Magna ... May11

By Asia Analytica.

New project launches underpin earnings for 2011-2013
Unbilled sales totaling RM293.3 million
Jewel in the crown is 2.62 acres land in Jalan Ampang
Modest valuations should see gains on re-rating

Magna Prima Berhad is a niche property developer focused, primarily, in the mid to high-end market segments for commercial and residential projects in the Klang Valley.

The emergence of a new controlling shareholder in May 2010 heralds a fresh strategic direction for the company. The stock was reclassified as a Property counter, from Construction previously, on the Main Market of Bursa Malaysia.

Having undergone an internal restructuring and management changes as well as the successful acquisition of several pieces of land through the better part of 2010, Magna believes that it is now poised for a turnaround with a rash of new project launches.

The company is upbeat on its earnings outlook for the foreseeable future – based on its newly launched projects as well as two others on the drawing board. The latter includes the jewel in its crown, the development of a 2.62- acre piece of prime freehold land in Jalan Ampang, near the KLCC’s
Petronas Twin Towers.

At the moment, Magna has five new projects in hand. The One Sierra @ Selayang – a mixed commercial-residential development – was launched in 3Q10. Three other gated and guarded residential developments – the D’Sierra Anggun Selayang, Seri Jalil in Bukit Jalil and d’16 in Shah Alam – were launched in 4Q10. The first phase of its latest project, a mixed commercial-residential development called the Boulevard Business Park @ Jalan Kuching is slated for launch in the current quarter.

With a combined gross development value (GDV) totaling some RM1.05 billion for these projects we expect Magna’s sales and earnings to strengthen considerably over the next 2-3 years.

The company has unbilled sales totaling some RM293.3 million at end-1Q11, which will translate into sales and earnings as the projects are progressively completed.

Given that its residential projects are niche property developments for the mid to upper-end market segments, we expect fairly robust margins of up to 25%.

Looking further ahead, development plans for a 6.95-acre plot of land in Jalan Gasing, Petaling Jaya – acquired last year for RM48.5 million – are on the drawing board. Details are likely to be finalised by 2012.
Last but not least, Magna is in the midst of completing the acquisition of a 2.62 acres piece of land in Jalan Ampang – where the Lai Meng Girls’ School is currently situated.

Details for the development are still being worked out but initial reports suggest that the GDV could approximate RM1.3 billion.

Approval for the relocation of the school to a new site in Bukit Jalil – next to Magna’s Seri Jalil development – was secured in mid-2010 and construction works on the new building is expected to start later this year. The relocation of the school to its new home is targeted by end-2013.

The two future projects – in Jalan Gasing and Jalan Ampang – as well as the second phase of the Boulevard Business Park @ Jalan Kuching project would contribute to earnings beyond 2013.

We expect the company to return to profitability this year, boosted by contributions from the five new projects. Net profit is estimated at RM30.8 million, which will rise further to RM63.2 million in 2012. That translates into fairly attractive valuations of 8.4 and 4.1 times forward earnings for the two years, respectively.

Magna’s net assets stood at RM0.49 per share at end-2010, which is forecast to expand to RM0.87 per share by end-2014, upon the completion of all the ongoing projects, but excluding the two new projects on the drawing board.

It bears to note that the Jalan Ampang land, currently pending completion, is expected to cost some RM174 million, including the cost of the Bukit Jalil land swap. That works out to roughly RM1,525 per square foot.
By comparison, Sunrise acquired a piece of land in the vicinity for RM2,588 per square foot in 2008, albeit with better frontage view. In 2009, Dijaya Corp paid about RM2,200 per square foot for an adjacent plot.

At this price, Magna’s land would be valued closer to RM250 million, or a revaluation surplus of roughly RM77 million. Thus, assuming prevailing market value for the land, Magna could potentially
add another 23 sen per share to its valuation, based on the enlarged share capital of 333.1 million shares.

Taking into account the company’s roster of projects in hand and expected earnings turnaround as well as relatively modest valuations, we are incline to recommend a BUY on the stock.



Business
Magna is a niche property developer, focused on pocket-sized landbank for commercial and residential developments in the Klang Valley that are aimed at the mid to high-end segments of the market.

After the completion of projects in hand in 2008-2009, the company went on a shopping spree to replenish its depleted landbank through the better part of 2010. In the absence of new project launches, sales and earnings suffered over the past two years.

For instance, there was only one ongoing project throughout 2010, the U1 Apartment Suites in Shah Alam with GDV of RM108 million. The project is slated for completion by mid-2011.

Sales fell from RM280.6 million in 2008 to RM191.9 million in 2009 and declined further to RM116.3 million last year. Similarly, net profit declined from RM26.9 million in 2008 to RM6.6 million in 2009 and dipping into a loss of RM11.7 million in 2010. The losses last year were attributed, in part, to incubation and marketing expenses for some of its new projects that were launched towards the end of the year.

Balance Sheet
The company’s gearing rose in 2010, primarily due to its land acquisitions, to 79% or net debt of RM94.7 million. Net debt is expected to rise further this year with the completion of two additional land acquisitions in Selayang and Jalan Kuching.

Nonetheless, we are not overly concerned. All of the company’s current projects have secured financing and progressive completion will generate revenue and cash flow, which will, in turn, gradually pare back gearing levels.

Magna remains on the lookout for acquisitions to boost its landbank. However, the company’s main focus would be on the execution of the projects in hand.

We expect the company to maintain annual dividend at 1 sen per share going forward in order to conserve cash for its expansion plans. At the prevailing price, shareholders would earn net yield of roughly 1.3%.

As for all property developers, Magna is exposed to the risk of a downturn in the sector.

The property market, especially that for the landed residential segment, has strengthened noticeably over the past two years. Judging by buyer response to recent new launches, we believe the probability of a downturn in the near to medium term is low.

Demand is expected to stay quite robust, particularly for those in choice locations. Indeed, recent news reports suggest that several upcoming residential properties are likely to be launched at record high prices.
The uptrend in property prices is attributed, in part, to the rising cost for land and raw materials, such as cement and steel, as well as low interest rates.

Expectations of inflation are providing strong support to property demand.

On the flipside, sharp increases in raw material prices could result in cost overruns and eat into the company’s profits. On the positive note, Magna’s projects are priced for the mid to high-end market segments where margins are pretty robust. That should, to a certain degree, buffer the company against unexpected cost inflation.

The company is also exposed to execution risks for its projects. With five concurrent projects, the company is running a tight ship. Positively, Magna has a long and pretty solid track record with respect to its previous projects.

Valuation and Recommendation
As mentioned above, the five new projects – excluding the soon to be completed U1 Apartment Suites – will underpin Magna’s sales and earnings for the next two to three years.

The company currently has unbilled sales totaling some RM293 million. Construction for the residential projects d’Sierra Anggun, Alam d’16 and Seri Jalil as well as the first phase of Boulevard Business Park @ Jalan Kuching are expected to commence in the current quarter.

Thereafter, we expect the two projects in the pipeline – the developments in Jalan Gasing and Jalan Ampang – to pick up the slack and provide investors with sustainable revenue and earnings beyond 2013.

We estimate sales to grow to about RM261.2 million in the current year and further to RM426.8 million in 2012 on the back of progressive sales from the company’s current roster of projects.

The higher revenue will return the company to profitability this year. Net profit is estimated at RM30.8 million, a reversal from net loss of RM11.7 million in 2010. Earnings are forecast to grow to RM63.2 million by 2012 with the projects in full swing.

Based on our forecast, the stock is trading at fairly attractive valuations of 8.4 times estimated earnings this year, on a fully diluted basis, which will drop sharply to roughly 4.1 times by 2012.

Magna’s net assets stood at RM0.49 per share at end-2010, which is forecast to expand to RM0.72 per share by 2012 and RM0.87 by end-2014, upon the full completion of the five projects in hand.

Our earnings forecasts have not taken into account any contribution from the
projects in Jalan Gasing and Jalan Ampang.

However, it bears to note that the land in Jalan Ampang, which is currently pending completion, is estimated to cost roughly RM174 million, including the cost of the Bukit Jalil land swap. That works out to roughly RM1,525 per square foot.

By comparison, Sunrise acquired a piece of land in the vicinity for RM2,588 per square foot in 2008, albeit with better frontage view. In another recent deal, Dijaya Corp paid about RM2,200 per square foot for an adjacent piece of land.

At this price, Magna’s land would be valued closer to RM250 million, translating into a revaluation surplus of roughly RM77 million. This could potentially add some 23 sen per share, based on its enlarged share capital of 333.1 million shares, to Magna’s share value once the acquisition is completed.

The company has some 85.8 million warrants outstanding that will expire in September 2011. Given that the warrants are deep “in the money”, with exercise price of 37 sen, we expect full conversion. This would enlarge Magna’s share capital from the existing 247.3 million to 333.1 million. The warrants are current trading at 45 sen per warrant, with a premium of 5.8%.

Taking into account the company’s pipeline of projects, anticipated earnings turnaround as well as relatively modest valuations, we are inclined to recommend a BUY on the stock.