News  Yesterday, Tropicana Berhad (TROP) announced that they had entered into a conditional sale and purchase agreement with AMT, acting solely as trustee for CMMT, for the disposal of the Tropicana City Mall (TCM) for a total disposal consideration of RM540.0m.

Comments  While we were not surprised by the disposal of their noncore assets like investment properties, which we have highlighted in our previous report dated 28-Nov-14, we were surprised by the sale of TCM to CMMT as the last attempt fell through back in 29-Oct-13. This is part of TROP’s de-gearing exercise.

 TROP is expected to register a one-off income statement net FV gain of RM13.5m from the disposal. However, the actual gain from investment cost amounted to RM223.6m. While there will be a loss in recurring income stream (estimated FY15E RM27.6m EBIT assuming 71% margin), the impact will be cushioned by interest savings (RM23.5m p.a.) as TCM-related debt would be settled.

 Upon completion of the disposal of TCM for the total disposal consideration of RM540.0m, TROP is expected to utilise RM460.0m to repay bank borrowings immediately while the remaining RM80.0m utilised as working capital and disposal expenses. Its net gearing (as of 9M14) of 0.72x is expected to come down to 0.52x. On this front, we are also unlikely to see special dividends arising from the disposal.

 While there is no major earnings impact from this sale, we are glad to see that net gearing has been pared down to more manageable levels. We hope to see debts being pare down further given the challenging property market outlook.

Outlook  The disposal of Tropicana City Mall is expected to be completed closer to 3Q15. That aside, we are banking on TROP to be able to recognise gains on its Tropicana Aman land sale (to ECOWLD) in the upcoming 4Q14 results; failure to do so would result in further deferment to 1Q15 whereby its gains can only be recognised in FY15.

Forecast  Our FY15E core net profit was not materially affected after taking into account: (i) lower FY15E revenue by 1.8% due to the loss of income from TCM, (ii) reduced finance cost by 33.0%. However, our FY15E earnings estimate was raised by 7.0% to account for the income statement disposal gain which we regard as non-core.

Rating Maintain MARKET PERFORM

Valuation  We reiterate our MARKET PERFORM call on TROP with an unchanged Target Price of RM1.15 based on 71.0% discount (one of the steepest discounts applied under our coverage) to its FD RNAV of RM3.89, due to its large risk exposure in Johor, larger higher-end high-rise components in their developments and also tougher times ahead due to the implementation of GST and also tighter lending criteria imposed by banks.

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

Source: Kenanga