News

Yesterday, Tropicana Bhd (TROP) announced that they are disposing their 73% stake in Tropicana Tenaga Kimia Sdn Bhd (TTK) to Austin Powder Asia Pacific Inc (APAP) for a total consideration of RM194.5m.

Comments

We were not surprised with disposal of TTK, as it is inline with TROP’s de-gearing exercise to further reduce its financing costs, which we have highlighted in our previous report dated 12-Feb-15 that management has planned at least RM580.0m of non-core assets for sale. To recap, this would be TROP’s second disposal of its non-core assets after they proposed to dispose Tropicana City Mall (TCM) back in Jan-15.

Upon completion of the disposal of TTK for the total disposal consideration of RM194.5m, TROP is expected to utilise RM170.8m to repay bank borrowings immediately. Its net gearing (as of FY14) of 0.68x is expected to come down to 0.46x post repayment of bank borrowings from the sale of TCM and TTK totalling to RM630.8m. On this front, we are also unlikely to see special dividends arising from these disposals as we believe the retained earnings would be utilised for the working capital needs.

The disposal is expected to complete in 2Q15. TROP is expected to register a one-off net gain of RM48.5m from the proposed disposal of TTK, and a loss of recurring income stream.

Outlook

Going forward, management has set a sales target of RM2.0b vis-à-vis our estimates of RM1.5b for FY15, on the back of RM2.0b planned launches and RM1.2b worth of unsold projects that was launched previously. That aside, we would expect its de-gearing exercise to continue especially on the disposal of landbanks with higher holding costs or in less prime area.

Forecast

We adjusted our FY15E net profit higher by 24% to RM238.0m to account for the disposal gain which we regard as non-core. We also tweaked our FY15-16E core net profit lower by 1% after taking into consideration the potential loss of income from TTK and also reduced finance costs.

Rating

Maintain MARKET PERFORM

Valuation

We reiterate our MARKET PERFORM call on TROP with an unchanged Target Price of RM1.10 based on 72.0% discount (one of the steepest discounts applied under our coverage, and close to its historical peak of 74%) to its FD RNAV of RM3.91, 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

Weaker-than-expected property sales.

Higher-than-expected sales and administrative costs.

Negative real estate policies.

Tighter lending environments.

Source: Kenanga Research - 16 Apr 2015