9 April 2008 by Asia Analytica Selangor Properties Berhad Prime land bank, asset and cash rich Strategic assets ripe for redevelopment Batai condos and E&O JV may provide re-rating catalysts RNAV of RM6.08 – fair value at RM4.26 BUY Key stock statistics FYOct07 FYOct08E EPS (sen) 23.5 20.7 P/E (x) 12.6 14.3 DPS (sen) 10.0 10.0 NTA/share (RM) 4.79 4.90 Issued capital (mil) 343.6 52-week price range (RM) 2.93-5.30 Major shareholders (%) Kayin Holdings 61.0 EPF 4.5 Share Price Chart (RM) Price RM2.95 Market capitalization RM1,014 million Board Main Indices KLCI Sector Properties Stock code 1783 Analyst Kevin Khoo Investment Summary Selangor Properties (Selprop) is one of Malaysia’s oldest property companies – with sizeable and valuable property assets, and a very strong balance sheet to boot. It has 33 acres of undeveloped and very valuable land in the prime Kuala Lumpur suburb of Damansara Heights – making it one of the largest landowners there. Selprop also has several well-located commercial and residential buildings, mainly in Damansara Heights, 270 acres of land in Ulu Langat, Batu Caves and Selayang, a shopping mall in Australia and a portfolio of investment securities. The company also has a 51% stake in Second Board listed HELP International Corp, one of Malaysia’s top private education players. Of the 33-acre Damansara Heights land bank, 19.8 acres is strategically located within the Damansara Town Centre area, adjacent to its own Menara Milenium and two upcoming projects – GuocoLand’s Damansara City and The Twins. These two projects (with pricing of RM850 psf for The Twins) will enhance the value of Selprop’s land and provide new pricing benchmarks. Selprop is generally perceived to be a “sleepy” company. Despite its quality land bank, it has not been aggressive in launches or replenishing the land bank. However, there are promising signs this is starting to change. The company has entered into a joint venture with E&O Property Development to develop 9.4 acres of land along Jalan Semantan in Damansara Heights. This will likely kick-off next year. On its own, it will soon develop a high-end condo project located along Jalan Batai, also in Damansara Heights. GDV is estimated at around RM300 million for 107 units of high-end large- sized condos, expected to be launched later this year. Over the past few years, there have been a large number of asset sales, especially with regard to its Australian assets and parts of its Damansara Heights land. The company also makes gains on its investment portfolio. While these moves have realized more value and boosted profits, they may also suggest a high level of volatility in profits. Selprop’s assets were revalued in Nov 2006, in accordance with current accounting standards. This boosted NTA per share to RM4.79 in Oct 2007 from RM3.86 in Oct 2006. We estimate its RNAV at RM6.08 per share. Assuming a 30% discount to RNAV, we place its longer-term fair value at RM4.26 – 44% higher than the current share price. Selprop’s share price has fallen 45% from its peak a year ago, reflecting the weak appetite for property stocks. We like its quality land bank, high asset values and prudent management – a plus in the current environment. Its shares offer good value for longer-term investors. BUY. The Batai condo and E&O joint venture projects should provide some re-rating catalysts and will boost earnings over the next few years. 2 Selangor Properties Berhad Background Selangor Properties (Selprop) is one of Malaysia’s oldest property companies, and is involved in property development and investments, as well as education. It has 33 acres of undeveloped land in Damansara Heights, several commercial and residential buildings, a total of 270 acres of land in Ulu Langat, Batu Caves and Selayang and substantial investments overseas, particularly in Australia and a large portfolio of investment securities. The low-profile company was listed in 1963 and traces its roots back to the 1950s, when its founders, the late Tan Sri T.K. Wen and his wife, Puan Sri Chong Chook Yew acquired large tracks of rubber plantation land from a foreign firm. The land, located in the outskirts of Kuala Lumpur, have since been developed into one of the Klang Valley’s most prestigious suburbs, Damansara Heights. The company is run by the Wen family, who raised their stake to 61% in 2005 after undertaking a general offer for the company at RM2.40 per share. Puan Sri Chong is currently the company’s chairperson and her son, Mr. Wen Chiu Chi, the managing director. Corporate structure Selangor Properties Bhd Property holding Property Education & investments development Bangsar Hill Jupiter Midas HELP Holdings (100%) (100%) International Corp (51%) Chong Chook Yew Karuan Jaya Holdings (100%) (100%) Damansara Devts Selayang Mulia (100%) (100%) Pusat Bandar Sabaran (M) Damansara (100%) (100%) SPB Australia (100%) Oriland (100%) 3 Selangor Properties Berhad Business Overview Selprop has three main core businesses – property development, property and investment holdings and education. In FY07, property development contributed 36% of revenue but just 2% pre-tax profits. They are derived from two ongoing lower-end housing projects – Bukit Permata in Batu Caves and Selayang Mulia in Selayang, both within the Klang Valley. The bulk of Selprop’s profits come from property and investment holdings, which accounted for 33% of revenue and 85% of pre-tax profits in FY07. This includes rental income from its investment properties in Malaysia and Australia, periodic gains from the disposal of properties and returns from a portfolio of investment securities. The balance comes from education – via 51% owned HELP International Corp, listed on the Second Board in 2007. A highly regarded private education institution, HELP has University College status and about 10,000 students in two main campuses – in the Damansara Heights area and the recently acquired Klang-based Sepang Institute of Education (renamed HELP-ICT). Revenue breakdown Pre-tax profit breakdown 4 Selangor Properties Berhad Key Investment Highlights Prime land bank & portfolio Selprop is one of the largest landowners in the matured and prestigious Damansara Heights area, with 33 acres of undeveloped land. Within the area, it also has a number of commercial properties held for rental and investment, plus several assets recently parked into a 50:50 joint venture with E&O Property Development for joint development. Selprop’s property investment portfolio consists of Menara Milenium, Wisma Damansara, SPB Towers and Wisma HELP, all located in Damansara Heights. The jewel in the crown is Menara Millenium, a 25-storey office tower with 573,175 sq ft of net lettable space on 3.8 acres, widely considered as the area’s most prestigious office address and is fully tenanted. Contributions from the other buildings are relatively minimal. Wisma Damansara’s occupancy rate is just 21% as most of the government offices there have relocated to Putrajaya. HELP occupies the bulk of space in Wisma HELP. Wisma Damansara has been earmarked for potential redevelopment and sold to a joint venture with E&O Property Devt. Annual recurring rental income from these properties is about RM36 million. Land value boosted by neighbouring projects Of Selprop’s 33-acre Damansara Heights land bank, 19.8 acres is located within the Damansara Town Centre area, adjacent to Menara Milenium and two upcoming projects – GuocoLand’s Damansara City and The Twins by Panareno, a joint venture between the Lion Group and AIG. The Twins project is ironically located on land earlier sold by Selprop back in 2005 to Panareno at RM420 psf. The 318-unit project on 2.17 acres of land was launched late last year and set a new benchmark price of RM850psf for Klang Valley condominiums outside of the KLCC area. Pricing details for GuocoLand’s 8.5-acre project are still unavailable, although tentative plans include two blocks of condominiums, two office towers, a hotel and a retail podium. It could up the pricing ante further, given the strong response to The Twins and the high KLCC area prices of RM1,200–2,000 psf. These two developments will further enhance the value of Selprop’s land. Jalan Batai condominiums Selprop is planning to launch a luxury condominium project on Jalan Batai, next to its existing SPB Towers, later this year. This will be its first major project within Damansara Heights in eight years, since the completion of Menara Milenium. And it will be a positive catalyst to dispel the company’s “sleepy” image. The project will consist of 107 units of condos with built-up space of 3,000-3,500 sq ft. Given the pricing trends in the area, we expect pricing to be upwards of RM800 psf and GDV of around RM300 million. Margins should be high (estimated at 40%) due to low land costs and the project will contribute to profits over FY09-11. 5 Selangor Properties Berhad Investment properties – some ripe for redevelopment Selprop has a number of investment buildings presently held for rental, but which can be redeveloped at some stage. Many of these assets are aging, with low yields and density, but are strategically located within Damansara Heights, one in Bukit Tunku and one in the city centre. Its portfolio of investment properties include: • Kompleks Pejabat Damansara – five blocks of 4-storey office buildings on 3.9 acres with 210,000 sq ft of NLA. • SPB Towers – a 17-storey apartment building sitting on 3 acres along Jalan Batai. • Jalan Batai shops – 16 units of 2-storey shops on prime Jalan Batai, with highway frontage and opposite the Damansara Town Centre, sitting on 1.8 acres of land.