- Ready for a new era? Last month, the group changed its name to Iskandar Waterfront City Bhd (IWC) from Tebrau Teguh Bhd (TTB). The renaming followed two major proposed exercises, which were announced in Dec-13 and still pending completion; (i) 1-for-2 rights issue with warrants to raise up to RM670m for reclamation works of the Tebrau Coast and (ii) establishment of 70:30 JV between Tropicana and IWC to acquire and develop 60ac (GDV: RM3.7b) of the Tebrau coast land from IWC. It appears the group is readying to realize its prized asset and we reckon the company’s value will unfold in a similar fashion to E&O when its share price benefited as it got closer to obtaining full approvals for the reclamation of c.760ac Seri Tanjung Pinang Phase 2 @ Penang.

- The prized jewel. IWC owns some 980ac waterfronting landbank along the Tebrau River line which is mostly fronting the river/sea with easy connectivity to 1st Link/CIQ and Johor Bahru City Centre (5-10mins driving distance) through the EDL Highway. They will need to reclaim 786ac out of the 980ac which is currently “underwater” while the rest of the land is already there. Following their JV with Tropicana, we reckon that IWC is open to JVs or land sales to expedite the realization of their Tebrau River landbank. Total reclamation cost is estimated at RM822m which would be satisfied by the rights issuance and some borrowings; we estimate post these exercises, net gearing would still be comfortable at 0.1x. However, to realize its landbank more aggressively, they will need to bring in other property brands or JVs. The proposed JV has two major conditions; namely securing a high plot ratio of 4x and converting the land to freehold status (still on-going). Assuming that these conditions are met, our analysis indicates that: (i) net land cost is RM252psf and (ii) GDV is based on ASP of RM629psf, which is fair when compared to neighboring prices (refer overleaf).

- Tebrau River project GDV could be worth RM54b, if we extrapolate this onto the entire Tebrau River landbank as per above. This would imply 29x GDV/enlarged market cap (post rights) ratio which implies that the group is undervalued against other developers under our coverage average of 11x. It also works out to be RM58m/ac in terms of GDV/acre vs. recent water-front development deals by China-based developers of between RM158-327m/ac (refer overleaf).

- Earnings. We expect FY14E earnings of RM132m after accounting for the gains on land sale and new property contributions (refer overleaf).

- Cum-Rights FV of RM3.39 based on ex-rights FV: RM2.60 after assuming a steep 55% discount to its ex-rights RNAV of RM5.73 (refer overleaf). Our applied discount is very steep vs. the average 30% applied on developers under our coverage to account for the negative newsflow from Johor and volatile earnings history. Also, our RNAV is conservative as it is primarily driven by land valuations rather than DCFing the future development profits of their landbanks. Our FV provides >100% share price upside to its last price. Since the group appears to be close to kick-starting reclamation of their landbank along Tebrau River, we recommend Trading BUY.

Source: Kenanga