Gadang issued circular to shareholders today for the Joint Venture. EGM date has been fixed at 10 am on 23 April 2014 (Wednesday) at Sri Damansara. I might be there to listen to what management has to say.
The objective of this article is to supplement / update / correct some of the information as set out earlier in Part 1 and 2 of the article series.
(1) Composition of the Development Project
In Part 1, it was mentioned that the Project will comprise retail mall, office suites and hotel suites. However, information on the exact composition is not available.
According to page 19 of the Circular, out of GDV of RM1.8 billion, RM1.3 billion is retail mall, RM200 mil office suites and RM300 mil hotel suites, representing 72%, 11% and 17% of GDV respectively.
What is the implication ? It is actually good news.
As mentioned in Part 2 of the article series, the retail mall (Capital 21) has received favorable responses from property investors due to the innovative concept of bringing 21 capital cities' attractions under one roof. Due to the heavy weightage of the mall component, the fact that it is well received means that the residual risk for the entire project has been cut down substantially.
In addition, the massive mall component augurs well for payment to be recieved by Gadang. Please refer to section (2) below.
(2) Mode of Payment
Details of how Gadang will be paid are set out in page 12 of the Circular. It is quite a mouthful and not meaningful to be reproduced here. Fortunately, there is a table that can help us to understand the payment structure :-
|Payment to Gadang|
|Mall Progress Billing||RM mil||RM mil|
^ the remaining of RM23 mil is to be booked in pursuant to construction of office and hotel suites
(note : if you read page 13 of the Circular, the payment structure is not as simplistic as set out in table above. However, I believe the concept is more or less there. Please don't hesitate to voice out if you identify any major errors)
What information from the table above is relevant ?
Out of RM324 mil to be received by Gadang, RM301 mil is mall related. It also happened that the mall will be the first to be constructed (target to be completed by 2017, while the entire project is to be completed by 2019 / 2020).
This means that Gadang will start receiving payment at relatively early phase of the project.
Based on assumption that construction work starts in 2014, Gadang might start booking in profit from as early as 2015 onwards
(shareholders please seek clarification with management during EGM)
(3) Windfall Gain
In Part 1 of the article, I wrote that the group could reap windfall gain of RM330 mil, and after tax deductions, the net profit should be RM248 mil. Apparently I had made a mistake by forgeting to factor in the land cost.
According to page 20 of the Circular,
"based on maximum entitllement sum of RM324 mil, the latest net book value of the land of RM31 mil, and tax of 25%, the JV is estimated to produce net profit of RM220 mil."
I was out by 13%. My apology.
(4) Utilisation of Proceeds
In page 23 of the Circular, the company states that the amount of RM324 mil shall be utilised as follows :-
|Acquisition of new land banks||100||yet to be identified|
|Part financing of existing projects||65||construction, property, utility, plantation|
|New investments of the group||60||to be identified|
|General working capital||15||day to day operation|
|Repayment of loans||10||based on 7% int rate, interest saving of RM0.7 mil|
|Cost related to the JV||74||mostly tax expenses|
(5) Pro forma Effects on Net Assets and Gearing
(note : based on FYE 31 May 2013 figures)
According to page 22 of the Circular, shareholders funds would be boasted by a massive 81% from RM263 mil to RM482 mil.
Net assets per share will increase from RM1.34 to RM2.45. Based on existing share price of RM1.27, Price to Book Ratio will drop from 0.95 times to 0.52 times.
Loans will drop by RM10 mil. However, due to spike in shareholders' funds, gearing will drop from 0.31 times to 0.15 times.
(6) Concluding Remarks
Based on the December 2013 announcement, we have already more or less known that the JV Project will create significant value for Gadang Group.
However, the release of the Circular today has shed more lights on the subject and allow us to have a better feel of the positive impacts.
In my opinion, it is an understatement to say that the JV project creates value for Gadang.
During the past 13 years (2000 to 2013), Gadang reported aggregate net profit of RM149 mil. The JV Project can single handedly deliver RM220 mil net profit over next three years, representing 150% of past 13 years' total net profit.
It will supercharge the balance sheets by boasting shareholders' funds by massive 81%.
The company has indicated that these additional resources will be ploughed back to the group to expand its operations, thereby bringing the group to a new level.
I have always tried to refrain from using promotional language to sensationalize my article. But this case simply blows my mind away.