Bolton (Kenanga Research) not rated

Bolton:  Preparing for growth

“Spring cleaning”. Since June 2005, Deputy Chairman Dato’ Azman Yahya has been spearheading Bolton in the transformation strategy of strengthening financial positions and development capabilities. Since then, Bolton has successfully lowered its net gearing from 1.0x in FY2006 to current 0.1x (as at Dec 31, 2009) by selling RM250 million worth of non-core or low yielding assets (e.g. landbank, construction arm, investment properties like Hotel Midah). Current 0.1x net gearing and 0.3x gross gearing is within industry norms.

Short to mid term strategy is to continue strengthening balance sheet. The group is trying to dispose of remaining non-core assets (including the shopping/office complex at Campbell Complex@Jalan Dang Wangi for RM50 million) to further build is cash pile and minimise land holding cost. Noteworthy is c. 75% of present total borrowings are for working capital purposes, which are easily pared down with quick take-up rates. Management is not considering cash-calls at the moment given their RM200 million credit line.

Targeting RM1.1 billion new launches in FY31March 2011. Bolton will be launching three niche condominium projects and a mixed development; Arata@Bukit Tunku, SixCeylon@Jalan Ceylon, Gurney51@Jln Gurney and The Wharf@Taman Tasik Prima. Notably, its residential projects in Klang Valley and Seremban can garner >80% take-up rates. Sales target for FY2011 is RM300 million.

FY12 to see RM2 billion high-end mixed development project on Jalan Mayang, off Jln Yap Kwan Seng. Bolton disposed of 4.3ac to a JV company consisting of Bolton (50%) and UM Land (50%) in line with its transformation strategy. Although the land has an existing DO, the JV company is seeking to resubmit and request for a higher plot ratio of up to 10x (currently <8x) and mixed development titles. Bolton hopes to get its DO in the next 6 -9 months with a targeted launch date in 4QFY2011.

Gross margins for upcoming launches are expected to be 25%-30%, which are within industry range. Management is confident of passing on cost of higher building materials to buyers while promotion costs (e.g. interest over construction period) have been built into prices.

Looking to increase landbank in the near term. Bolton exhausts its niche landbanks very quickly and requires replenishment to sustain earnings. Niche parcel landbanking in Klang Valley and Penang Island are likelier in the next few months. Management also expressed interest in acquiring or co-developing government land for sale (e.g. Sungai Buloh), but has yet to receive any response yet. But, they were not kee n on township size lands due to long gestation period, balance sheet risk and land holding cost; hence, JV projects are likelier on large scale projects.

c.50% of the RM200 million credit facilities in place are earmarked for new landbanking. Assuming RM100 million worth of landbank is acquired tomorrow, current net gearing and gross gearing will increase to 0.4x and 0.5x, respectively, or higher-end of the spectrum of industry norms. But as mentioned earlier, group’s gearing can be easily pared down as majority relates to working capital financing.

Property sector is very resilient according to management and attributes it to people’s need to hedge against inflation. However, management did indicate that end-financiers are exercising stricter credit criteria whilst bankers are more selective in terms of developer’s eligibility to embark on IAS . Bolton does expect hikes in RPGT in CY11 due to recent buying frenzy.

Signs of confidence from bankers. Bolton is offering 10/90 home loan schemes for Arata@Bukit Tunku and Six Ceylon@Jalan Ceylon, sweetening Bolton’s products vs. its competitors. Since early this year, we understand financiers are increasingly selective on which developers get to utilise Interest Absorption Schemes (IAS); it depends on developers’ product type , location and capital appreciation opportunities, as well as, developer’s track record in terms of quality and quick take-up rates.

Expecting FY10E net profit to grow 15% y-o-y to RM21 million (6.5 sen EPS); key drivers for FY2010E are Surin and Taman Tasik Prima. Currently, it has unbilled sales of RM133m which provides less than a years visibility.

Targeting RM100 million PAT in three years time; this implies RM909 million topline if we assume 11% net margins. Based on pipeline launches, it will be tough to achieve this goal; hence more landbanking and new launches is needed to meet the goal.

No official dividend policy yet , but management is hoping to increase payout this year. Bolton dished out higher FY09 NDPS of 2.15 (2.8% yield) or 36% net payout of net profit vs. FY08’s 1.83sen (2.4%) or 12% net payout of net profit. Assuming 36% net payout of PAT, we can expect NDPS of 2.62 sen (3.5% yield) which is within peer averages.

SoP RNAV of RM2.60 . If we apply historical average PBV of 0.6x to its RNAV, we arrive at valuation of RM1.56, which is still considerably richer than last price of RM0.76. But at last price of RM0.76, Bolton is already trading close to small cap peer averages at 1) 0.6x PBV vs. historical 0.6x and small cap peer average of 0.6x 2) 11.6x FY10E PER vs. historical 12.9x and small cap peer average of 10.2x. Hence, more earnings growth via new landbanking and exciting projects are needed to yield more attractive valuations; this will take the form of commencing new projects like the high-end mixed development project on Jalan Mayang and other new projects (e.g. Jln Peel).