Titijaya plans to double its GDV to RM14b in next 2 years

Titijaya Land Bhd
(June , RM2.43)
Maintain trading buy with target price ranging from RM2.95 to RM3.32: The group targets to double its total gross development value (GDV) in the next two years to RM14 billion, with its focus on projects in the Klang Valley and Penang. This will increase the group’s landbank visibility from eight years to at least 13 years, which we believe is achievable.

Its recent landbanking efforts were commendable considering that news flow for this sector has been relatively quiet. It shows that Titijaya has the ability to access landowners or joint-venture (JV) deals.

The group has a light balance sheet, being in a net cash position and we expect net gearing to increase to 0.3 times after it completes the acquisition of its land in Penang (RM126 million) by year-end.

We prefer developers with a net gearing ceiling of 0.5 times. Assuming the group leverages up to 0.5 times after taking into account its Penang land obligations, the group can still raise RM72 million from new borrowings. Assuming that the cost of the land makes up 12% of GDV, we estimate that the group can replenish another RM0.6 billion new GDV by the end of financial year 2015 ending June 30 (FY15), which falls short of its two-year GDV replenishment target.

Titijaya has clinched a 70:30 JV with Bina Puri Holdings Bhd for a project in Brickfields, Kuala Lumpur, with a GDV of RM1.3 billion. JV deals, such as this, are “cash-flow friendly” and are positive for developers with high growth ambitions but lack sizeable balance sheets to gestate landbanks. We strongly believe that Titijaya is seeking more of such arrangements as relying on its current balance sheet will limit its growth. Furthermore, the group can consider cash calls to finance large landbank acquisitions.

We have come up with three different scenarios to assess the potential of the company’s capacity to landbank and its potential valuations: (i) borrowing up to 0.5 times net gearing; (ii) borrowing up to 0.5 times net gearing and assuming a placement of 10%; and (iii) landbanking via pure JV structures.

Based on scenario (i) and (ii), the group can replenish between RM0.6 billion and RM1.5 billion new GDV in the next one year, which implies a realisable net asset value (RNAV) range of RM4.92 to RM4.96. Assuming an unchanged 40% RNAV discount, this implies a target price of RM2.95 to RM2.97. If the group adopts scenario (iii), the sky is the limit; however, in this scenario, we opt to be conservative and assume that the group will replenish up to RM3.0 billion in the next 12 to 18 months which is almost half of its two-year GDV replenishment target. Scenario 3 implies a RNAV of RM5.54 and assuming 40% discount, its target price would be as high as RM3.32.

While we had revised our FY14 to FY15E earnings lower by 17%-13% to RM70.8 million and RM84.4 million respectively, on lower FY14 sales assumption from RM605 million to RM450 million and also slower recognition, we are expecting Titijaya to still chart a commendable net profit growth of 36% to 19% vis-à-vis its peers’ average growth of 9.6% to 15.0% in FY14 and FY15E despite the headwinds facing the property sector.

We derived a target price range of RM2.95 to RM3.32 in view of potential landbanking newsflows. Our target price range is based on 40% discount to our blue-sky scenario’s RNAV of RM4.92 to RM5.54. — Kenanga Research, June 24

This article first appeared in The Edge Financial Daily, on June 25, 2014.