Paramount Corp Bhd (Jan 15, RM1.94)
Maintain buy call with a higher target price (TP) of RM2.40: We deem Paramount Corp Bhd’s cost to acquire new land in Cyberjaya as reasonable, since the development order has already been obtained. While we like its management’s strategy to reposition its portfolio, we think this should balance against the company’s financial position.
Nevertheless, its management has indicated that there would be no more land acquisitions over the immediate term, after this transaction. Hence, the company’s unbilled sales of RM588 million should help to improve its cash flow ahead. We maintain our “buy” rating, while our TP is raised to RM2.40 (from RM2.37; 25% upside).
Paramount announced its acquisition of 41.41 acres (16.76ha) of freehold land in Cyberjaya from Makmur Asiamaju Sdn Bhd for a total cash consideration of RM149.7 million. Although the land cost of RM83 per sq ft is more than double the price when the company purchased its 50-acre (20.23ha) parcel in Cyberjaya in June 2010, the new land comes with approval for development as well as with ready infrastructure and duly completed earthworks. Hence, we think the price is reasonable.
The new land is just about 1km away from the existing Sejati Residences. It is planned for a gated and guarded landed, residential property project, replicating the success of Sejati Residences that has achieved a take-up rate of 90%.
Sejati Residences currently still has RM513 million in GDV, and the township should be completed in 2021. Given the success, we agree with the management’s preference to replenish land bank in the same area, given the strong brand positioning, existing marketing network and relationship with the local authorities.
While we like the management’s effort to restrategise its property development portfolio, we are somewhat concerned with the rising net gearing trend. Last December, Paramount also entered into a joint venture (JV) to develop a project in Section 14. Given its initial funding commitment of RM80 million, as well as the acquisition cost of RM150 million for this land in Cyberjaya, the company still needs RM138 million in bank borrowings after offsetting the RM92 million sale proceeds of the land in Kota Damansara. We estimate that its net gearing could rise to about 0.8 times from 0.71 times currently (as at the third quarter of 2017 [3Q17], or 0.57 times if private debt securities are included in equity).
The impact on our earnings estimates is minimal, given the higher interest expense, and the expected maiden earnings from the Cyberjaya land in FY19. The company expects the acquisition of the land to be completed in 3Q18.
Given the incremental value to our revalued net asset value (RNAV) estimate, we lift our TP to RM2.40 (from RM2.37), based on an unchanged 55% discount to RNAV for the property division and 20% holding company discount. — RHB Research, Jan 15
This article first appeared in The Edge Financial Daily, on Jan 16, 2018.