News

Tropicana Danga Senibong Sdn Bhd (TDSSB) has terminated the sale and purchase agreement (SPA) for the acquisition of a 84.5ac leasehold land meant for a RM3.7b mixed development project in Mukim Plentong, Johor, also known as Senibong Waterfront Land.

TDSSB, (previously known as Renown Dynamics) is a 30:70 joint-venture (JV) between Tebrau Teguh Bhd and Golddust United Sdn Bhd, a wholly-owned unit of Tropicana. The SPA that was signed on 23 Dec 2013 was terminated due to the conditions precedents not being fulfilled.

Comments

We reckon that Tropicana would have financed the land acquisition solely by borrowings of RM311.0m (which we have previously accounted for in our estimates).

We are positive on the termination of the land acquisition as: (i) this would mean lower borrowing inline with their de-gearing exercise, to 0.37x (from 0.47x) in FY15, which translates to lower borrowing cost by 14.5-17.0% to RM37-31m in FY15-16E, and (ii) we prefer companies with lower exposure to the Johor property market due to the negative sentiment arising from the oversupply situation in Johor, which could lead to slow take-up rates in the future.

Outlook

Management maintains FY15 sales target at RM1.4b, which is in-line with our full-year sales estimates of RM1.5b.

The SPA termination should help with TROP’s degearing exercise as it is planning to reduce net gearing closer to 0.40x by 4Q15, while we estimate it to be at 0.37x by FY15 (from 0.58x as at 2Q15), as proceeds from land sales and inventory are utilised to pare down borrowings.

Forecast

We increase earnings by 2.5-3.6% to RM194-136m in FY15-16E to account for lower interest cost due to lower borrowings.

Unbilled sales remain strong at RM3.0b which continues to provide 2.5-3.0 years of visibility.

Rating

Maintain MARKET PERFORM

Valuation

We reiterate our MARKET PERFORM call on TROP with a slightly higher TP of RM0.99 (from RM0.98) based on an unchanged historical low Fwd P/NTA 0.45x and a marginally higher FY16E NTA/share of RM2.19 (from RM2.18). We believe investors are currently less enticed by the challenging property market and the company’s relatively high net gearing and thus, we have applied its historical low valuations as a base point. Although the group is trading at its historical low with FY16E P/NTA of 0.4x based on current share price, we maintain our MP call as downsides are limited from hereon while there are also no promising re-rating catalyst as sector’s dynamics remain weak.

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 - 25 Sep 2015