The growth angle for both property and education divisions plus thepotential asset monetisation exercise are the key re-rating catalysts forParamount. Maintain BUY with a higher TP of MYR2.40 (28% upside).After a sluggish period in 2013-2014, we expect FY15 earnings to turnaround, as new property sales are likely to grow >25% and the additionof student numbers is on track to hit 1,000 this year.

• Roadmap for growth laid out.Our recent meeting with CEO Jeffrey Chew reinforces our positive view on Paramount. Growth strategies for both property and education divisions are in place, and earnings growth is on track as construction works for most property projects are in full swing this year.
• Healthy pipeline launches to hit MYR400m sales target (+26%YoY).By integrating its own KDUbrand into its property development, the takeup rate for Paramount’s Utropolis has achieved 92% since its launch in 2013. In 2H, the company has MYR400m worth of projects lining up, including Block 6 in Utropolis, a new phase in Sejati Residences, Salak Tinggi township and Section 13 projects. As at May, Paramount’s new sales have already reached MYR200m.
• Strong growth potential for education division.YTD, the total number of student under Paramount’s education division has increased by 346 or 4.4%. With the recent opening ofKDU University College (KDUUC) campus, the company is on track to add 1,000 students for the division. Given the popularity of Sri KDU, a new brand may be created to capture the demand from tier-2 markets, with students likely to continue their tertiary studies in KDUUC. The completion of the Batu Kawan campus in 2018 is expected to sustain the long-term growth.
• Potential asset monetisation exercise for expansion purposes.While there is still room to gear up, given the funding requirement ofabout MYR200m-300m over the next two years, we believe Paramount will likely monetise some of its assets. Value-unlocking could be on the cards and we view the education division as the most valuable jewel as its education peers are currently going at above 30x forward P/E.
• Reiterate BUY.After we update our landbank and balance sheet numbers, our TP is raised to MYR2.40 (from MYR2.00) based on SOP.The growth angle for both property and education divisions as well as the potential value-unlocking plan are the key re-rating catalysts.

New blood in the old Paramount and KDUbrand Paramount had previously suffered from leadership issue after the departure of the former CEO Mr Chan Say Yeong in mid-Apr 2013. However, leveraging on the established property and education brand names, we believe the company will stage a new phase of growth from 2015 onwards under the leadership of its new CEO Jeffrey Chew, who came on board in Jul 2014. Although Chew did not have much background from both property and education sectors (he was formerly the CEO of OCBC Bank Malaysia), after our few meetings with management, we concur with the CEO’s roadmap for growth over the medium term. In our view, execution is key, and material results of the plan can only be seen in one year, at the earliest.

Together with Chew, Paramount has also hired two experienced key management personnel last year to drive the company’s two core business divisions. Mr Beh Chun Chong (formerly COO of Ireka Development) is the deputy divisional CEO for the property division, while Ms Susan Ooi (formerly the senior VP of enrollment at Taylor’s) is taking the CEO role of KDU College Petaling Jaya and chief marketing officer of the university college.

MYR400m sales target looks achievable Management has a sales target of MYR400m for FY15, compared with only MYR318m in FY14. New sales in 1Q15 were strong at MYR157m. The strong sales in Utropolis have shown the synergistic benefit of integrating both property and education in the development concept, bucking the softening trend of the property market. In our view, unlike many other developers which will need to rope in external education institutions, Paramount is the only developer that has an edge in this development concept given its own in-house KDUbrand. The promising rental market has, therefore, attracted both parents and investors to buy into Utropolis. Since its launch in 2013, the take-up rate for Utropolis has reached 92%. The price increase for every launch has also been decent at only 3-5%, and the latest ASP for Tower 5 has hit MYR700-750 psf.

In anticipation of the weakening market post the goods and services tax (GST) in 2Q, Paramount has also taken the opportunity to push sales in other higher-end product segment in 1Q, such as Sekitar 26 in Shah Alam and Sejati Residences in Cyberjaya, via closer engagement with potential buyers and banks. Although the product pricing for Sejati is more expensive, we believe the new clubhouse and the completion of earlier phases have also helped attracting sales. To date, the overall take-up for Sejati has achieved 60%.

While there were not many new launches in 2Q due to the GST implementation, management is looking to launch a few projects worth an estimated MYR400m GDV in 2H, which we think are quite marketable and will enable the company to reach its sales target. These include Block 6 in Utropolis (117 units of service apartments), some linked houses and semi-detached homes in Sejati, 99 units of terraces in the new Salak Tinggi township as well as the Section 13 project. The Section 13 development will comprise two towers of high-rise residential and two towers of office sitting on a retail podium. Given the decent size of the office blocks (GFA 300,000 sqf for both), Paramount will take up the smaller block as its corporate office, while the other block will be up for en-bloc or strata-titled sale. We are positive on the en-bloc potential given the pent-up demand for small office blocks for many corporates in Malaysia. As seen in Bangsar South and Petaling Jaya, UOA Development (UOAD MK, NEUTRAL, TP: MYR2.45) had been selling office buildings in the past, and MRCB-Quill REIT (MQREIT MK, NEUTRAL, TP: MYR1.25) has lately disposed of its vacant office asset in Section 13.

Strategic landbank portfolio The Klang Valley.Of Paramount’s 374 acres of prime land in the Klang Valley, the newly-acquired 237 acres of freehold land in Salak Tinggi marks Chew’s first deal since he joined Paramount. At a land cost of MYR22 psf, the acquisition comes with the Development Order, and major infrastructure and amenities (TNB substations, water retention pond, water and power supply etc) have already been put up. The land is also near to the Xiamen University, which will open in late 3Q, as well as Mitsui Outlet Park. Within a 13.5km radius, there are INTI College, Nilai International University College, Tesco, Giant Nilai as well as the Salak Tinggi express rail link (ERL) station. In view of the depleting township project in Kemuning Utama, this new land will be another township development for the company over the next eight years.

It will also suit market conditions given rising demand for affordable landed housing. The indicative pricing for its first launch will likely be around MYR500,000 per unit. To replicate the success of Utropolis, management also plans to integrate the education element into its development plan for the land in Klang, and this project could potentially yield a GDV of MYR1.6bn. Other valuable land parcels in the Klang Valley include the 9.4-acre land in Kota Damansara. Due to the proximity of the land to the proposed new mass rapid transit (MRT) station, the development plan has been put on hold, as the company seeks to upgrade the land use from industrial to commercial. In our view, there could be further upside to the current estimated GDV of MYR660m.

Penang mainland.Paramount is also strategically-positioned in the growing Batu Kawan market, with 44 acres (including education land) there while the other 65 acres in Machang Bubok could also capture the positive spillover from the catalytic investments in Batu Kawan. Paramount’s entry cost in Batu Kawan is fairly reasonable at MYR40.50 psf for the education land and MYR55 psf for the freehold development land (largely), when compared with Eco World’s (ECW MK, NR) costs of MYR56 psf for the leasehold development land and MYR10 psf for a 30+30 year lease for the golf course land (excluding the cost to develop the golf course). Adopting a similar concept to its Utropolis project, of the 44 acres, 28.8 acres are allocated for property development and the remaining 15 acres are for its education campus. Given that the land is sandwiched between Aspen Vision City, where the IKEA store will be sited and the Design Village outlet, Paramount will plan its development in such a way that a friendly commercial precinct will be built to capture the flow of visitors walking from IKEA to the premium outlet (or vice versa). The whole development will have a GDV of MYR1.3bn, and construction works for the campus, which costs MYR200m, will start in 2H15. The developer plans to have its maiden launch in early 2016.

Apart from these land parcels, we think Paramount’s other old KDU campuses also have high future development potential given their strategic locations, such as the 2.7-acre land for the Damansara Jaya (DJ) campus and the 2-acre land for the college campus at Jalan Anson in Georgetown, Penang. It is worth noting that the book value (MYR17 psf and MYR334 psf by land area, respectively) is very low for these education properties as they have not been revalued since their inception. We also have not taken into account the development potential into our RNAV estimate as the realisation will be in five years’ time, in our view.

Strong growth potential for education division Student numbers have seen some recovery after a sluggish 2013, given intense competition in the tertiary segment. Efforts have been made to bring in more lecturers and introduce new programmes to attract students. As at 1Q15, the total number of students for primary, secondary and tertiary segments has grown by 346 or 4.4%. While the new additions are mainly from the Penang campus, we believe that with the recent opening of KDUUC, the new campus experience should be able to draw more students, and based on management’s expectations, it will be on track to add 1,000 students for the division this year. Meanwhile, the growth in primary and secondary schools has been rather stable given the reputable Sri KDUbrand in the segment. However, as Sri KDUis in the premium segment, most of the secondary students proceed with their tertiary studies overseas after graduation, hence KDUUC has not been able to capture the student flow within the division. Therefore, to mitigate the leakage, management plans to introduce the “value-for-money version” for international primary and secondary schools in some tier-2 markets so that the students will be drawn to the tertiary segment in KDUUC.

Meanwhile, the completion of the Batu Kawan campus in 2018/19 will likely sustain the long-term growth. This new university college will have a capacity of 5,000 students, and if all the students in Jalan Anson campus are moved to the Batu Kawan campus in the future, this will bring a net addition of about 2,000 students. Together with the current capacity to accommodate another 5,000 students in the Klang Valley campus, the growth potential will seal the gap between now and 2018.

Potential asset monetisation exercise for expansion purposes Although Paramount’s current net gearing stands at 26% and there is still another MYR100m of perpetual bond to be drawn down, given the funding requirement of about MYR200m-300moer the next two years (for the construction of Batu Kawan campus, as well as the balance payment for the Salak Tinggi land, which will be funded by borrowings), we believe the company will likely monetise some of its assets. Value-unlocking could be on the cards and we view the education division as the most valuable jewel given that its education peers such as SEG International (SYS MK, NR) is currently going at above 30x forward P/E, and the book value of the education properties currently stands at MYR367.5m (at historical cost). While we think the premium valuations for the education players could be partly due to the scarcity of listed sector players available, we think the defensive nature of the education business also suits the current market environment given uncertainties in the equity market.

Earnings outlook After the sluggish period in 2012-2014, we believe earnings will gain momentum this year from both core divisions. Earnings from the property development should pick up due to faster progress billings (unbilled sales as at 1Q15 were MYR422m), as construction of most projects is in full swing this year. Meanwhile, revenue for the education division grew 11.8% YoY for 1Q15, but PBT fell 16.4% YoY, largely because of expenses and depreciation for KDUUC. We expect a steady margin recovery going forward as its ongoing property projects are higher-margin products and there is no more low- to mid-end project from Kemuning Utama. Margin for KDUUC should also improve next year as the number of students picks up. Meanwhile, management has decided to terminate the construction job for external projects due to its historically low margin trend which drags down efficiency.

Valuations We revamp our valuations to SOP from RNAV. After we update the latest landbank data and balance sheet numbers, our TP rises to MYR2.40 (from MYR2.00), based on a 40% discount to property RNAV and a 20% holding company discount. Current valuations are undemanding at 10x FY16F P/E. Assuming 8x P/E and 20x P/E for the property and education divisions, respectively, and given their 70% and 30% earnings mix, the blended average P/E valuations for Paramount would be 11.6x. P/BV is currently at 0.9x, which is still undemanding, and we note that the book value is very much suppressed as the education property assets are recorded at historical value and the average land costs for its property development are also low. The growth angle for both property and education divisions as well as the potential valueunlocking plan are the key re-rating catalysts for the stock. The defensive nature of the education business should also entice investors, especially when the equity market outlook is uncertain

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