SEAL Incorporated - 11 June 2014
BY RHB
Queensville & Bayan City 2 Projects To Boost Future Earnings
After going through a series of restructuring exercises since 2005, SEAL managed to clean up its balance sheet to a total net cash of MYR141.8m (net cash per share of 65 sen) as at end-March 2014 from a total net debt of MYR79.2m in FY06. Going forward, earnings visibility is premised on its property development projects, especially its maiden venture into Klang Valley – Queensville project in Cheras. Queensville, with a total GDV of MYR800m, is an integrated property development project that include s a mall, 49 units of three-storey shop-lots, three blocks of suites, and five blocks of service apartments. Bayan City 2 is another key project in Penang with a total GDV of MYR1bn that includes a hotel, a mall, a commercial hub, corporate offices as well as suites. Excluding the exceptional gains arising from the MYR2.6m disposal gain of a subsidiary and a piece of land in Kelantan, as well as a revaluation gain on its investment properties (MYR9.5m), we are expecting a core net profit of MYR55.7m in FY14. Pegging it to 1.0x FY14F P/BV, SEAL is valued at MYR1.16. At FV of MYR1.16, SEAL is trading at a 4.5x FY14F P/E. The company is currently trading below its BV/share of MYR1.16 as at end-March 2014.
Brief background. SEAL Incorporated Bhd (SEAL) is involved in timber logging, property development and property management activities. It has a timber concession in Perak as well as property development projects in Penang and Kedah. Bayan City 2 is one of its key projects in Penang with a total GDV of MYR1bn that includes a hotel, a mall, a commercial hub, corporate offices as well as suites. In FY14, the company is planning to launch its maiden project in Klang Valley.
Queensville – a project in a prime location with good accessibilities. SEAL has entered into a turnkey agreement with Dwitasik Sdn Bhd to develop a piece of land measuring 12.46 acres in Bandar Sri Permaisuri, Cheras into an integrated property development area called Queensville that includes a mall, 49 units of three-storey shop-lots, three blocks of suites and five blocks of service apartments. This project, with a total GDV of MYR800m, would last for the next 5-7 years. It is strategically located at the prime area in Cheras with easy accessibility via Sungai Besi Expressway, Kuala Lumpur Putrajaya Highway and East West Link Expressway, coupled with being well connected to public transports such as Salak Selatan LRT station (700m away) and Salak Selatan KTM Komuter station (800m away). 70% of its 49-unit commercial shop-lots were sold after its launch last month, and the
company is planning to launch its 3-block suites in phases beginning this week.
Stable recurring income from property investments. In FY13, the property investment division contributed 10.4% to its total revenue. Its key contributor – Selayang Mall Shopping Complex, which has been managed by SEAL since 1995, is enjoying a 100% occupancy rate. Selayang Mall has been contributing about MYR17m-19m in the past three financial years. In addition, the company is holding a few commercial units in its Elit Avenue project in Penang for rental yield. Going forward, the company is also planning to hold some of the units in Queensville and North Avenue (in Sungai Petani) projects for rental income in the future.
Improved balance sheet. Over the years, SEAL has tidied up its balance sheet after going through a series of restructuring exercises since 2005, to a total net cash of MYR141.8m (net cash per share of 65 sen) as at end-March 2014 from a total net debt of MYR79.2m in FY06. Profitability has improved over time to a retained profit of MYR118.1m as at end-March 2014 from an accumulated loss of MYR294.2m reported in FY06. Property development to anchor future earnings. With pending launches of the Queensville project in Cheras and the Bayan City 2 project in Penang, as well as other projects that have a combined total GDV of approximately MYR2.0bn, we believe that property development will continue to anchor its future earnings. Excluding the exceptional gains arising from a MYR2.6m disposal gain of a subsidiary and a piece of land in Kelantan and a revaluation gain on its investment properties (MYR9.5m), we are expecting core net profit of MYR55.7m in FY14. In view of SEAL’s potentially higher earnings growth in the coming years, we think that the company should be able to revalue back at its MYR1.16 BV and therefore we are valuing the stock based on P/BV. At FV of MYR1.16, SEAL is trading at a 4.5x FY14F P/E. Currently, the company is still trading below its BV/share of MYR1.16 as at end-March 2014.