Magna Prima’s land buy: Above market value, but deemed fair and reasonable

KUALA LUMPUR (Sept 7): Magna Prima Bhd’s proposed acquisition of 5.25 acres leasehold land in Shah Alam for RM43 million to be developed into a residential project is deemed as fair and reasonable, says Affin Hwang Investment Bank Bhd.

Affn Hwang, the independent adviser to Magna shareholders who have no interest in the deal, said it has noted that the price tag represented a premium of RM5 million or 13.2% over the market value of the land, as ascribed by Messrs Khong & Jaafar Sdn Bhd, the independent valuer.

It said while the price appears to be not fair, the proposed acquisition, rendered on an overall basis, is fair and reasonable and is not detrimental to the non-interested shareholders.

Upon the completion of the acquisition, Magna City Shah Alam Sdn Bhd (MCSASB), a wholly-owned subsidiary of Magna, will develop the residential project comprising 315 units of 3 blocks of 15-storey residential apartments and five shops.

According to a filing with Bursa Malaysia, the gross development value (GDV) of the proposed development is estimated at RM220.81 million and the total development cost is estimated to be RM180.69 million, with an expected gross profit of RM40.12 million.

Affin Hwang said it took note of the fact that Magna could immediately embark on the proposed development, considering it has the necessary approvals from Majlis Bandaraya Shah Alam for the commencement of the development work.

It added that the proposed acquisition would enable the group to have earnings sustainability in the near future, considering its on-going development projects of the group are expected to be completed within 2017.

A feasibility report, prepared by PPC International Sdn Bhd to assess the viability of the proposed development, is of the view that a relatively small scale residential development such as the proposed development will sustain and prevail in a slower market, as large scale development would involve high capital outlay and holding cost.

Affin Hwang said the pricing for the development translates into a gross internal rate of return (IRR) of 37.71% and a gross return of sales of 19.14% for the entire project.

“According to PPC, this is an acceptable return, especially for small-sized development projects, where the associated risk is relatively lower,” it said.

Although there is a RM5 million premium paid for the land, the proposed development will generate a gross return on sales of 19.14% for the entire project, which is an acceptable return based on the current market conditions, said the investment bank.

Magna’s shares edged higher by 0.51% to 99 sen today, with a market capitalisation of RM328.1 million. At its current level, the group is trading at a P/E of only 0.87 times and has a dividend yield of 3.05%. — theedgemarkets.com

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