Outperformed benchmark indices. Recall that we had issued a Trading Buy note on ENCORP on 6 August 2013 due to our belief that its shares were undervalued. Since then, the stock has been performing well with a Total Return of 19.3%. It has also outperformed both FBMKLCI and FBMEMAS by wide margins of 15.9% and 16.6%, respectively.

Latest developments. Over slightly the past one year, we saw a series of corporate developments and shareholding changes. In 6 May 2014, it was reported that the investment arm of the Federal Land Development Authority (Felda) bought ENCORP’s common shares, equity warrants and 5-year 6% Redeemable Convertible Secured Loan Stocks (RCSLS) from Lavista and Pegang Impian Holdings. Back then, Lavista owned 29.85% of ENCORP while Pegang Impian holds 19.60%. With such acquisition, Felda had also made a Mandatory General Offer (MGO) for the remaining ENCORP shares at RM1.55/share, RM0.55/warrant and RM1.55/RCSLS. Based on latest filing, ENCORP is now 72.27%-owned by Felda Investment Corporation S/B (FIC).

Eyeing the Top 10 position. With the changes in share holdings, ENCORP is aimed to be one of the Top 10 players in property development and construction industry in Malaysia in the next 10-15 years. Thus far, ENCORP has 5 signature development projects currently (Encorp Strand in Kota Damansara, Encorp Cahaya Alam in Shah Alam, Enclave Seaview Residences in Batu Feringgi Penang, Encorp Marina Puteri harbour in Nusajaya Johor and Residences on McCallum lane in Perth Australia) with a total Gross Development Value (GDV) of RM3.4b, which will last until 2017. Total undeveloped land bank is recorded at 22.34ha. It is understood that the acquisition of FIC into ENCORP was one of the steps taken in an effort to build the capacity of FIC and spread its wings in property development. This strategic move is also inline with FIC’s objective to unlock the value of its land bank across prime areas in Malaysia. As for its construction division, Encorp Construction S/B has also received a Letter of Acceptance issued by LT Leong Sekutu on behalf of Aikbee Timbers S/B for the main contract to build a 25-storey mixed development in Jalan Kelang Lama, KL. The contract is worth RM101.67m.

Latest financials. According to ENCORP’s 2Q14/6M14 unaudited quarterly results, revenue increased 28% QoQ (to RM119.1m from RM98.3m) but PBT decreased c.58% (to RM6.6m in 2Q14 from RM15.5m in 1Q14). The decline in profitability was due to the recognition of fair value gains of RM7.3m from completed investment property in 1Q14. Nonetheless, excluding this one-off gain, PBT margin was lower. As for 1H14 vs. 1H13 comparison, the Group also saw a decrease in revenue of c.9% (from RM233.7m to RM212.4m) due to lower sales and progress achieved by property division. Consequently, PBT of the Group also declined to RM22.1m in 1H14 as compared to RM26.0m for 1H13, representing a 15% decline.

Addressing its public shareholding issue. As at 20 August 2014, the public shareholding spread of ENCORP was 12.84%, which is still below the minimum public shareholding spread requirement of 25.0%. While the Group was granted an approval for extension of time of 6 months until 9 January 2015 for the Company to comply with the requirement, the Group may be required to address this shortfall via private placement of new shares and/or secondary placement of existing shares by certain shareholders.

Take Profit. As the share price of ENCORP has performed well since our recommendation coupled with the weaker set of recent financial results as well as dilution from potential private placement of new shares, we believe now could be a good time to Take Profit. Hence, we are downgrading our rating from TRADING BUY to NOT RATED. As for fair value, we employ the earlier MGO price of RM1.55 as a benchmark.

Source: Kenanga