Yi-Lai taking the lead in Batu Kawan property sector

Yi-Lai Bhd (March 7, 85.5 sen)

Not rated. The potential injection of landbank and property projects by Aspen Vision All Sdn Bhd should transform Yi-Lai Bhd substantially. Earnings profile is likely to enter into a new growth trajectory with the Batu Kawan growth story, tie-up with Ikea and lucrative property development margin being the key catalysts. We estimate a valuation range of RM1.28 to RM1.45 — a potential 52% to 73% upside.

Yi-Lai, which is largely off the radar of many investors, would see an exciting transformation ahead. It signed a heads of agreement with Aspen in February. A total of RM100 million in cash and RM450 million worth of new shares would be issued to Aspen with the injection of Aspen’s assets into the company. Currently, Aspen owns 245 acres (99ha) of freehold land in Batu Kawan as well as a total of 21.6 acres of land in Penang Island and Subang. It has also tied up with Ikea to set up the first Ikea store in the northern region. Key risk to our investment thesis: the deal falling through.

Unlike other players, which have not launched any project in Batu Kawan, Aspen is taking the lead. It already sold 451 units of shop office last year and just rolled out five blocks of residence early this year. The total gross development value for the 245-acre Aspen Vision City in Batu Kawan is a whopping RM8 billion, anchoring earnings for the next ten years.

Although Aspen has not shown any earnings track record, we expect gross margin for the property projects to be around 30% to 35%, which is above the industry average of 20% to 25%. The lucrative margin can be attributed to the simple design of the properties, with packaged deals offered to buyers to upgrade the interior furnishing. Given the tie-up with Ikea, Aspen is likely to bulk purchase furniture and fittings from Ikea for most of its residential projects, making its products more sellable.

Aspen achieved RM900 million sales in 2015. With unbilled sales of over RM1 billion, earnings should kick in immediately after the completion of the asset injection exercise. Based on our estimates, we believe the price-earnings ratio can be compressed to less than five times in financial year 2017.

Aspen’s future growth potential should not be underestimated. The company is currently exploring further joint ventures with Ikea for expansion in Bangkok and the Philippines. Aspen would then likely undertake the commercial development adjacent to Ikea’s new stores. We like this viable business model.

Based on a 40% discount to revalued net asset value, our range suggests an attractive upside of 52% to 73%. We believe the stock would be rerated more significantly once all the necessary approvals are obtained and the details of asset injection are announced over the next few months. — RHB Research, March 7

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This article first appeared in The Edge Financial Daily, on March 8, 2016. Subscribe to The Edge Financial Daily here.