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Wednesday, April 22, 2015

Fututech: The Future Is Simply Exciting - Bursa Dummy

Tuesday, 21 April 2015 
 
There is no doubt that Fututech's current executive chairman Datuk Tee Eng Ho has successfully transformed this previously ailing company into an exciting one.
 
 
 
 
Mr Tee and his brother first emerged as the largest shareholder of Fututech after acquiring the entire shareholding of 27.71% from E&O and Samudra Pelangi in March 2011 at only 50sen per share.
 
Prior to this, Fututech, which mainly involved in manufacturing, sale and installation of lighting & kitchen cabinet, suffered annual loss for 6 consecutive years, with accumulated loss reaching RM31.4mil in 2010 compared to share capital of RM58.7mil.
 
After Mr Tee joined in, Fututech immediately turned profitable until today.
 
 
       Fututech financial results
 
 
Mr Tee brought with him experience in construction industry which saw Fututech successfully diversified into construction business by securing 2 sub-contract works in the second half of 2010.
 
Those contracts were to construct high-rise building of St Mary Residence in KL and Seri Tanjung Pinang in Penang. Both projects are awarded by E&O.
 
This has resulted in immediate surge in revenue and profit in year 2011 & 2012.
 
After 2012, it seems like there is no more major new construction work and so its revenue fell drastically in 2013.
 
It is currently holding just about RM200mil worth of contracts in 2014. Its lighting & kitchen cabinet business mostly just cater for its own needs.
 
In year 2013, Fututech started to venture into property development business by acquiring 2 parcels of land in Genting Permai (1.43 acres) and Shah Alam (8 acres) for RM24.5mil.
 
It has just launched its first property project Vista Residence at Gohtong Jaya (Genting). This leasehold project consists of 378 residential units and 28 retail lots in a 27-storey building, and has a GDV of RM300mil.
 
Its second property project at Monterez Golf & Country Club (Shah Alam) which carries a GDV of RM200mil is expected to be launched later this year.
 
 
       Vista Residence @ Gohtong Jaya
 

I started to come across Fututech in Dec last year. I knew that its profit was going to increase significantly by venturing into property development business.
 
To me, it's one of the many listed companies who want to share a slice of cake in property development business.
 
As property sentiment is rather bad, I was not sure whether Fututech can generate good sales and launch more and more projects consistently after these 2 projects. This is a case almost similar to Weida.
 
I didn't follow up on Fututech and so I missed its announcement and share price movement in Feb15.
 
On 6th Feb 2015, Fututech proposed to acquire 2 companies privately owned by its executive chairman Datuk Tee Eng Ho, which are Kerjaya Prospek S/B (KPSB) and Permatang Bakti S/B (PBSB) for RM380mil.
 
KPSB is a construction company and PBSB is a construction management company.
 
The jewel here is KPSB which is said to be a well-known "specialist" in high-rise building construction.
 
It claims to have current contracts worth RM2.25bil on hand. I'm not sure whether this figure is total project value or current outstanding value.

Recent notable projects by KPSB include:
  • E&O's Seri Tanjung Pinang (RM410mil)
  • Eco World's EcoSky (RM 463mil)
  • SP Setia's Setia Sky 88 (RM463mil)
  • 100 Residency Setapak
  • The Shore @ Malacca River
 
It shows that KPSB has good business relationship with the country's top property developers such as Eco World, SP Setia & E&O. The latter 2 projects are Mr Tee's private property projects.
 
For the last 3 financial years of 2011, 2012 & 2013, both companies to be injected into Fututech has an average profit after tax of RM31mil.
 
For KPSB, it registered RM33.3mil net profit in year 2013 and has no borrowing.
 
The interesting part of this acquisition is, Mr Tee gives a profit guarantee of at least RM150mil for 3 years from 2015 to 2017.
 
To fund the acquisition, Fututech will issue 280 million new shares at RM1.16 each plus cash of RM55.2mil.
 
Before the day of announcement of acquisition, Fututech's share price closed at RM1.15. The next day, it shot up 27% to RM1.46 before closed at RM1.30 for a 13% gain.
 
After that, it is on its continuous uptrend until today.
 
 
       Fututech: breaking new highs
 
 
It is expected that Fututech's profit will jump by leaps and bounds after the acquisition of KPSB & PBSB. However, its paid-up shares will also increase by leaps and bounds and its share price has moved up by leaps and bounds as well.

Is Fututech still attractive at share price of RM1.79 now?
 
There is a profit guarantee of RM150mil in 3 years from 2015 to 2017. The acquisition will only be completed in the 2nd half of 2015. So, 2015's result might not be that "great".

Moreover, I'm not sure whether the RM150mil is calculated from Jan15 or from the day the acquisition is completed.
 
Anyway, in average, it will be RM50mil net profit per year but we know that profit recognition of construction business will fluctuate a lot so it's not easy to predict.
 
Fututech will launch property worth RM500mil this year. If they are fully sold and has net profit margin of 20%, then it will be another RM100mil profit in the next 3-4 years.
 
Usually we can only see significant property contribution in the final year of construction which is around 2-3 years from commencement.
 
Its manufacturing segment is not expected to grow much or contribute significantly. This segment posted a pretax profit of RM3.3mil in FY14.

 
       Progress of Vista Residence (April 2015)
 

In summary, Fututech's financial results are likely to increase progressively from year 2015 to year 2017, with best result achieved in 2017.
 
From a local newspaper interview, Mr Tee mentioned that after the acquisition Fututech can "cin cin cai cai" (ie. easily) achieve RM200mil cumulative net profit from 2015 to 2017.
 
Base on what Mr Tee predicted, I would guesstimate roughly RM80mil net profit for Fututech in its FY2016. This is almost 6x better than RM15mil net profit in FY14.
 
I think this assumption is not too conservative as construction cost are going up and Fututech might delay the launch of its Shah Alam project.
 
Anyway, I expect that Fututech can get more new construction contracts along the way.
 
After the issuance of new shares, Fututech's paid-up shares will increase form 91 million to 371 million. If it were to post RM80mil net profit in FY16, then guesstimated EPS for FY16 will be 21.5sen.
 
However, if we add in 26.7mil warrants which will expire in Dec 2017, diluted guesstimated EPS will be 20.1sen.
 
So Fututech might worth at least RM2 in 2016 if we give it a PE ratio of 10x.
 
 
       Fututech's FORTE Kitchens
 
 
Will Fututech continue to grow beyond 2017?
 
It is reported by The Edge that although Fututech wish to make property development its main business in the future, it does not expect to acquire more land until FY2017. It has no more land besides the Genting and Shah Alam land.
 
Fututech is a specialist in high-rise building construction. Can it get contracts for construction of roads, LRT/MRT and others? Can it get government contracts which typically has higher margin?
 
There is no doubt that Fututech will become a much much better construction company after the assets injection. However, it needs to get more projects in order to grow beyond 2017.
 
With its relation with other renowned property developer especially Eco World, it seems to have a bright future.
 
In the future, we cannot rule out another asset injection by Mr Tee.

Mr Tee still owns a private property development company known as Kerjaya Prospek Property Sdn Bhd which owns Malacca's tallest building The Shore @ Malacca River.

Its other property projects include Residency V (Old Klang Road), 100 Residency, 222 Residency, 288 Residency (all Setapak) & Viridian Cheras Idaman.
 
 
       The Shore @ Malacca River
 
 
Mr Tee seems like a humble person who grows up from a poor family in which both his parent were rubber tappers.
 
I feel like he will grow his empire through Fututech so it might just be a matter of time for his private property company to be injected into Fututech.
 
Is this the reason why Fututech does not plan to purchase development land until FY2017?

 

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