of RM317 mil.

Another point worth mentioning is the low construction cost of the entire Atria project.  OSKP acquired the land cum building from Lien Hoe in 2007 for RM75 mil.  They incurred RM50 mil to demolish the original building and structure, and awarded RM230 mil construction contract to Beijing Urban Construction group.  

As mentioned above, the GDV of the project is RM1 billion.  Based on simplistic model, surplus = RM1 billion less RM75 mil less RM50 mil less RM230 mil = RM645 mil, if adjusted for 25% tax, nett amount would be RM484 mil.  

It is diffiult at this stage to figure out how realistic the above computation is.  However, the risk of over optimism is mitigated by the fact that they bought the land at such a low price (in 2007, before land prices appreciated).  As such, there is truly room for a windfall from this project.  

(3) Conclusion

There are many other details of OSKP Group.  For example, apart from the Atria Project, they have multiple ongoing projects at Cyberjaya, Kota Damansara, Sungai Petani, etc.  (current unbilled sales of RM1.1 billion is 200% of FY2013 revenue of RM455 mil)

However, as an investor in listed property development company, I usually don't dwell too much into these kind of details as I trust that the management would be savvy enough to take care of the operations.

The main messages of this article are as follows :-

(1) OSKP has good fundamentals.  Its gearing is low, unbilled sale is high, and PER valuation is not expensive.

(2) There is immediate growth potential in the near future.  The company targets to complete and open the Atria Mall by end 2014.  Based on high level calculation, the new Mall will create significant value for OSKP group.  This could trigger a re-rating.

In this regard, it is time to put this stock on watchlist.

(note : for leveraged exposure, OSKPROP-WC at 62 sen is an interesting play. The Warrants expire in 2017, has exercise price of RM1.00.  Conversion premium is only 3%.  If mother share goes from existing RM1.57 to RM2.00, OSKPROP-WC can potentially double in value by end 2014)