Tuesday, September 13, 2011

BRDB ... Sep11

Ambang Sehati Sdn Bhd, the major shareholder of Bandar Raya Developments Bhd (BRDB), has offered to buy some of the developer’s assets, including the famous Bangsar Shopping Centre (BSC) and Menara BRDB in Jalan Maarof. The other assets to be acquired by Ambang Sehati are CapSquare Centre in the city and Permas Jusco Mall in Johor Bahru.

The price will be determined later. BRDB will make quite a substantial capital gain from the disposal. Otherwise, it won't make sense to dispose of these income-generating assets. If BRDB is offered a good deal to sell the assets with substantial capital gain, that may outweigh the loss of future income stream. BRDB can generate income from property development projects.

It was reported that the disposal of BSC is being part of a complex corporate exercise to be undertaken by BRDB. The possibilities include disposing of BRDB’s entire or partial stake in BSC in return for development land or a stake in another company.

As at end-FY10, BSC and the 12-storey Menara BRDB located next to it had a combined book value of RM660 million. Both properties sit on a land area of 214,256 sq ft and have a total net lettable area of about 550,000 sq ft. A conservative assumption that BRDB will dispose of BSC and Menara BRDB at one times book value and 20% of the proceeds will be distributed to its shareholders as special dividend, could translate into a special dividend of some 26 sen per share.

Ambang Sehati believes the proposed disposal will enable BRDB to monetise these assets and achieve a more efficient utilisation of its capital, according to an announcement to Bursa Malaysia yesterday. Ambang Sehati owns 18.8% equity interest in BRDB.

News report that BRDB is looking to pay a bumper dividend to its shareholders under a complex corporate exercise that could see it dispose of its most prestigious property assets — BSC and Menara BRDB.

CapSquare had a carrying value of RM214.37 million, BSC and the 12-storey Menara BRDB RM660 million and Permas Jusco RM68 million. The entire assets, worth a total of RM942.37 million, were revalued in 2010.

Sources say based on BRDB’s new-look balance sheet after the disposal of CapSquare, which was completed in Aug 2011, shareholders are expected to receive a bounty from the proceeds of the sale.

Now the that the proposed acquisition will need to get the greenlight from the shareholders. The largest shareholder of BRDB is Credit Suisse with 23% equity. HSBC nominees also holds a 9.67% stake for Credit Suisse.

The shareholders of Ambang Sehati are Datuk Seri Akbar Khan Mohamed Khan and his children Sascha Saleem Khan and Tania Aishah Khan. Other shareholders include BRDB chairman Datuk Mohamed Moiz J M Ali Moiz and Abdul Sathar MSM Abdul Kadir.

As at June 30 2011, BRDB had long-term debt of RM461.2 million while its short-term borrowings amounted to RM307.56 million. It is worth noting that the bulk of BRDB’s debts were tied to CapSquare, a project that had been on its books since the late 1990s.

The bulk of the debts are expected to be cleared because on Aug 5 2011 BRDB announcd the completion of the disposal of two towers in CapSquare to a German fund for RM440 million. This should leave the company with a fairly clean balance sheet. If the debts are reduced after the disposal of the assets it will leave the company, which has a share base of 487.6 million 50 sen shares, a handsome cash pile.

For the quarter ended June 30, 2011, of BRDB's revenue of RM198.9mil, RM152.05mil came from property development while RM28.25mil was generated from property investment. Operating profit derived was RM31.02mil and RM10.62mil respectively.

This acquisition will be fully cash-funded.

As at the first half of 2011, BRDB had retained earnings exceeding RM1bil but held a cash balance of RM41mil only while a chunk of its assets were in the form of investment properties.

Although BRDB does not have large parcels of land in prime areas, it had entered into a joint venture with Multi-Purpose Holdings Bhd (MPHB) to develop the latter’s landbank in the Klang Valley and Penang island. Among the parcels of land is Mimaland in Gombak, Selangor.

Apart from its property assets, BRDB also has a 56.76% stake in Mieco Chipboard Bhd, which is slated for disposal.

Its net asset value stood at RM3.57 (as at June 30 2011).

The proposed corporate exercise could realise hidden value in BRDB’s assets, but it remains to be seen how much above their current carrying value Ambang Sehati has to offer for the assets and how BRDB will reward its shareholders.

Going Forward …

Bandar Raya wants to increase its property development activities to improve earnings, which have been below par lately.

It may sell its prime assets to buy more land in the Klang Valley, Penang and Johor as its current landbank is depleting. It may agree on a price of RM1.2 billion, which is about 27 per cent more than their book value.

BRDB, which has four ongoing projects, has less than 25 hectares of land in Bangsar, Dutamas, Seri Kembangan and Taman Duta, and some 124ha of land in Johor.

Meanwhile the proposed sale will have a negative effect on BRDB's business risk profile over the longer term. Should the proposed deal go through, BRDB would be divesting all of its investment properties, which have been providing a stable source of recurring rental income. The divestment will steer BRDB towards becoming a pure property developer. This heightens the group's business risk.

Moreover there are two big questions are yet to be answered in BRDB’s announced related-party transaction. At what price the key assets will be sold to Ambang Sehati Sdn Bhd and what management plans to do with the cash proceeds from the proposed disposal.

Ambang Sehati is the private vehicle of BRDB chairman Datuk Mohamed Moiz Jabir Mohamed Ali Moiz, who owns 18.8% of BRDB. The assets essentially include the Bangsar Shopping Centre, Menara BRDB, CapSquare Retail Centre and Permas Jusco Mall.
BRDB has up to Sept 19 2011 to revert with its decision. This acquisition will be paid fully by cash. According to BRDB's 2010 annual report, the carrying value for Bangsar Shopping Centre and Menara BRDB is RM660mil while Cap-Square Retail Centre and Permas Jusco Mall are valued at RM214mil and RM68mil, respectively.

The jewel of the assets would be Bangsar Shopping Centre, which is located in the prime Bangsar area and has a net lettable area of 330,000 sq ft. Bangsar Shopping Centre is currently almost fully occupied with average rental rates of about RM10 per sq ft. On the other hand, activity in CapSquare has much room for improvement and is relatively quiet after office hours.

Based on estimates, the four properties would fetch a value of about RM960mil, with Bangsar Shopping Centre accounting for 64% of that, valuing it at RM594mil (or RM1,800 per sq ft).

Currently, the group has a net gearing of about 0.4 times with total borrowings in the region of RM780mil. The bulk of the debt is tied to its CapSquare development. The group could have excess cash of RM120mil to RM150mil, or 25 sen to 30 sen per share, after paying off its outstanding debt.

Critics say that rewarding shareholders with bumper dividends are right at this point. Apart from reducing its gearing, the group would be better off deploying the cash for its property development, either for landbanking or to fund its future development.

BRDB is not as aggressive as other developers in developing its properties and land bank. Without Bangsar Shopping Centre, earnings may not be as stable. Selling it off will only yield a one-time dividend.

An industry observer says BRDB may be doing the right thing by disposing of Bangsar Shopping Centre and the other retail outlets. Are the returns from these outlets actually attractive? Earnings-wise, it is only delivering some 20% to operating profits. This is low when compared to the amount of capital expenditure and debt the company is taking up.

Also it is the F&B segment is doing well in BSC. If Bangsar Shopping Centre continues to charge rentals at a premium, how will the normal retail tenants be able to survive?
In 2008, BRDB was reported to have invested RM250mil to upgrade Bangsar Shopping Centre. The renovation was completed in 2009.

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