As much as I hate to admit, all these years most of the money I made in stock market were from property stocks.  For me, property companies are relatively easy to understand  :  buy land, launch projects, book in the profit.  Everything auto-pilot.  There is no need to worry about raw material price fluctuation, competitors undercutting, clients defection.

(Of course must watch the macro environment. I know you are going to say that.)

One stock that caught my attention is Global Oriental Berhad ("GOB").  (Previously known as Equine Capital Berhad)

The company was previously owned by Patrick Lim.  However, since GE12, he sold down his interest and ceased to be a substantial shareholder.  The company is now believed to be owned by people linked to Desmond Lim. 

(1) Small market cap + tiny profit, is a plus point 

With 227m shares and share price of 79 sen, GOB's market cap is RM180m only.   For the 9 months ended Dec 2013, the group reported earnigns of RM19m (annualised RM25m) only, compared to Tambun's net profit of RM60m, Mah Sing's RM280m and SP Setia's RM400m.  

When picking property counters, tiny profit and small market cap are actually plus points. As long as the owner / management is not the laid back type (who only wants to sit on the land bank to wait for it to appreicate over time), growing profit by 50 to 100% over two, three years is usually not a problem.

For example, Tambun reported RM23m net profit in 2011, its net profit grew to RM60m in 2013.

Hua Yang reported RM20m net profit in 2010, its net profit grew to RM65m in 2012 (reported RM61m net profit in 2013).   

Big cap companies on the other hand, offer lower upside but carry higher risk.  KSL has been reporting annual earnings of RM200m plus.  However in the latest quarter it reported a small loss, and share price tumbled.

(2) Healthy balance sheet

GOB has shareholders' funds of RM252m, loans of RM180m and cash of RM60m.  As such, net gearing is 0.48 times only.  This is relatively low. Gearing will drop further as the company has recently proposed a rights issue, which will be implemented in few months time (further details below).

(3) Land bank

All of GOB's land bank are either located at District of Petaling (Selangor) or Seberang Prai Selatan (Penang).

Most of the Selangor land bank were acquired in 1990s.  Based on low net book value ranging from RM145,000 per acre to RM1.3 million per acre, it is believed that these lanbank had not been revalued.

The Seberang Prai Selatan land bank also has low net book value of RM391,000 per acre and RM460,000 per acre respectively.  These land bank will benefit from the opening of the Penang Second Bridge, just like Tambun Indah, Asas Dunia, etc.   

(4) Development projects (source : FY2013 annual report)

(a) in May 2013, GOB entered into JV agreement with Lembaga Getah Malaysia for development of 5.75 acres freehold land near KLCC with GDV of RM860 mil 

(b) Equator, Seri Kembangan  - shop offices and shops.  Launched in 2011.  Construction expected to complete by early 2014.

(c) Villa Heights, Seri Kembangan - guarded and gated residential project. 35 acres semi detached and bungalows.  Launched in 2012 and end of 2013.  

(d) Springville, Seri Kembangan - low density 277 units of condos. Launched in 2012 (90% take up rate).  Target completion by 2015.

(e) Suria Permai - 330 units medium cost apartments and 13 units shops. Target completion by end 2013.

(f) Callisia, Seberang Prai Selatan - doucble storey tarrace houses.  Targted completion by end 2013

(g) new projects, Seberang Prai Selatan - for FY2014, the group targets to launch 271 units of double storey terrace houses and 64 units of semi detached houses

(h) Da:men, USJ, Subang Jaya - mixed development with GDV of RM1 billion.  Located next to USJ Summit.  Fourty one (41) units of shop offices achieved take up rate of 98%, with target completion by 2015.  Four hundrfed eighty (480) units of service apartments achieved 95% take up rate, with target completion by 2015.

(5) Proposed rights issue

On 24 February 2014, the company proposed a rights issue on the basis of 1 right share and 0.5 free warrant for every share held.  The rights issue targets to raise RM113m, out of which RM59m to be used to repay borrowings while RM52m to be used for working capital purpose.

Post rights issue, share base will double to 455m shares, net gearing will drop from existing 0.48 times to approximately 0.15 times. The rights issue will be implemented in the next few months.

Together with the rights issue, the company also proposed to cancel 50 sen par value.  This is purely an accounting adjustment and had no impact on shareholders. 

Note : a cancellation of 50 sen par value followed by consolidation of 2 shares into 1 will reduce the number of shares held by shareholders by half (the dreaded "Capital Reduction" scenario that is widely known). 

However, a cancellation of par value WITHOUT consolidation of shares will be a pure accounting manouver to clean up balance sheet and has no impact on shareholders

(6) Conclusion

The company is interesting because it has small market cap and yet sizeable undervalued land bank at strategic locations (District of Petaling and Seberang Prai Selatan).

The Group is currently profitable.  Earnings in latest four quarters are RM12.8 mil, RM3.2 mil, RM7.6 mil and RM8.6 mil respectively.  This translates into historical PER of 5.6 times. 

Major shareholders and senior management had demonstrated willingless to further unlock value by growing profitability through development of the group's undervalued land banks (as evidenced by the recent cash call to amongst others, beef up working capital).  

It is not inconceivable that profit could double over next, two to three years, thereby propelling valuation to a higher level.

Please refer to the article below by OSK (now RHB).  The article is 6 months old, but the info seemed to be still valid

https://research.osk188.com/attachments/56/osk-report-my_gob-unveiling-hidden-potential_20130819_rhb-y8Kg176129622452117d770741e.pdf