Unknown to many, the unloved property sector is seeing a major shift in demand now that interest rates are significantly lower and expected to stay that way for a long time to come.

Earlier this year, Bank Negara reduced interest rates by 125 basis points to 1.75%. This is further boosted by the incentives and measures for the property sector under Budget 2021.

One property company which looks prime to benefit from this is the mid-tier player Paramount Corp Bhd. Based on sales in the third quarter of this year, don't be surprise if it records one of its best quarters in a long time.

Funnily, this stellar performance happened right after the Movement Control Order (MCO) was lifted in May. 

Paramount's executive chairman is Datuk Teo Chiang Quan, also the 'FIABCI Malaysia Property Man of 2019’. The Teo family currently control some 28% of Paramount.

At its share price of 73 sen, the stock is down some 40% on a YTD basis, and is at one of its lowest levels in the last five years.

Using its 2019 net profit of RM104.05mil as a guide, the stock is only trading at a price earnings ratio (PER) of 4 times!

At this price, the stock also offers a dividend yield of 9.09% and has a market capitalisation of RM439.33mil. The company pays out dividends every year with an average payout of 40% per year.

Its warrants, which currently trades at a measly 13 sen, and expires on July 28, 2024, is totally out of the money at an exercise price of RM1.79.

Now surely management wants its warrants to go back to being in the money before 2024.

After all, with some 173.34 million warrants in the market, and at its exercise price of RM1.79, the company would net RM310.28mil in proceeds should the warrants be exercised.

Which CFO in this world would not want such 'free money?'

In the meantime, Paramount has been busy getting its house in order.

Earlier this year, Paramount completed the sale of its controlling stake in its pre-tertiary education arm to Prestigion Education Sdn Bhd for RM540.5 million.

From the gain of close to RM500mil, the company is using the money to retire debt and buy more land.

After a poor Q2, its back to business in the second half of the year

While the company declared a loss of RM3.7mil on the back of revenue of RM64.2mil for its second quarter ended June 30, 2020, this was predominantly due to its construction work being at a permanent standstill due to the MCO.

In an interview with BFM last month, Paramounts CEO Jeffrey Chew said that for the months of May, June and July, the sales achieved by the company actually surprised them.

"We thought with Covid, people would be very cautious about buying properties. Instead shockingly we got some of the highest in terms of booking in June, July and August," he told BFM

"By August, we ran out of good products to sell, and so sales came down a little bit,"

"We had about RM270mil bookings in June, July had RM380mil, and we haven't seen that kind of numbers in the last 3 to 4 years," Chew said.

He added too that sales were across the board of Paramount's eight property projects.

This would indicate that the third quarter will not only turnaround, but see a full quarter of normalised profits.

Should there also be no lockdown or enhanced MCO in any of Paramount's sites, profit figures should go back to normalised levels for the second half of the year. 

With some RM450mil worth of sales secured to date, Chew feels Paramount can exceed last years pre-Covid sales figures, with unbilled sales staying close to RM900mil.

For its year ended Dec 31, 2019, Paramount recorded property sales of RM700.3mil. The company's net profit stood at RM104.05mil. 

Paramount's unbilled sales stood at RM870mil as of June 30, 2020

As of June 30, 2020, the company has a net asset value of RM2.32.

Why low interest rates will significantly raise Paramount's profits

Bank Negara Malaysia has cut interest four times this year by 125 basis points to 1.75% currently.

During the BFM interview, Chew said that the effects of low interest rates are starting to show: People are no longer asking whether they should buy or rent, but rather, they want to buy because it is getting more expensive to rent.

The housing interest rates are now at about 3%, and the expectation is that it will stay low for a long time to come.

The psyche of buyers is that they won't want to buy a property if interest rates are only going to be low only temporarily.

With interest rates expected to remain depressed, this has caused a major shift where people are starting to buy instead of holding back like in previous years.

Furthermore, Paramount's net interest margins of 11% to 17% in the last 6 years looks set to improve.

In the past, Paramount has been experiencing a 1% margin erosion every year. Its margins which used to stand at 20%, now sits roughly at 15%.

With low interest rates being an impetus for property, Paramount sees its margins improving.

So how does low interest rates benefit Paramount?

1. Property developers buy alot of land. Then they spend the next 10 to 20 years developing and launching new properties. All that is done in phases and a huge portion of that cost there is interest cost. It is either charged to the P&L or capitalised.

Thus when interest rate is reduced from 3% to 1.75%, that saves Paramount almost half of its interest cost. In 2019, the company paid RM45.81mil in interest.

2. Secondly, when interest rates are down, demand is stronger. This means Paramount does not have to dish out so much discount to push its properties.

So for example if it only needs to give a discount of 1% to the end buyer instead of say 3% previously, it can save cost of roughly RM20mil from total sales of RM1bil.

The increase in interest savings alone from its inventory, holding cost of land and discount to purchasers, will significantly boost its bottomline.

Cusp of change - looking to be a Top 5 property player from Top 10 presently

At the moment, Paramount has landbank with a gross development value of RM6bil, which is enough to last it about six years.

This landbank size is considered small for a property developer. However Paramount's strategy is to stay lean and mean.

Paramount is also looking to take advantage of the low interest rate environment where it intends to buy more landbank.

Every five years, Paramount has a masterplan where it buy some RM500mil worth of land.

Based on the landbank it has purchased so far, Paramount it has commited to some RM300mil worth of land, and it is hoping to buy the remainder RM200mil over the next year.

In fact Chew has said that the company might be taking an aggressive stance, where it acquires a further RM300mil to RM400mil worth of landbank over the next 3 to 4 years, especially if interest rates are going to be very low.

it may do so should it be serious in becoming one of the Top 5 property players in Malaysia. 

Meanwhile, Paramount has also ventured overseas with first foray in Bangkok, Thailand. Paramount is aiming for the overseas market to contribute 10% over the next three years.

More importantly in Aug last year, Paramount announced that Benjamin Teo Jong Hian, the son of chairman Teo, has joined the group’s board of directors as an executive director.

It is always a good sign when entrepreneurs bring their children into the company.

Paramount which celebrated its 50th anniversary last year.

It sure looks as if the company is being steered to last another 50 years.