GUOCO (1503) : Will Guocoland shine again?
In 2007, Guocoland surged from RM0.80 to RM3.30, on the back on several news:
(i) Earnings growth
(ii) Acquisition of OVAL KL which was a prime land
(iii) Abolishment of RPGT in 2007
(iii) Optimism on Damansara City's project (which were projected to have a GDV of RM1.2b back then)
(v) Rumoured to obtain University Malaya land by swapping its Sepang land
After
the financial crisis during 2007-2008, Guocoland has been trading
sideways for almost 5 years with a few small surges that happened to
fail after that. However, for the past 1 week, there is some renew
interest on Guocoland where the stock has surged more than 30% with huge
volume, highest traded volume for the past 5 years. Is something
brewing?
This is my own analysis on Guoco's fair value.
Guocoland Malaysia (ESOS) – 4.4%
(i) Earnings growth
(ii) Acquisition of OVAL KL which was a prime land
(iii) Abolishment of RPGT in 2007
(iii) Optimism on Damansara City's project (which were projected to have a GDV of RM1.2b back then)
(v) Rumoured to obtain University Malaya land by swapping its Sepang land
This is my own analysis on Guoco's fair value.
TP: RM2.53
Current price: RM1.52
Market cap: RM1.064b
Upside: 66%
(A) Company Background
-GuocoLand
(GLM) is the property arm of Hong Leong Group, with an established
presence of over 50 years in property development and hotel operations
in Malaysia.
-GLM also owns GLM REIT Management which is
the manager of Tower REIT, listed in Main Market of Bursa. Tower REIT
owns 3 prime commercial buildings (Menara HLA, Menara ING & HP
Towers) and 2 hotels (Thistle JB and Thistle Port Dickson Resort).
Currently, GLM effectively owns 22% of Tower REIT.
(B) Shareholders
Guocoland Limited (Listed in SGX) – 65%(B) Shareholders
Guocoland Malaysia (ESOS) – 4.4%
Tha Bank of Nova Scotia – 3.1%
Tan Sri Quek Leng Chan – 2.8%
-As
you can see, Tan Sri and related parties have owned more than 75% in
the company, free float is thin here.If you look at Tan Sri's other long
term investment like HLIND/ HLCAP and NARRA, their share price had done
exceptionally well for the past 2 year.
(C) Current and upcoming launches
Developers
are moving out of central KL to places like Semenyih, Kajang, Sg Buloh
and Rawang. This position definitely benefits Guocoland as they own land
in Kajang, Sg Buloh and Rawang.
Rawang (50% JV basis)
(i) The Rise (180 bungalow lots at RM1.6m – RM4.7m)
(ii) Emerald Gardens (161 units of superlink houses)
(iii) Peridot (65 bungalow lots) – sold out
(iv) Amberley (semi-detached homes) – sold out
(v) Coris (double storey houses) – sold out
(vi) Coral (double storey houses) – sold out
Damansara City
One
of the Guocoland’s upcoming flagship project in Damansara Heights. The
iconic landmark (8.5 acres) will include 2 luxury condominium blocks, 2
corporate office towers, a lifestyle mall and international-class hotel.
According to a recent report by the edge, the response of pre-launch of
DC Residency is good. I would expect the condos to be fully taken up
within a year. The project is expected to have GDV of RM2.5b.
Amandarii Kajang - 33 units of 2-storey bungalows
Sepang (40% JV basis)
Huge
piece of land (4,800 acres) where 1,200 acres will be allocated to
develop the Pantai Sepang Putra project with residential development
Melaka (50% JV basis)
Guocoland
has announced they will increase stake in their JV company, Continental
Estate Sdn Bhd which owns the 3,869 acres land in Melaka. The company’s
capital structure consists of ordinary shares and convertible
preference shares. A back to envelope calculation shows that the company
is worth at least RM480m. There will be definitely be potential upside
from this deal as Guoco is planning to develop this piece of land soon.
(D) Financial analysis
Revenue
Since
last year, Guocoland has registered a strong growth of 130% in their
revenue due to a few launches that has done pretty well. I expect
Guocoland’s revenue to go higher from here as they desire to complete
Damansara City’s project in 2016. A RM2.5b GDV by Damansara City will
register total annual revenue close to RM800m for the next 3 years
(assuming the mall/hotels and offices are sold to third party). Revenue
may hit RM1b in FY2016 if all these materialise.
Contribution by JV
JV
contribution has slowed down abit due to a massive launches in Rawang
for the past 2 years. However, there are still huge landmark sitting in
Emerald East and West waiting to be develop. With the addition of
possibly launches in Melaka and Sepang for the next 1-2 years, earnings
contributed by JV would set to double or triple in FY2016.
Contribution by associate
The major contribution in this segment is Guoco’s 22% interest in Tower Reit. Expect to remain flat.
PATMI
Profit
after tax and minority interest have shown more than 50% growth in the
past 2 years. Using a PAT margin of 15%, we could expect contribution
from Damansara City alone would easily generates RM100m annually for the
next 3 years.With the projects mentioned above, Guocoland could easily
register RM150m in FY2015-2016.
(E) Valuation
In
this case, the company did not mention most of its upcoming development
and potential GDVs for their projects, thus we use per square feet
basis to value each of its landbank. I have not included the increase in
stake in Melaka, at RM4 psf, assuming an increase of 10% interest,
there will be boost of 10cents to their NTA. The table below shows how I
derived my valuation for Guocoland. I know some of them are subjective,
but you can always verify it with comparable transactions around that
area or consult an expert on land valuation.
(F) Technical analysis
(F) Technical analysis
From
the chart below, Guocoland looks promising as for the past 1 week, the
volume traded for Guocoland has not happened since 5 years ago.
S1: RM1.42, S2: RM1.25
Will
Guocoland reach its five years high? I am not sure, but I would think
there is a high probability that Guocoland will retest RM1.65 and RM1.74
soon.
(G) Risk reward ratio
-As
mentioned, my derived NTA for Guocoland is RM3.61. However, it is a
fact that most of the property stocks trades below their NTAs.
(i) Upside return of 58% - Using 30% discount for my margin of safety, Guocoland could trade up to RM2.53
(ii) Downside risk of 10% - As Guocoland has broken the 1 year resistance at RM1.42 on 25 July 2014, assuming cut loss position is 3% below the resistance level at RM1.38.
R/R ratio: 6 times.
I only take trades that has more than 30% upside and offers more than
risk reward ratio of 2.5 times. At current price, Guocoland is
considered very cheap and undervalued
1 month TP: 50% discount on NTA @ RM1.80
3 months TP: 40% discount on NTA @ RM2.16
6 months TP: 30% discount on NTA @ RM2.53
1 month TP: 50% discount on NTA @ RM1.80
3 months TP: 40% discount on NTA @ RM2.16
6 months TP: 30% discount on NTA @ RM2.53
(H) Rerating factors/ Catalysts
(i) Guocoland has more than 10,000 acres of land yet to be developed.
(ii)
Earnings set to triple for the next 2 years after the launch of
Damansara City, more projects in Rawang, potential development in Sepang
and Melaka and higher contribution by associates and hotel management.
(iii) Still trading at 0.4x their revalued book value
(iv) Asset disposal to unlock gains
Cheers. Hope my first post here can help you to understand Guocoland better. Feel free to drop me comments.
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