Eyes on Weida’s property development

Weida (M) Bhd (June 4, RM1.61)

Not rated with fair value of RM1.63: Weida (M) Bhd is a well-diversified company that operates in four business segments: (i) manufacturing of polyethylene-based building materials; (ii) environmental services (waste water management); (iii) telco towers;  and (iv) property development.

Its manufacturing division, Weida’s core business, drove 54% of its revenue of RM333.8 million in financial year 2015 ended March (FY15), followed by telco towers (19%), property development (13%) and lastly waste water management (7%).

Apart from being well-diversified, Weida’s balance sheet is relatively strong with a net cash position of RM64.7 million or 4.9 sen per share at the end of the fourth quarter of FY15, providing ample room to gear up by another RM250 million before breaching our comfortable net gearing threshold of 0.5 times should it plan to embark on another development project.

In 2013, Weida launched its maiden property project, the Urbana residence, with an estimated gross development value (GDV) of RM231 million. That project was well received at 90% take-up within a month of its launch.

After Urbana residence’s success, we gather that management intends to launch its second property project in Mont’ Kiara namely Ardena with an estimated GDV of RM330 million in the near to medium term (FY16) as most of the preparation works for the project are almost in place.

That aside, its proposed joint development agreement with Pacific Mutiara Sdn Bhd to develop 11.5 acres (4.65ha) of land in the Cheras area into an affordable to low-cost development has recently become unconditional.

Based on a minimum density ratio of 200 units per acre, we reckon that the project would have an estimated GDV of RM575 million assuming an average selling price of RM250,000 per unit.

Moving forward, while we expect its manufacturing, environmental services, and telco tower division to continue enjoying steady growth, say 10%, underpinned by the strong demand in the construction industry and the need for water supply, sanitation facilities, housing and general infrastructure developments in Sabah and Sarawak, its property division will still be its core earnings driver.

We are expecting Weida’s earnings catalyst to come from its property development division. Hence, we are projecting Weida to register a net profit growth of 21% and 44% for FY16 and FY17, should they launch its Mont’Kiara project, Ardena, in FY16.

To recap, its property development division is currently still loss-making, primarily due to higher operating costs, that is sales and administration, and marketing costs incurred for the preparation works for Ardena.

While we are projecting a healthy net profit growth for the next two years, we believe that the stock is fairly valued at this juncture as we are valuing it at only RM1.63 based on 10.3 times FY16 price-earnings ratio (PER).

Our applied PER of 10.3 times is in line with FTSE Bursa Malaysia Small Cap (FBMSC) Index’s one-year forward PER of 10.3 times.

Furthermore, our earnings projection relies heavily on the timing of its launch for its Mont’Kiara project.

We believe there is potential earnings risk if this particular project fails to take off in FY16. — Kenanga Research

This article first appeared in The Edge Financial Daily, on June 5, 2015.