Business

Saturday March 28, 2009

Broker's Call


MAGNA PRIMA BHD (RM2.44 as at March 26)

BUY

COMMENT by Affin Securities: Magna Prima’s wholly owned subsidiary Twinicon (M) Sdn Bhd early this week entered into a conditional sale and purchase agreement with Lai Meng Girls’ School Association (LMGSA) for the proposed acquisition of 10,587.5 sq m for a cash consideration of RM148.2mil, with the condition that Twinicon shall cause the transfer of freehold land measuring 22,280 sq m (swapped land) to LMGSA for the purpose of relocating the existing Lai Meng Primary School and Lai Meng Kindergarten. The proposed acquisition is expected to be completed by 2015.

The purchase price will be funded through a combination of internally generated funds, external bank borrowings, and/or through joint venture with equity partners – the exact combination has not been finalised yet at this juncture.

The Lai Meng school land is located along Jalan Ampang and is a five-minute walk from KL City Centre (KLCC). Magna Prima intends to develop high-end commercial and residential properties worth RM1.3bil.

The market value of the land is RM194mil and development can only start after the schools are relocated to Bukit Jalil. Note that Magna Prima was the developer of the successful Avare development in the KLCC vicinity.

As at Dec 31, 2008, Magna Prima had a cash balance of RM18.5mil, total borrowings of RM74mil and a net gearing of 0.5x.

Internally generated funds should grow as we expect the company to be profitable in the next three years – of course, barring a collapse of the Malaysian and global economies.

Recommendation: The proposed acquisition shows the company’s ability to secure land in good location to boosts its construction order book and property development profits.

The cost of the swapped land implies an acquisition price of RM1,470.6 psf, which is reasonable along the stretch of Jalan Ampang within the KLCC vicinity. Magna Prima can also build on its success with the Avare development.

Since the proposed acquisition is expected to be completed only in 2015, there is no change in our FY2009 and FY2010 forecasts. Maintain BUY recommendation, with a target price of RM2.51 based on CY2009 price-earnings ratio of seven times.

CAN-ONE BHD (89 sen as at March 26)

BUY

COMMENT by OSK Research: The liquidators of Kian Joo Holdings (KJH) have accepted the conditional offer from Can-One Bhd’s wholly owned subsidiary to acquire 32.9% of the entire issued and paid-up share capital in the former Kian Joo Can Factor (KJCF) at RM1.65 per share for an aggregate purchase consideration of RM241.1mil. Can-One has paid a deposit of RM5mil to KJH for the proposed purchase.

We think that the offer price of RM1.65 is not particularly cheap given that it is 44.7% above OSK Research’s previous target price of RM1.14 for KJCF and at a 10% premium over the net tangible asset per share. The offer price is also 26.9% above yesterday’s closing price of RM1.30.

Assuming the acquisition is financed entirely via debt, Can-One’s net gearing is likely to shoot up to a risky 3.1x. As the company is already highly leveraged, we believe it may be fairly difficult for Can-One to raise financing on good terms amid the current financial slowdown. Apart from an all-debt option, it may be possible for partial equity financing in the form of a private share placement to avoid higher interest charges. We also note that only an associate stake has been acquired to avoid triggering a General Offer for KJCF. As such, Can-One will not be able to receive cash from KJCF unless via dividends. However, given that Can-One will be the largest shareholder of KJCF, it may be able to account for KJCF as a subsidiary if it is deemed to hold a controlling stake. This would help to ease its funding issues.

The associate stake in KJCF is expected to be earnings accretive for Can-One, assuming the corporate exercise is completed by mid-FY2009 and fully supported via debt. At the net profit level, the incremental value of the acquisition is projected to be RM4.4mil and RM12.8mil for FY2009 and FY2010 respectively, without taking into consideration possible cost synergies. However, we are cautious that its interest coverage ratio has plunged by over half in FY2010 to only 1.6x.

It will take time to derive the synergistic benefit of this acquisition given the different specialisation and potential changes in the management structure of KJCF. Can-One will emerge as the single largest shareholder in KJCF, having significant influence over KJCH’s longer-term strategic direction and operations.

Recommendation: Upgrade from NEUTRAL to BUY. Pegging a PER of 6x on the revised earnings per share of 17.54 sen, we upgrade our target price on Can-One to RM1.05 from 92 sen previously.

BERJAYA LAND BHD (RM2.91 as at March 26)

HOLD

COMMENT by Standard & Poor’s: Berjaya Land’s third quarter (3Q) ended April 2009 results were below our expectations as it reported a net loss of RM400,000 compared with our original full-year net profit forecast of RM8.7mil.

The variance was due mainly to lower-than-expected contribution from Berjaya Sports Toto (BToto), which was affected by poor luck factor. Despite a 23.4% year-on-year (y-o-y) rise in 3QFY2009 number forecast revenue, BToto posted a 1.1% y-o-y decline in 3QFY09 net profit, due to a four basis points increase in the prize payout.

Berjaya Land’s nine month (9M) FY2009 revenue is not comparable to that of 9MFY2008 because BToto’s results were not consolidated in the 9MFY2008 period. Berjaya Land made a net loss of RM48.2mil in 9MFY2009 versus a net profit of RM479.8mil in 9MFY2008. Earnings in 9MFY2008 were boosted by gains from the placement of irredeemable convertible unsecured loan stock and the sale of two hotels and KL Plaza.

Contribution from property development/investment fell into the red with a loss of RM3.6mil in 9MFY2009 from a profit of RM47.1mil in 9MFY2008 due to a lack of new projects in 9MFY2009 and also a gain from the sale of KL Plaza in 9MFY2008.

Based on its 3QFY2009 results, we revise our FY2009 and FY2010 earnings forecasts to a net loss of RM21mil and a net profit of RM30.1mil respectively from net profit of RM8.7mil and RM65.7mil previously.

Recommendation: Maintain HOLD on Berjaya Land but lower our 12-month target price to RM3.30 from RM4.20 previously.

Berjaya Land’s valuation is well supported by the strong cash flow from BToto and also the long-term growth potential of its projects in Vietnam.

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