INVESTMENT MERIT

Atlan Holdings Berhad (Atlan)’s robust earnings momentum and strong cash flows from 75.78%-owned SGX-Listed Duty Free International Limited (DFIL), will lead investors to rediscover the company’s hidden assets. In the meantime, Atlan’s prized Ampang land is at net book value of 80% discount to the average curren market value. We like Atlan for: (1) 75%-owned DFIL endowed with strong cash flows and hence provide potential case for earnings enhancing acquisition, which offers a re-rating catalyst, and (2 unlocking value of undervalued prime land in Jalan Ampang Trading Buy with a SOP-based TP of RM5.65 (20% discount to holding company).

Partial divestment of DFZ to attract eye-balls and an impetus for the stock to be re-rated.Atlan’s 75.78%-owned DFIL has entered into a sale and purchase agreement to dispose of up to 25% equity stake in wholly-owned DFZ Capital Berhad to Heinemann Asia Pacific Pte. Ltd. (HAP) for a total cash consideration is RM239.1m comprising: (1) 1st tranche EUR19.7m (RM90.2m) and (2) an additional option of up to 15% equity interest in DFZ is RM148.9m (based on agreed enterprise value of the DFZ Group of EUR216.7m o RM992.5m). Based on the divestment of 25%, DFZ is valued at RM956.4m. The disposal of DFZ is valued at EV/EBITDA of between 11.5x to 12.6x based on the latest audited FY15 results. Based on DFZ’s FY15 PATAMI of RM54.4m and ne assets of RM156.7m, the total deal (assuming 25% stake divestment) works ou to a PER of 17.6x and 6.1x P/B. The Proposed Disposal of the 1st tranche (10% has been completed in June 2016. DFIL’s effective stake in DFZ Capital is currently 90%. Note that DFIL contributes to >90% of Atlan’s earnings. HAP is a wholly-owned subsidiary of Gebr. Heinemann SE & Co KG, a prominent globa travel retail player in the world. DFIL is in the trading of duty-free merchandise under the brand name ‘the ZON’, in Peninsular Malaysia.

Huge war chest at DFIL. We expect DFIL to rake in a huge cash pile to the tune of between RM380-RM439m or an estimated 32.0-37.0 sen/DFIL share (assuming enlarged no. of share from new shares placement) due to: (1 divestment in DFZ assuming 25% stake(RM239m), (2) private placement of new DFIL shares to comply with free-float requirement and a transfer from Catalist to the Mainboard of Singapore Exchange Securities Trading Limited (SGX-XT (estimated at RM60-100m), and (3) reduction in working capital (RM80m-100m based on our forecast) i.e. DFZ Capital could free up cash flow via Heinemann’s expertise in running the duty-free retail outlets more efficiently and leverage on the latter’s massive global bulk procurement, which is expected to further reduce DFZ’s purchasing cost. For illustration purposes, assuming an ROI of 3%, the war chest estimated at RM439m, could enhance DFIL net profit by an additiona RM13m or 12% to our Atlan’s FY18E net profit.

Dividend yield 5-6%. Atlan’s 1Q17 1st interim DPS is 12.5 sen (+25% YoY (1Q16: 10 sen), in line with better 1Q17 performance from DFIL. With bette performances from DFIL coupled with an expected huge cash pile flowing into DFIL, we forecast Atlan’s FY17 DPS at 26.0 sen implying a yield of 5.4%.

Head I win, Tail I win too. We believe Heinemann’s global bulk purchasing power, better inventory management, logistics and procurement could plug earnings leakage (or minority interest) from the divestment of DFZ. As such there could be a strong potential of no earnings dilution from the stake sale ove the medium to longer term. Based on our back-of-the-envelope calculation, the savings and earnings back to DFZ total an estimated RM12m-RM18m pe annum.

Undervalued prime land at Ampang. Atlan is sitting on a 4.66 acre land in Ampang which includes Menara Atlan, Zon hotel, a 3-storey car park block and a 2 basement levels for car park at a net book value of RM64.6m as at 29 Feb 2016 or an estimated RM318/sq ft (The NBV is 80% discount to the average current market value). The surrounding area is being transacted at market price range of between RM1,500 to RM2,300 per sq ft. Recall, back in 2013, a 1.38ha freehold plot in Jalan Ampang (popularly known as Nasi Kandar Pelita) sandwiched between Wisma Central and a Chinese temple, was sold fo approximately RM495.34m or RM3,325/ sq ft.

Trading Buy with TP of RM5.65. We value Atlan based on Sum-of-Parts a RM5.60/share, which has already factored in a 20% holding company discount In our sum of parts valuation, we use consensus target price for DFIL.

Source: Kenanga Research - 13 Oct 2016