Fiamma stands to benefit from the housing boom of  the last 2-3 years.While  its  distribution  business  is  experiencing  annual  resilient  growth of  4-13%, property development is a new growth driver.  A  few  strategic land parcels  are  now  held  at low  costs, which mean  high development margins. The company is  also in a net cash position. Based on our SOP valuations, the stock could be valued at MYR3.20-3.30.

Distribution:  a  resilient business. Fiamma distributes home appliances and  has  a  property  development  division,  which  indirectly  and  directly ride  on  the  local  property  cycle  respectively.  Despite  the  housing market’s  mini  ups and  downs,  its  distribution  segment  has  achieved  4-13%  growth  per  annum  previously.  It  has  been  strong  in  the  home appliances  market  with  a  wide  distribution  network  nationwide.  This segment typically yields 30-40% gross margins.   

Property  –  a  new  source  of  growth.  Fiamma  will  see  a  new  growth driver  led  by  its  property  development  wing.  The  market  may  not  be aware of this  business  as yet,  but it  contributes  ~25% of total turnover.While  Fiamma’s  existing Centara project is expected to be completed in Oct/Nov 2014, it has >MYR1bn worth of projects in the pipeline, including MYR600m  high-rise  developments  at  Jalan  Yap  Kwan  Seng  (Kuala Lumpur)  and  the  MYR400m VIDA residenz (Johor Bahru). By end-2015, management  also  plans  to  utilise  its  land  behind  Wisma  Fiamma  for development after an existing warehouse there is moved to Klang. 

Low  land  costs  creates  RNAV  re-rating  angle.  The  property development  division  gives  gross  margins  of  30-35%.  This  trend  is expected to continue as Fiamma’s landbank is carried  at low book costs.The most significant contributor to RNAV is the 1.4-acre Jalan Yap Kwan Seng land, with a  land cost of only MYR631psf. The current market price for land parcels in the vicinity is already going at above MYR3,000 psf.

Net cash now.  Fiamma  is currently in  a  MYR54m  net cash position. We expect it to gear up gradually to ~20-30% over the next two years in view of its upcoming slew of high-rise projects. Dividend payout should remain at about 30%, translating into a decent yield of almost 4%.

MYR3.20-3.30  FV.  Fiamma’s  land  parcels  are  in  deep  value  while  the distribution segment provides stable income growth.  Based on our SOP valuations,  the  stock  could  be  valued  at  MYR3.20-3.30.  It  is  currently trading at an undemanding 6.2x FY15f P/E.
 

A Beneficiary Of The Housing Boom

Company background
Fiamma started up marketing mainly  the  Elba  brand of electrical home appliances  in 1997. Since then, the company has managed to  pick up a number of other brands to widen its distribution reach. Key brands currently carried include  Elba, Rubine, Faber, MEC,  Tuscani,  Haustern  and  EBAC  Home.  It  also  handles  agency  brands  (sole distributorship)  such as  Omron, Whirlpool  and  Braun.  Given the number of brands  it carries,  Fiamma  has  a  wide  product  range  to  cater  for  the  mass  and  high-endmarkets.  These cover  kitchen appliances, pre-fabricated kitchen cabinets, electrical home appliances, bathroom accessories and sanitary ware.  Currently,  the company has  a  nationwide  distribution  network  and  these  products  are  distributed  mainly  to electrical shops/outlets and hypermarkets.

While the distribution business has been generating resilient earnings, management decided  to  have  property  development  exposure  a  few  years  ago.  In  Dec  2008, Fiamma  completed  the  acquisition  of  two  subsidiaries  –  Uniphoenix  Jaya  SB  and Oaksvilla  SB  –  that  own  landbank  in  Kota  Tinggi,  Johor.  Note  that  property development  is  not  a  new  venture  for  the  company,  as  these  subsidiaries  were previously  owned  by  its  founders.  Over  the  years,  Fiamma  acquired  several  other land parcels, such as the 1.12 acres at Jalan Tuanku Abdul Rahman and 1.4 acres at Jalan  Yap  Kwan  Seng.  Currently,  the  company’s  distribution  and  property development  segments  contribute  75%  and  25%  of  the  company’s  earnings respectively.

Fiamma is now managed by Mr Lim Choo Hong, who is the CEO/group MD of the company.  Choo Hong, Mr  Lim Soo Kong (non-executive director)  and  Mr Ngo Wee Bin are the founder members and major shareholders. Choo Hong has more than 30 years of experience  in  dealing in home appliances. He also has  more than 15 years of expertise in property development.

Distribution segment – a resilient but high-margin business

Given  the  10  brands and  the wide range of products  it carries, Fiamma’s distribution segment has managed to achieve an average growth of 4-13%  per annum  over the past 4-5 years.  Earnings from this business  have  been rather resilient despite the  yo-y changes in residential property units completion in Malaysia.

The  home  ware  products  are  generally  sourced  from  a  few  original  equipment manufacturers  (OEMs)  and  about  half  of  them  are  distributed  via  external  parties. Going forward, some cost savings can be expected when  its  existing warehouse is moved to Klang, Selangor, from Bandar Manjalara, Kuala Lumpur, as all products will then be distributed  via  its  in-house  logistics.  Currently, transportation costs  make up about 4-5% of  sales.  Hence, this move  should  enhance  Fiamma’s  current  30-40% gross margins  by 2-3%. Among all the brands and products,  Omron  and the  cooking range provide the highest profit margins'

More interesting property angle

We think Fiamma’s property angle is more interesting  one  and will contribute a new phase of growth  to the company. We believe that  the market may not be fully  aware of  this  division  as  yet,  due  to  the  limited  number  of  ongoing  projects.  However, Fiamma’s  presence  in  the  property  market  will  likely  be  broadened  going  forward, given that it has over MYR1bn worth of property projects in the pipeline. Currently  itsexisting Centara project at Jalan Tuanku Abdul Rahman is  slated for completion  in Oct/Nov,  and  30%  of  the  office  suites  at  Menara  Antara  will  be  kept  as  property investment  assets.  This  ought  to  strengthen  its  pool  of  rental  income-generating assets in addition to the existing Wisma Fiamma building.

By  end-2014,  two  service  apartment  projects  will  be  rolled  out.  This  includes  the MYR600m GDV high-rise developments at Jalan Yap Kwan Seng and the MYR400m VIDA residenz in Johor Bahru. The Jalan Yap Kwan Seng project, with a plot ratio of 10x, is strategically located in the Kuala Lumpur city centre. Development order (DO) for  the  project  was  obtained  two  months  ago  and  it  is  now  pending  finalisation.Indicative pricing for the property units will be at abou t MYR1,200 psf. W e think there is scope for another 8-10% upside,  given the pricing of other recent  launches in the vicinity such as The Mews by Eastern & Oriental (EAST MK, BUY, TP: MYR3.60).VIDA  residenz  is  a  joint-venture  (JV)  project,  whereby  the  land  owner  has  a  30% share of the profits from the development. The project is in a good location within the Johor  Bahru  central  business  district  (CBD)  at  Jalan  Muafakat,  7km  from  the Customs  &  Immigration  Quarantine  Complex  (CIQ).  This  service  apartment  project will be rolled out in two phases.  Phase 1 will comprise 267 units  with a built-up area of 500-900 sqf  at an indicative pricing of MYR500 psf. We believe this  project will be well-received as the pricing is conservative, given the challenging market co nditions in Iskandar Malaysia and considering the fact that new high-rise projects launched by a few Chinese developers recently are mostly going at above MYR750 psf.

To  further  unlock  value  of  its  assets,  management  also  plans  to  redevelop  theexisting  3-acre  warehouse  land  behind  Wisma  Fiamma  in  Bandar  Manjalara  into high-rise service apartments next year. The current warehouse will  be moved to the 6.28-acre  newly-acquired  land  in  Klang  once  its  new  warehouses  are  built.  With a plot ratio of 5x (pending approval), the potential GDV  for the old warehouse land  is estimated at about MYR250-300m, assuming an ASP.  We foresee pent-up demand in this area, as Wisma Fiamma is located within a matured enclave, with schools, commercial precincts and houses already in place.

Management  will  continue  to  grow  the  property  development  division  and  is constantly scouting for landbank. Key targeted areas are still largely within the Klang Valley,  as the market is more sustainable given the  area’s  7.2m population  and its business  activities.  VIDA  residenz  could  be  the  only  Johor  project  over  the  short term, as management holds a cautious stance over the Iskandar Malaysia market.Low land costs create RNAV re-rating angle

The property development division, of which Centara @ Jalan Tuanku Abdul Rahmanis  the major  contributor  currently,  gives  gross  margins  of 30-35%,  ie  similar  to  the distribution wing.  This  trend is expected to stay as Fiamma’s landbank is carried at 
low book costs, given that most of the development land parcels were acquired many years ago. The most attractive one is the 1.4-acre parcel at Jalan Yap Kwan Seng, which was acquired in 2007 at a  land cost  of  only MYR631 psf. The current market price for land plots in the vicinity is already going at above MYR3,000 psf.  We have assumed  a market value of MYR3,000  psf in our RNAV estimate, which  we think is reasonable, considering that  Magna Prima (MAGNA MK, NR)  is said to be looking to sell its Lai Meng school land at MYR3,300-3,500 psf. This comes with a plot ratio of 12x.  Meanwhile,  according  to  media  reports,  Oxley  Holdings  (OHL  SP,  BUY,  TP: SGD0.91) paid the Loke Wan Yat estate MYR3,300 psf for a 3.1-acre parcel in Jalan Ampang while the  KSK Group (KSK MK, NR) paid MYR3,299 for a 3.95-acre land in Jalan Conlay.

Besides  these,  Fiamma  also  plans  to  sell  its  86  acres  of  leasehold  land  in  Kota Tinggi,  Johor,  as this parcel is not contiguous with  its  other two parcels of freehold land in  the same area (Taman Kota Jaya) that are currently being developed. Hence,it  will have to incur major  infrastructure  capex  if it starts development there.  Some gains can be expected, given its book cost of only MYR4.50 psf.

Earnings forecasts and valuations

Forecasts.  Fiamma’s  distribution  segment  is  expected  to  maintain  a  single-digit growth in FY14 while the earnings from its property development business will largely drive bottomline growth. Going into FY15, the Centara project will be completed, and earnings from VIDA residenz and  the  Jalan Yap Kwan Seng project will start to kick in. We, therefore, estimate 15% growth in FY15 . This  growth is expected to  be more material in FY16 as progress billings from the property developments come in higher.Valuations.  We value  Fiamma at  MYR3.20-3.30, based  on SOP valuations.  Using our  FY15  earnings  projections,  the  stock  is  currently  trading  at  an  undemanding FY15f  P/E  of  only  6.2x.  We  apply  a  P/E  of  8.8x  for  the  company’s  distribution division, which is 30% higher when compared with Khind Holdings (KHIN MK, NR)’s 6.8x. This is justifiable given  Fiamma’s ability to achieve  much  higher margins.  We
believe  the  stock  is  undervalued,  given  its:  i)  resilient  growth  in  the  distribution business and earnings kicker from property development,  ii) deep landbank value as land parcels were acquired many years ago – hence significant surplus in RNAV, and iii)  high  margins  from  both  the  distribution  and  property  development  businesses.Given  Fiamma’s  net  cash  position  and  consistent  dividend  payout  of  30%,  the company’s  dividend yield of about 3-4% looks sustainable.  We also think there is a scope for a bonus issue, considering its solid balance sheet and shareholders’ funds.This could potentially enhance the liquidity of the stock.

Source: RHB