We initiate coverage on Paramount Corporation (Paramount) with a HOLD recommendation at RNAV-based fair value (FV) of RM0.73/share. Our FV is based on a 55% discount to its RNAV, on par with property developers with a focus on properties that are largely priced above affordable segment, with a neutral ESG rating of 3 stars.
Following the divestment of the group’s controlling stakes in its tertiary education business in September 2019 and pre-tertiary segment in February 2020, Paramount’s focus is now centred on property development, complemented by co-working activities.
Paramount has a geographically diversified development portfolio with 9 ongoing projects and 2 future projects. The group has a remaining GDV of RM6.9bil spread across Kedah, Selangor, Penang and Kuala Lumpur.
It is in the process of acquiring a 32.7-acre freehold land in Cyberjaya with an estimated GDV of RM370mil. It has also entered into a development rights agreement with Kumpulan Hartanah Selangor to develop a 9.7-acre leasehold land in Section 14 with an estimated GDV of RM1bil. We anticipate the planned development activities on these lands to begin contributing to Paramount’s revenue and earnings from FY23F.
QoQ, Paramount’s 1QFY22 revenue decreased by 47% while core net profit (CNP) slid 75% due to the combination of lower sales following the expiry of Home Ownership Campaign (HOC) and the one-off gains recognised in 4QFY22 from disposal of a parcel of commercial land at Sekitar26 development amounting to RM11mil.
Driven by the gradual recovery of property demand coupled with resumption of construction activities after pandemicdriven lockdowns, the group’s CNP is expected to grow by 6% to RM26mil in FY22F, 52% to RM39mil in FY23F and 29% to RM50mil in FY24F.
The growth in earnings will be supported by: (i) unbilled sales of RM1.1bil representing a cover ratio of 1.6x of FY22F revenue; and (ii) estimated FY22F-24F sales of RM900mil-RM1bil, primarily from The Atera, Sejati Lakeside 2, Utropolis Batu Kawan and Ampang Hilir.
Nevertheless, due to the group's higher price range for its product offerings, new sales for properties is expected to be impacted by heightened inflation and rising interest rates. Besides, we expect margins to be dampened by the increase in construction cost. The stock currently trades at a fair FY23F PE of 11x vs. a 4-year average of 10x, while dividend yields are decent at 5%.
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