Icon8888 Gossips About Stocks

(Icon) Global Oriental Bhd (8) - Sticking My Neck Out

Icon8888
Publish date: Thu, 24 Apr 2014, 11:18 PM
Icon8888
0 404
I follow the smell of money.

 

 

 

 

Hundreds of years ago, Galileo said that the earth revolved around the sun and he got into trouble. But that doesn't mean that he was wrong.

Sometime when you are faced with compelling evidence, do you have the courage to stick your neck out, disagree with everybody else and defense what you believe is possible ?

 

In Part 7 of GOB articles, I mentioned that in the Company's 2013 annual report, management mentioned that Da:Men's office and service apartments are targeted to be completed in 2015.

Since Da:Men has GDV of RM1 billion, wouldn't that result in a substantial boast in earnings ? 

To answer that question, I started playing with some figures.

 

 

1. Financial Model for the Office / Service Apartments

 

First of all, in RHB's latest report, the analyst estimated that Da:Men's mall would have market value of approximately RM500 mil.

Since Da:Men's total GDV is RM1 billion, the GDV of Office and Service Aprtments will work out to be RM500 mil as well.

 

According to the JV agreement, GOB needs to pay the landowner RM275 mil. Since both the Mall and Office / Service Apartment components have GDV of RM500 mil respectively, let's allocate the land cost of RM275 mil equally among them (RM137.5 mil each).

 

OSK Property's Atria development project has a mall (470,000 sq ft instead of Da:Men mall's 400,000 sq ft) and two Small Offices Flexible Offices tower blocks on top of the mall (similar to Da:Men's two office / service apartment tower blocks, which are located on top of the mall as well). The Atria project's GDV is RM1 billion, same as Da:Men GDV.

 

OSK Property awarded construction contract to Beijing Urban Construction Group for RM230 mil. In Da:Men's case, I have assumed the construction cost is RM300 mil (to be conservative). Same as land cost, RM150 mil is allocated to mall and office / service apartment respectively.

 

Based on the above assumptions, the financial model will work out to be as follows :-

 

Office and Service Apartments (RM mil)
GDV 500.0
less : land cost (137.5)
less : construction cost (150.0)
PBT 212.5
less : tax (53.1)
PAT 159.4
   
to be recognised in 2015 159.4

 

Based on the above model, GOB will recognize RM159 mil net profit for the development project in 2015.

 

Dear readers, that is a figure that even Galileo might hesitate to stick his neck out to support.  Just imagine how stressful it is for me to write this article.

 

 

(2) Cashflow Model

 

For the mall component, I could repeat the same step by assuming that GOB disposes of the mall to Pavillion REITS for RM500 mil, as suggested by RHB analyst. The profit figure will come up to be exactly the same as the office / service apartment model.

 

However, In order for that to happen, GOB and Pavillion REITS needs to conduct valuation, obtain shareholders' approval, etc. I think it is too early stage to make such a bold assumption.

As a result, I have assumed that GOB will retain the mall so as to benefit from its recurrent income. 

 

Under that kind of scenario, GOB needs to sort out its cashflow as it needs to service its payment obligations. It turned out that there will be a cash flow deficit of RM128 mil (please refer to model below).

 

For discussion purpose, I have assumed that this deficit will be funded by bank loans.   Based on assumed interest rate of 6%, annual interest expenses would be aprpoximately RM7.7 mil. 

 

Da:Men Cashflow     (RM mil)
Sale of office and service apartments 500.0
less : land cost   (275.0)
less : tax for offcie / service apartment component     (53.1)
less : construction cost   (300.0)
Net cash flow   (128.1)
       
to be funded by loans   128.1
interest rate (%)   6.0
interest expenses   7.7

 

 

3. Profit Contribution by the Mall

 

Having established that GOB needs to raise RM128 mil to fund its payment obligation, we will now look at how the additional interest expenses will affect the Mall's profitability.

 

RHB's analyst estimated that the Mall's market value is approximately RM500 mil. I don't know how this figure is arrived at. 

However, by plugging the RM500 mil valuation into the model, and assuming 6% yield for investment property, net profit works out to be RM30 mil per annum.

After factoring in the interest expenses, annual profit contribution will be RM22 mil.

 

Mall annual profit contribution (RM mil)
assumed valuation 500.0
assumed Net Yield (%) 6.0
implied net profit 30.0
   
interest expenses (7.7)
Adjusted net profit 22.3

 

 

4. Impact on GOB's Future Earnings

 

Based on all the figures as obtained above, I have come out with a simplistic model for GOB's profit for 2015 and 2016.

The resulting profit figure is extraordinarily high. Even based on enlarged share capital of 454 mil shares post rights issue, EPS works out to be 41.7 sen in 2015.

 

However, the impact would be one off as upon completion of the office / service component in 2015, GOB will not be able to repeat the same performance in 2016.

How would the market value GOB ?   

 

GOB profit forecast     2015 2016
      (RM mil) (RM mil)
existing net profit     30.0 30.0
add : profit from office and service apartments 159.4 0.0
add : Mall net profit     0.0 22.3
Total net profit     189.4 52.3
         
shares (m)     454.0 454.0
EPS (sen)     41.7 11.5

 

 

5. Concluding Remarks

 

No analyst has ever suggested that GOB will have the potential to report such windfall gain in the immediate future.

 

Have I made any mistake in the calculation (assumptions, facts, mathematics, etc) ?

 

Or am I just being one step ahead of others ?

 

I welcome comments from readers.

 

Have a nice evening.

 

 

 

 

 

 

Related Stocks
Market Buzz
Discussions
3 people like this. Showing 50 of 235 comments

james70

Domain Resources, a wholly owned sub of Malton was appointed the contractor for DaMen. Refer to the 2 ARs.

2014-04-30 13:55

Alphabeta

Construction costs could be in early stage, don't forget the land costs which form a sizeable chunk of the overall development cost (47.8%). The % of completion based on actual dev cost over budgeted dev costs could be much more than the physical construction progress. In accounting treatment, progress billing to customers can fall behind profit recognition.

Based on the FY13 chairman report, the sale take up rate of service apartment already hit 95%. Hence, the revenue and profit recognized in the earlier years depend on the sale take-up rate then.

2014-04-30 14:20

Alphabeta

There could be interest costs capitalized as development costs.

2014-04-30 14:21

Alphabeta

If you refer to note 8 of FY 13 annual report, the total interest capitalized to development cost in the year was RM 23.45mil, RM 19.6 mil was imputed on interest free financial liability - landowner’s entitlement.

2014-04-30 14:33

Alphabeta

GOB construction segment profit contribution in FY13 and FY12 were negatives. Only in the recent Q3 (31/12/13), the segment contributed positively at RM 2.3 mil and this represent a miserable 3.2% profit margin.

2014-04-30 14:51

Icon8888

Alphabeta, what is the conclusion ?

2014-04-30 14:54

james70

GOB was completing the low cost component of the Batu Kawan projects which could explain the poor or negative margin in 2012.

2014-04-30 15:09

kancs3118

@ James70, i believe the low cost component in Batu Kawan that you are referring to belongs to the "abandon" housing projects left over by Equine Capital (under Patrick Lim).

In the future, GOB also needs to commence building its obligatory LMCs (Low Medium Cost). In the scaled down model in GOB's Batu Kawan sales gallery, these are the flats and apartments. Construction has not commence for this portion. I don't think there are any landed terrace houses for the LMCs - which should be good because revenue yield per square feet will be higher this way.

2014-04-30 15:40

james70

The LMC homes obligation have been fulfilled as I understand having spoken to the sales person when I visited the gallery on 12Apr. Those homes are not the flats and apartments you are referring to.

2014-04-30 16:06

Alphabeta

At current price, GOB prospective P/E in FY 14 already at 7.11 times compared to last year 3.75 times. With marginal improvement in EPS (14.22 sen per share), P/E multiple revaluation was not due to fundamental.

Fundamental has to catch up to justify the higher P/E. Though price to book is 0.84, there is no dividend payout for the last 2 years.

If you compared this with Hua Yang even though it’s EPS is expected to come down, it is around 28.5 sen per share. At current price (reduce price), its prospective P/E is 6.64 compared to last year 4.95. Its dividend yield is around 7%. Price to book is around 1.38.

You can also check counters like Daiman, Glomac, Crescendo etc with comparable P/E. These counters have good dividend yields.

Unless GOB has exciting development up their sleeve in the next few years that yield better profit margin, any further upside in price will not be justifiable. It needs to have more strategic land bank like those in Batu Kawan that you have mentioned in earlier posting. Its land held for development is just too small to give longer term earning visibility.

2014-04-30 16:24

Alphabeta

What i meant is longer term earning growth visibility. Let said double the current EPS in the next 5 years.

2014-04-30 16:26

Icon8888

Thanks Alphabeta for your view. Huayang is indeed a good company. So are Daiman, Glomac and Crescendo

2014-04-30 16:36

james70mother

Post removed.Why?

2014-04-30 17:06

james70mother

Post removed.Why?

2014-04-30 17:07

james70

you are the owner of your actions rich_trader=OneMillion and ultimately your karma. you'll reap what you sow.

2014-04-30 17:24

james70father

Post removed.Why?

2014-04-30 18:21

james70father

Post removed.Why?

2014-04-30 18:22

Icon8888

how come today nobody attack me ? jokers ? adam ? chong ? jumbo ?

2014-04-30 19:09

Chong8206

Stay in ur house I won't attack lah.......

2014-04-30 19:20

Icon8888

ha ha sian already ? no kick anymore ? told you already not sustainable...

losers..

2014-04-30 19:47

Chong8206

Ya lor how haiiii ahhh???

2014-04-30 19:52

Icon8888

ok jennywong i checked your postings, It seemed you are a genuine investor. So I am happy to answer your question

Are you referring to GOB ? I would not want to suggest a target price (always get people into trouble)

but I dont mind highlighting that they made 30mil last year, and in 2015, based on my calculation, they potentially can make RM100mil from Damen service apartments / office component

I will leave it to u to imagine how high it can go. Does that make sense ?

(but first of all, we need to establish that 100 mil profit from damen is indeed achievable. Which for me is still a hypothesis waiting to be proven. So please dont blame me in the future if that kind of profit is not achieved. I have done my best to be 100% transparent by laying out the calculation for everybody to examine and challenge)

2014-04-30 19:55

Chong8206

Hello What is damen take up rate??

2014-04-30 19:57

Icon8888

95% and 98% respectively

if you are literate

2014-04-30 19:58

Icon8888

GOB better announce good result this quarter. Otherwise you wont see Icon in this forum anymore, he would have gone into hiding

(even though he never mentioned next quarter is good, the crowd won't care, they will still crush him)

2014-04-30 20:03

Icon8888

end May

all PLC must announce their result within two months of accounts closing, and their closing is 31 March

2014-04-30 20:06

Icon8888

Mr Chong, how come dont attack me ? where is your buddy adam, thambi, saturn and jumbo ?

2014-04-30 20:07

Icon8888

jenny, I wish you all the best. If things turn sour (touch wood) and you feel bad, please think of icon. He has three lorries of GOB, so he will suffer most

then you will feel better

2014-04-30 20:10

Chong8206

It's ur house mah.....u already kena what you deserve as I see in all attack.

2014-04-30 20:14

Icon8888

boring...

2014-04-30 20:16

Alphabeta

Dear Icon8888, i appreciates your passion and untiring effort to unearth an up and coming property developer. Beside the financial numbers published in the annual report, i have done some research on the property development costs. I am interested to invest in GOB, before that there are still some questions which i would like to raise with you concerning the property development costs and the methodology of developers lock in sales, recognizing revenue and profit, progress billing to customers in stages and its impact on cash flow.

Answers to these questions cannot be found in annual report.
a> Land Cost, does this include the stamp duty & legal fees (normally around 1% of land cost), pre-development expenses.
b> Professional fees, like Architect, M&E, land & quantity surveyors etc..
c> Sales & Marketing expenses plus developers' overheads.
d> Contribution to authorities for plan approval, sewerage & sanitary, water & electricity connection etc..
e> Is your construction costs comprised only earthwork, piling & building (foundation & superstructure works), how about infrastructure works like internal roads, drainage, water reticulation/pumps, fire fighting, sewer reticulation, telecom manhole & cabling, street lighting, electrical & water supply, main reservoir/water sumps, sewerage treatment plant, landscaping etc).

The common costs such as land, infrastructure costs are allocated by estimated revenue to be generated from the respective products.

Sales revenue is recorded but billing to customers is based on stages of progress to be certified by architect, such as 10% upon signing S&P, maybe another 10% upon completion of earthwork, foundation etc... Hence, lock in sale is completed only with S&P being signed. Then 1st stage of progress billing can proceed before monies start rolling in.

Recognizing of revenue & costs in based on two things:
a> the ascertainment of estimated profit (revenue minus costs)and this must be revised from time to time as development progresses.
b> the ascertainment of % of completion (actual development cost/budgeted development cost), if 10% of progress is achieved on cost basis, then 10% will apply on the sales revenue lock in and the associated budgeted costs.
In the service apartment case, if only RM 100 mil sale revenue out of the RM 500 mil total estimated GDV as the point of recognition. Then only RM 10 mil will be recognized as revenue.

Developers' ohds and marketing are recognized as periodic costs and cannot be capitalized and to be charged out immediately.

The computation is quite complex and based on a number of parameters. I can create the excel template but unless you have a ballpark figures on those parameters, it is fruitless exercise.

2014-05-03 10:51

Icon8888

Dear Alphabeta, I remember your earlier participation in Uncle Koon's write up on Mudajaya, which you also went into details on the various aspects of the business.

Unfortunately, I neither have the expertise nor access to information that can help you to build up the model before you take a plunge into GOB.

I guess we have very different approach when come to investing. I am the kind of person who put my money in a stock once I figure out the broad details, which is apparently different from your style

Back to GOB. I have put big money in GOB. However, I don't know whether the RM150 mil net profit that I described in Part 8 can really materialise. There are many factors in play : I could have got the timing wrong by 6 to 12 months, I could have got the construction cost wrong by 100 mil to 200 mil. I could have mis-interprete the GDV figure by 100 mil to 200 mil, etc.

In other words, I could have got a lot of things wrong (but I might not have got them wrong, after I posted the articles, so far nobody has been able to pinpoint any fatal mistake, which I will be very keen to listen to, if any).

But I still feel very safe.

The reason is because I don't need 150 mil net profit next year to protect my investment. GOB made RM30 mil last year. Their market cap is only RM250 mil now. Even if the Damen project only turns in additional RM30 mil next year (instead of RM150 mil), GOB would have grown its profit by 100% to RM60 mil. That would translate into PE multiple of 4 times.

Can you see the logic why I don't bother to get bogged down by the details ?

But of course, you are entitled to look at things differently. You must be comfortable with the theme before you put your money in. Nothing can replace that.

I fully respect your decision to dig real deep. But unfortunately, I don't have the resources or expertise to assist you.

I apologize

2014-05-03 11:46

jennylim

Post removed.Why?

2014-05-03 11:49

Icon8888

jenny you didnt go shopping meh ? why everyday stick to the computer ? you must have a real big portfolio

kaka

2014-05-03 11:59

Icon8888

I am busy blogging. Writing an article on Crest Builder

2014-05-03 12:00

Icon8888

wah you so rich

i stay in jinjang

i am a jinjang analyst

2014-05-03 12:09

Icon8888

i thought CB belongs to Yong family ?

2014-05-03 12:11

jennylim

front only.

2014-05-03 12:13

Alphabeta

Earning growth prospect of a business depend very on the robustness of the industry and the ability of the business entity to capitalize on the market trend to drive revenue, control costs and manage its working capital well.

Volatility of share price can be temporary driven by news (good and bad) but the long term growth prospect still need to be supported by fundamental.

Fundamental like sale volume and sale price, ability to control unit cost will determine revenue growth and profit margin. Beside these, good management of working capital and efficient utilization of assets improve Return of Equity.

Question of positive free cash flow and economic value added are cornerstone of successful businesses which will continuously add shareholder value in the long run and increase dividend payout.

Mudajaya financial strength is still intact but its growth prospect is lacking due to depleting order books and its uncertain fate of the Indian Power Plant return on investment (it will be lucky if they can get back their investment capital plus some profit). That's the reason for its low valuation.

I am still confident to invest (though not a lot) in Mudajaya in view of its past performance and undemanding P/E compared to others in the same industry. It will move once it secures big ticket job and improve its order books.

I do not select stock based on short term capital gain, more for dividend yield and long term sustainable earning growth with capital gain.

I will take profit if the price move too far from fundamental in short time and drive the valuation into unrealistic level.

There is no hard and fast rule in investment, there are successful traders who invest purely based on technical analysis. I prefer to base on fundamental and the management ability to drive value for shareholders.

GOB has showed sign of improve earning but still need to know how it can drive higher earning growth without positive free cash flow and more borrowings.

Who knows, Icon8888 may be the early bird that catch the worm. I wish all the best to you. Will not bother you anymore since we have different approach.

2014-05-03 14:10

jennylim

too much of number crunching not suitable for trading stock....

go study why john keynes bankrupt investing in stock mkt.

stock market is a discounting mechanism, the details in numbers and cash flow etc will take care of themselves as long as the direction is correct. i m in favour of icon method. less number, more concepts.

2014-05-03 14:16

jennylim

alphabeta, if wallstreet trader or investor think like u, nobody would buy facebook, google when they listed. nobody even dare to underwrite them.

2014-05-03 14:19

jerome888

Jennylin the coke talk. Steal ideas of others talk coke as if so pro.

2014-05-03 14:21

duatlai

Yongtai bhd is heading back to where is begin

2014-05-03 14:50

Icon8888

Duatlai, based on my experience, usually that means a substantial portion of upside had happened

Rights going ex is a high profile event. The creation of OR will attract attention of a lot of short term traders. They will move in to try to take opportunity to profit. Meaning during that period of time, almost all profit would have been squeezed out of the stock

My personal view only. If u want to wait for OR and WA, there is nothing wrong with it also, especially if you are a long term investor

2014-05-04 08:03

MrNobody

Blog: (Icon8888) Global Oriental Bhd (Part 8) - Sticking My Neck Out
Apr 30, 2014 07:55 PM | Report Abuse

ok jennywong i checked your postings, It seemed you are a genuine investor. So I am happy to answer your question

Are you referring to GOB ? I would not want to suggest a target price (always get people into trouble)

but I dont mind highlighting that they made 30mil last year, and in 2015, based on my calculation, they potentially can make RM100mil from Damen service apartments / office component

I will leave it to u to imagine how high it can go. Does that make sense ?

(but first of all, we need to establish that 100 mil profit from damen is indeed achievable. Which for me is still a hypothesis waiting to be proven. So please dont blame me in the future if that kind of profit is not achieved. I have done my best to be 100% transparent by laying out the calculation for everybody to examine and challenge)

2015-07-01 22:34

paperplane2

Neck? Tot little head

2015-07-01 22:59

MrNobody

I will leave it to u to imagine how high it can go. Does that make sense ?

2015-07-01 23:08

MrNobody

Hundreds of years ago, Galileo said that the earth revolved around the sun and he got into trouble. But that doesn't mean that he was wrong.

Sometime when you are faced with compelling evidence, do you have the courage to stick your neck out, disagree with everybody else and defense what you believe is possible ?


Based on the above model, GOB will recognize RM159 mil net profit for the development project in 2015.



Dear readers, that is a figure that even Galileo might hesitate to stick his neck out to support. Just imagine how stressful it is for me to write this article.

2015-07-01 23:16

MrNobody

5. Concluding Remarks



No analyst has ever suggested that GOB will have the potential to report such windfall gain in the immediate future.



Have I made any mistake in the calculation (assumptions, facts, mathematics, etc) ?



Or am I just being one step ahead of others ?

2015-07-01 23:17

icon8888

GOB is a screw up. Until now I still don't know what went wrong. : p

2015-07-01 23:37

Post a Comment