Ivory bets on Iskandar, sells Penang land

IVORY Properties Group Bhd’s recent land disposals got the market talking. This is because the group seems to be cashing out from its home base in Penang and venturing into Iskandar Malaysia, a region said to be facing a property glut.

The move comes amid high land prices in Penang and the rising visibility of Iskandar as a vibrant development corridor in the south. The special development region, which has a land mass three times the size of Singapore, has been attracting interest from multinational foreign investors.

To recap, on Sept 25, 2014, Ivory (fundamental: 1.10; valuation: 2.10) announced that it had entered into a joint-venture agreement with JB Lee Properties Sdn Bhd to develop a mixed-use project on a 7.1-acre parcel in Teluk Jawa, Johor Baru, with a gross development value (GDV) of about RM2 billion.

On Jan 14, the group announced that it had entered into a sales and purchase agreement with Jesselton Land Sdn Bhd for the disposal of its land in the northeast district of the Penang Island measuring 21.78ha for RM150 million.

On Jan 22, Ivory announced that it had entered into a share sale agreement with Aspen Vision Development Sdn Bhd (Aspen Group) to divest its 49% stake in Aspen Vision Land Sdn Bhd (AV Land) for RM55 million.

Recall that AV Land owns 80% of Aspen Vision City Sdn Bhd (AV City), the developer of the 245-acre Aspen Vision City in Bandar Cassia, Batu Kawan, which has a GDV of RM8 billion. The other 20% is held by Ikano Pte Ltd.

Aspen Group CEO Datuk M Murly says the valuation is based on the discounted cash flow of AV Land’s assets and the group is willing to pay a premium for Ivory’s stake because of the long-term prospect of the project.

“The deal comes at the right time and the project is going smoothly. Plus, the cost is not that huge. Where else can you get a large land tract in Penang at that price? We get to have full control of a 245-acre parcel with good connectivity at the price of RM55 million.

“The market is going to soften, but this is not an overnight project. Looking at the long-term prospect of AV Land with the Aspen Vision City project gradually taking shape, we are confident of this investment,” Murly tells The Edge.

AV City bought the land for RM484 million or RM45 per sq ft in January last year from Penang Development Corp. According to Murly, the project has a plot ratio of five, which is the maximum that developments in the state could normally get.

When contacted by The Edge, an Ivory spokesperson declined to comment on the group’s strategy behind the land disposals and pointed to the rationale stated in its announcements.

According to its filing with Bursa Malaysia, the divestments will enable the group to unlock the value of its investments immediately and focus on projects that can generate returns over a shorter gestation period.

The group notes that the disposal price, which is at a substantial premium over its original investment cost, will raise funds to strengthen Ivory’s financial position to facilitate any expansion plan for its current business activities.

Strengthening balance sheet at the expense of future growth?

Proceeds from the disposals totalling RM205 million will be partially utilised to reduce the group’s gearing level and fund future projects. Ivory will net a gain of RM73 million or 16.45 sen per share from the disposals by December 2016 when both deals are expected to be completed.

The disposal of the stake in AV Land is at a 65% premium to Ivory’s investment cost.

As at Sept 30, 2014, Ivory’s short and long-term debts stood at RM318.32 million. Its shareholders’ equity was RM393.72 million, giving the group a gearing ratio of about 0.81 times, above the average 0.43 times of property counters traded on Bursa, according to Bloomberg data.

Thus, it seems prudent for Ivory to monetise its assets now and reduce its gearing level, say industry observers. However, some question whether it is wise for Ivory to sell its land, as the group will now miss out on future profits.

What is more perplexing is the fact that Ivory is venturing into Iskandar, a region which is said to be facing a surplus of property. Many analysts have warned about the impending oversupply situation in Iskandar.

In October last year, Maybank IB Research issued a report highlighting the oversupply of property and the increasing competition among local and foreign property developers in Iskandar. Observers opine that Iskandar has grown too fast too soon.

“We remain cautious about the increasingly crowded development space in Iskandar. Oversupply of apartments and retail spaces in hotspots such as the Nusajaya-Medini and Danga Bay areas may cause a decline in property values over the medium term.

“Johor’s House Price Index (HPI) contracted 1.6% quarter on quarter in the second quarter of 2014, the first decline in 27 months, on weaker buyer sentiment due to the government’s cooling measures effective from January 2014,” states Maybank IB Research in its Oct 3 report.

Since then, however, there have been more land deals and property launches within Iskandar by both local and foreign developers.

On Jan 22, Iskandar Waterfront City Bhd (fundamental: 1.65; valuation: 1.50) announced that it has entered into a shareholders’ agreement with Shanghai-based Greenland Group for the development of a multibillion ringgit mixed-use project on a 128-acre reclaimed parcel on Tebrau Coast.

In the same week, Country Garden Holdings Ltd received the green light from the Department of Environment to reclaim 5,000 acres of land on the Tebrau Strait for its mixed-use developments, while Guangzhou R&F Properties Co Ltd launched 3,200 residential units of its Princess Cove@Tanjung Puteri development.

Ivory has been trying to expand its geographical footprint over the last one year. Prior to the group’s venture into Iskandar, it had bid for and won the right to revive the long-abandoned Plaza Rakyat project.

However, the bid was annulled because AdamPrimus Chartered Accountants, the receiver and manager of the original developer Plaza Rakyat Sdn Bhd, had failed to secure approval from the Kuala Lumpur City Hall (DBKL) for the revival of the project.

According to Ivory’s website, all of its completed, ongoing and finalised future projects are located in Penang. Thus, the group’s foray into Iskandar is the first step towards diversifying its geographical presence in the property sector.

Only time will tell whether the strategy to monetise its landbank in Penang and invest in Iskandar’s growing property market will be beneficial to Ivory.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations.

This article first appeared in The Edge Malaysia Weekly, on February 2 - 8 , 2015.