News  Yesterday, Tropicana (TROP) entered into a sale and purchase agreement with Mediaraya Sdn Bhd (MSB or Purchaser) for the disposal of a piece of freehold land measuring approximately 2.46 acres in Subang Jaya for a total cash consideration of RM37.6m.

Comments  The deal does not surprise us as it is part of a degearing exercise to strengthen its balance sheet as the group has quite a large choice of landbanks in its books.

 While that particular piece of land’s net book value stands at RM18.6m, TROP is only expecting a net gain of RM3.7m from the disposal, after net of tax and payables due to some development cost incurred on that land previously. To date, the group has sold c.RM956.9m worth of landbanks i.e. Canal City, Jalan Bukit Bintang and Subang Jaya. However, we only factored in the Canal City land sale to ECOWLD and Jalan Bukit Bintang land sale to Agile Property in our FY14 and FY15 earnings estimates, respectively.

 Despite the land sale, we would expect minimal impact its current net gearing of 0.6x. However, we expect its net gearing to ease to 0.4x by year-end should the potential earnings from the ECOWLD land sale (Canal City) is completed within this year. However, TROP and ECOWLD have extended the Approval Period for a period of 6 months to 19 March 2015 to facilitate the completion of the SPA.

Outlook  Looking ahead, management remains focused on their de-gearing exercise in which they are still actively looking to dispose of their non-core assets i.e. malls and office towers.

 Apart from that, management is also maintaining its sales target of RM2.0b for FY14 with another RM2.6b launches in 2H14 which we believe is achievable given that TROP is launching more landed residential products in the Central Region.

Forecasts  We maintain our earnings forecasts as the land sale gains result in <2% increase in earnings. Additionally, our FY14E earnings are heavily dependent on the realization of the land sale to ECOWLD. FY15E earnings are not affected.

Rating Maintain MARKET PERFORM

Valuation  We are keeping our MARKET PERFORM call on TROP but further lower our TP from to RM1.28 from

RM1.40 as we widened our discount to its historical high level of 67% from 64% previously, based on FD RNAV RM3.89 largely due to risk exposure issues in Johor, larger higher-end high-rise components in their launches and possible delay in the conclusion of the ECOWLD deal, which may affect FY14E earnings.

Risks to Our Call Execution risks (i.e. shortage of labour). Later-thanexpected land sale recognition timeline.

Source: Kenanga