Magna Prima poised for a turnaround

MAGNA Prima Bhd (RM0.775) is a niche property developer focused primarily on developing pocket-sized parcels of land. It targets at the mid to high-end segment. All of its commercial and residential projects are located in the Klang Valley.

The emergence of a new controlling shareholder in May 2010 heralded a fresh strategic direction for the company. Having undergone an internal restructuring and management changes, as well as having acquired several pieces of land through the better part of 2010, Magna believes it is now poised for a turnaround with a rash of new project launches.

The company is upbeat on its earnings outlook for the foreseeable future — based on its newly-launched projects as well as two others on the drawing board. The latter includes the jewel in its crown, the development of a 2.62-acre piece of prime freehold land in Jalan Ampang, near the Petronas Twin Towers.

New launches underpin earnings in 2011/13
The company has five projects — excluding the soon-to-be-completed U1 Apartment Suites — on its plate right now. They will underpin Magna's sales and earnings for the next two to three years.

One Sierra @ Selayang, a mixed commercial-residential development, was launched in 3Q10. Three other gated and guarded residential developments —
(i) D'Sierra Anggun Selayang;
(ii) Seri Jalil in Bukit Jalil; and
(iii) d'16 in Shah Alam — were launched in 4Q10. The first phase of its latest project, a mixed commercial-residential development called the Boulevard Business Park @ Jalan Kuching is slated for launch in the current quarter. These projects have a combined gross development value (GDV) of some RM1.05 billion.

The company had unbilled sales totalling some RM293.3 million as at end-1Q11, which will translate into sales and earnings as the projects are progressively completed. Given that its residential projects are niche property developments for the mid- to upper-end market segments, we expect fairly robust margins of up to 25%.

Upbeat outlook for property market

The property market, especially the landed residential segment, has strengthened noticeably over the past two years. Judging by buyer response to recent new launches, demand appears likely to stay robust, particularly for those in choice locations. Indeed, recent news reports suggest that several upcoming residential properties are likely to be launched at record- high prices.

The uptrend in property prices is attributed in part to the rising cost of land and raw materials, such as cement and steel, as well as low interest rates. Expectations of inflation are providing strong support to property demand.


Two more projects on the drawing board
Looking further ahead, Magna is working on two other projects. The first is likely to be a mixed commercial-residential development on a 6.95-acre piece of land in Jalan Gasing, Petaling Jaya. The land was acquired for RM48.5 million last year.

The second is widely viewed as a flagship project for the company. Magna is currently in the process of acquiring a 2.62-acre plot of land in Jalan Ampang, where the Lai Meng Girl's School is located.

Details of the development are still being worked out, but initial reports suggest that the GDV could be about RM1.3 billion.

The company has already secured another piece of land in Bukit Jalil for RM10.7 million, which will be the new home for the school. Construction on the new school building is expected to begin later this year. Once completed, scheduled for 2013, the school will be relocated to the new site and development on the Jalan Ampang land can commence. Magna intends for these two projects to take off after it has completed the five developments currently ongoing. If all goes according to plan, its roster of projects — both ongoing and on the drawing board — will sustain sales and earnings for the foreseeable future.

Accounting methodology may restate, distort sales and profit numbers
At the moment, Magna's accounts for its projects are on a percentage of completion basis. However, Malaysia is expected to adopt the IFRIC 15 (International Financial Reporting Interpretation Committee) method of accounting next year, where sales are recognised only on the completion of the project basis.

It is still uncertain if the new accounting standard will apply to ongoing as well as new projects. As such, we could see some restatements and distortions to our sales and earnings forecasts for the company. But, regardless of the method of accounting, the company's underlying fundamentals would be intact.

Earnings poised for turnaround
As mentioned above, the five new projects, excluding the soon-to-be- completed U1 Apartment Suites, will underpin Magna's sales and earnings for the next two to three years.

Construction of One Sierra @ Selayang is currently ongoing while that of three other residential projects, d'Sierra Anggun, Alam d'16 and Seri Jalil, is expected to commence in the current quarter.  Additionally, work on the first phase of Boulevard Business Park @ Jalan Kuching is expected to start very soon, while phase two will kick off sometime in 2012/13.

Thereafter, we expect the two projects in the pipeline — the developments in Jalan Gasing and Jalan Ampang — to take up the slack and provide investors with sustainable revenue and earnings beyond 2013.

We estimate sales will grow to about RM261.2 million in the current year and to RM426.8 million in 2012 on the back of progressive completion of the company's current roster of projects. As at end-1Q11, unbilled sales totalled some RM293 million.

The higher revenue will return the company to profitability this year. Net profit is estimated at RM30.8 million, a reversal from a net loss of RM11.7 million in 2010. Earnings are forecast to grow to RM63.2 million by 2012 with the projects in full swing.

Modest valuations suggest room for gains
Based on our forecast, the stock is trading at fairly attractive valuations of 8.4 times estimated earnings this year, on a fully-diluted basis, which will drop sharply to roughly 4.1 times by 2012.

Magna's net assets per share stood at RM0.49 as at end-2010, which is forecast to expand to RM0.72 per share by 2012 and RM0.87 by end-2014, upon the completion of the five projects in hand.

It should be noted that the estimated cost of the land in Jalan Ampang, is RM174 million, including the cost of the Bukit Jalil land swap. That works out to be roughly RM1,525 psf.

By comparison, Sunrise acquired a piece of land in the vicinity for RM2,588 psf in 2008, albeit with a better frontage. In 2009, Dijaya Corp paid about RM2,200 psf for an adjacent piece of land.

At this price, Magna's land would be valued closer to RM250 million, translating into a revaluation surplus of roughly RM77 million. This could potentially add some 23 sen per share, based on its enlarged share capital of 333.1 million shares, to Magna's share value once the acquisition is completed.

The company has some 85.8 million warrants outstanding that will expire in September 2011. Given that the warrants are deep in the money with an exercise price of 37 sen, we expect full conversion. This would enlarge Magna's share capital from the existing 247.3 million to 333.1 million shares. The warrants are currently trading at 45 sen per warrant, implying a premium of 5.8%.

Taking into account the company's projects in the pipeline and anticipated earnings turnaround, and relatively modest valuations, its prospects for capital gains are good.

Balance sheet in fairly good shape
The company's gearing rose to 79% — net debt of RM94.7 million — in 2010 due primarily to its land acquisitions. Net debt is expected to rise further this year with the completion of two additional land acquisitions in Selayang and Jalan Kuching.

Nonetheless, we are not overly concerned. All of the company's current projects have secured financing and progressive completion will generate revenue and cash flow, which will in turn gradually pare down gearing levels.

Magna remains on the lookout for acquisitions to boost its landbank for future developments. However, the company's main focus would be on the execution of the projects in hand.

We expect the company to maintain annual dividends at one sen per share going forward in order to conserve cash for future expansions. At the prevailing share price, shareholders would earn a net yield of roughly 1.3%.

An artist's impression of Magna City.

A brief profile of the company
Magna was incorporated in 1995 and listed on the local bourse in January 1997. Prior to its reclassification as a property counter in March 2010, Magna was better known as a construction company. In the early years, the company has undertaken a host of external construction and civil engineering jobs, in addition to in-house property projects. These include construction of the Putrajaya Wetlands, high-rise condominiums and related facilities in the Commonwealth Games Village as well as quarrying works, earthworks and dredging works.

However, in recent years, Magna has shifted its focus to developing pocket-sized parcels of land in the Klang Valley. The construction arm now undertakes primarily in-house projects.

The company also has a manufacturing and trading arm for ready-mixed concrete, supplying for both in-house projects as well as external parties. External sales contributions are relatively small and the unit's primary aim is to ensure timely and quality supply of materials to its own projects.

One of the company's signature projects was The Avare, a six-star super-luxury condominium located near KLCC that was completed in 2008. Other recent projects include the Magna Ville in Selayang, which consists of medium cost apartments, and Dataran Otomobil in Shah Alam, both of which were completed at end-2009.

Magna's controlling shareholder, Fantastic Realty, now owns a 13.3% stake in the company, which is expected to increase to 25% upon full conversion of its holdings in the soon to expire warrants.

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.