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Bandar Raya Developments (OSK Research) maintain buy; target price RM3.06

On 12 Nov 2010, Bandar Raya Developments entered into a joint venture cum shareholders agreement with Country Heights Land SB to undertake the proposed development of 66 parcels of leasehold land in Bluwater Estate (The Mines, Seri Kembangan) expiring in 2091 measuring approximately 47.58 acres via the 75:25 JV company called Earth Pavilion SB (EPSB). On the same date, EPSB entered into separate sale and purchase agreements with the vendors of the said parcels of land in Bluwater Estate for a total cash consideration of RM160m. (Bursa)

OUR TAKE
The 3rd JV for the year. BRDB has been aggressively expanding its landbank in the past 12 months primarily via, so far, joint ventures with various developers and landowners throughout the country. Examples include its JV with UEM Land to develop mixed high-end residential properties on a 111-acre freehold land in Puteri Harbour, Nusajaya (Johor) as well as the proposed JV with Multi-Purpose Holdings (still in the MOU stage) to jointly develop various parcels of land in Penang (80 acres), Rawang (266.7 acres) and Gombak (324 acres).

The current proposed JV with Country Heights Land SB to develop the 47.58-acre of leasehold land in Bluwater Estate will be BRDB’s third JV this year. JV structure and terms. The development in Bluwater Estate will be carried out via the 75:25 JV company called Earth Pavilion SB (EPSB), with BRDB holding the majority equity stake. Also, in accordance to the JV agreement, BRDB has been granted the first right of refusal to either purchase or jointly develop another parcel of land from/with its JV partner measuring 20.48 acres in the Mines Wonderland (Mines Resort City) facing the North Lake (see Figure 1). In addition, BRDB’s JV partner has been granted a put option to withdraw from the JV company at any time by selling its entire 25% stake to BRDB for a sum equivalent to the higher of the RNAV of EPSB, or the cost the partner’s investment in the JV company.

The location. These land parcels are located within the larger Bluwater Estate in Seri Kembangan, a leasehold gated and guarded project of Clearwater Group. Bluwater Estate
fronts The Mines South Lake, and is about 2 to 20 minutes from the Australian International School Malaysia and Alice Smith International School respectively. Bluwater Estate is connected to 4 major highways – MRR2, North-South Highway, BESRAYA and SILK - and is close to amenities and facilities such as The Mines Resort & Golf Club and Mines Shopping Mall.

Bluwater Estate is a 247-acre green township development featuring bungalows, semidetached houses, link villas and mid- to high-rise residential towers. The main facility within the enclave is the estate clubhouse, which will provide water sport activities such as rowing, canoeing and sailing in the Mines South Lake.

Short history of Bluwater Estate. The Bluewater Estate was previously known as the Mines Southlake, which was owned and developed by Mines Resort Bhd, the privately-held
company of Tan Sri Lee Kim Yew. In mid-2008, the Clearwater Group, controlled by Dian Lee Cheng Ling, the eldest daughter of Tan Sri Lee, bought over Mines Resort Bhd (now known as Bluwater Developments Bhd).

Figure 1: Location of the Bluwater Estate
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Land valuation. The land parcels will be acquired at an average cost of RM77.20psf. Assuming that the projected GDV of RM652m of the project is sensible, the land cost would
be equivalent to 24.5% of the GDV, which is far higher than the average 10%-15% ratio in the Klang Valley. Of course, imputed into the cost would probably be the security that the larger gated and guarded Bluwater Estate has to offer, its access to the clubhouse and the Mines South Lake as well as other facilities in the township.

The rationale. While BRDB has a large development township in Johor, its development portfolio in the Klang Valley in recent years has mainly comprised strata titled development
properties. Its venture into Bluwater Estate will therefore immediately expand its exposure to the development of mid-to-high end landed properties in the Klang Valley. On the other hand, for the boutique developer Clearwater Group, the entry of a large and experienced developer in the likes of BRDB to develop parts of Bluwater Estate will help to fast-track the growth of the 247-acre township and attract the necessary critical mass soonest possible.

Development plans. The proposed development in Bluwater Estate will comprise 310 units of Semi-Ds and 13 bungalows. Construction works is expected to commence sometime in 4QCY11, implying that any significant earnings impact will likely kick in only by sometime FY12. Spanning 5 development years, the project will have an estimated GDV of RM652m with an expected gross profit margin of about 26%, potentially translating into an EPS enhancement of 27 sen p.a. over 5 years.

Maintain BUY. As we await the launch details of the project from the management, we maintain our earnings forecast on BRDB for now. Its decision to expand its Klang Valley
development portfolio to mid- to high-end landed properties coincides with our view that the next upcycle, between now and 2012/13, will be primarily led by this particular residential asset class (see our sector report ‘A Brewing Real Estate Mania’, 3 Sept 2010). This is also a period when the 1950s Baby Boomers are on the lookout for vacation homes. We therefore view BRDB’s latest venture positively. We maintain our BUY call on the stock with a target price of RM3.06, based on 0.83x CY11 P/NTA.


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