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Tuesday, June 24, 2014

TITIJAYA LAND BERHAD - Not to be Underestimated



- Aggressive landbanking ambitions. The group targets to double their total GDV in the next 2 years to RM14.0b and will focus on Klang Valley and Penang projects. This would increase the group’s landbank visibility from 8 years to at least 13 years which we believe is achievable. Their recent landbanking efforts are commendable considering that landbanking newsflow for the sector has been relatively quiet. It shows they have the ability to access landowners or JV deals.

- How will they finance these ambitions? The group has a light balance sheet, being in a net cash position and we expect net gearing to increase to 0.3x after it completes the acquisition of its Penang land deal (RM126m) by year-end. We prefer developers with net gearing ceiling of 0.5x. Assuming the group leverages up to 0.5x after taking into account its Penang land obligations, the group can still raise RM72m from new borrowings. Assuming that land cost makes up 12% of GDV, we estimate that the group can replenish another RM0.6b new GDV by end-FY15, which falls short of its 2 years GDV replenishment target.

- More than one way to skin a cat. As highlighted earlier, the group managed to clinch a 70:30 JV with Bina Puri for the Brickfields project (GDV RM1.3b), implying that ‘land payments’ are essentially paid progressively over the lifetime of the project. This is a positive for developers with high growth ambitions but lacks sizeable balance sheets to gestate landbanks as these JV deals are ‘cash-flow friendly’. We strongly believe that the group is seeking more of such arrangements as relying on its current balance sheet will limit its growth, as highlighted above. Furthermore, the group can consider cash calls to finance large landbank acquisitions as well.

- Blue-sky scenarios. We have come up with 3 different scenarios to assess the potential of the company’s capacity to landbank and its potential valuations; (i) borrowing up to 0.5x net gearing (ii) borrowing up to 0.5x net gearing and assuming a placement of 10%, and (iii) landbanking via pure JV structures. Based on scenario (i) and (ii), the group can replenish between RM0.6b-RM1.5b new GDV in the next 1 year, which implies a RNAV range of RM4.92-RM4.96. Assuming unchanged 40% RNAV discount, this implies a FV of RM2.95-RM2.97. If the group adopts scenario (iii), the sky is the limit; however, in this scenario, we opt to be conservative and assumed that the group will replenish up to RM3.0b in the next 12-18 months which is almost half of its 2 year GDV replenishment target (refer overleaf for scenario assumptions). Scenario 3 implies a RNAV of RM5.54 and assuming 40% discount, its FV would be as high as RM3.32.

- Earnings growth momentum sustained. While we had revised our FY14-15E earnings lower by 17%-13% to RM70.8m-RM84.4m, respectively, on lower FY14 sales assumption from RM605m to RM450m and also slower recognition, we are expecting TITIJYA to still chart a commendable net profit growth of 36%-19% vis-à-vis its peers average growth of 9.6%-15.0% in FY14-15E despite the headwinds faced by the property sector.

· Our take. In view of potential landbanking newsflows, we derived a FV range of RM2.95-RM3.32. Our FV range is based on 40% discount to our blue-sky scenarios’ RNAV of RM4.92-RM5.54. Our applied RNAV discount is steeper than the average 29% discount applied to developers under our coverage to account for the weaker-than-expected earnings delivery, midcap market capitalization and lack of township landbanks. Positively, the group has also been recently included in the FTSE Bursa Malaysia Small-Cap Index, which explains the recent run-up in its share price. Risks to our FV lies with its ability to replenish its GDV; if the group fails to replenish any new projects in the next 6-12 months, we will review our recommendations.

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