Asset sale limbo puts BRDB at the crossroads

KUALA LUMPUR (May 7): Bandar Raya Development Bhd's (BRDB) long drawn-out plans to sell its investment properties, coupled with slow property sales, have left the company in limbo on its future direction.

Questions remain as to whether BRDB is better off forging ahead as a pure property developer or if it should remain as it is; a company with interests in development, assets and manufacturing.

The four assets up for sale are BRDB's Permas Jusco Mall in Johor, CapSquare Retail Centre and a holding company which owns the prized Bangsar Shopping Centre (BSC) and the adjacent Menara BRDB office block in Kuala Lumpur.

Almost eight months have passed since BRDB's major shareholder Ambang Sehati Sdn Bhd made its unsolicited offer last September.

BRDB's board has yet to announce further details on the asset disposal except a brief filing with Bursa Malaysia on March 27 in which BRDB said the tender process was still ongoing.

In the same announcement, BRDB reminded shareholders that Ambang Sehati was still evaluating its plan to increase its stake in the company, which may or may not result in a general offer.

However, the major shareholder "has been unable to confirm" to the board its decision to proceed with this exercise, according to the announcement. This has added more uncertainty to BRDB's prospects.

BRDB opted for open tender to sell its assets following criticism of Ambang Sehati's offer price of RM914 million and concern over the transparency of the related party transaction.

Based on last Friday's share price of RM2.30, a general offer for BRDB could be a cheaper option for Ambang Sehati to get hold of the four assets it is keen to acquire.

Should it pay a 20% premium at RM2.76 per share, the general offer will cost Ambang Sehati about RM1.09 billion for all the assets and liabilities of BRDB, not just the four assets.

Property analysts watching the deal are mixed on BRDB's path ahead, especially since the group has seen slow sales in some of its projects.

In a recent note, AmResearch said BRDB's sales have been rather quiet as the group has not launched new properties in 1Q12.

BRDB's YTD sales are almost RM100 million, underpinned by sales in its existing high-end projects such as Verdana North Kiara, 6Capsquare, Troika and One Menerung, AmResearch said.

The research house said it was assuming new sales of RM550 million for BRDB this year, somewhat lower than the management's target of RM700 million.

In the coming months, BRDB will launch several residential projects — Bluwater@Mines, Selangor, semi-detached houses at Permas Jaya and Phase 1 of the Puteri Harbour project in Nusajaya, both in Iskandar Malaysia in Johor.

In the future, BRDB will also develop projects in Gombak, Selangor, and in Penang in three separate joint ventures with Multi-Purpose Holdings Bhd's subsidiaries.

BRDB's most anticipated launch this year is its Medang Serai luxury apartments in Bangsar (gross development value of RM876 million) expected to be launched in the second half of the year.

Medang Serai could be one of the last high-rise developments within the upmarket Bangsar locale, a factor which could garner strong response from buyers, said AmResearch.

Analysts said it is understandable BRDB would want to focus its resources and efforts on property development, which typically yields better margins and higher returns.

"Property investments yield about 7% but real estate development margins could be in access of 20%. If you do property development well, you would definitely make more money," said an analyst at a local research house.

But some analysts caution that BRDB could see some volatility in earnings tied to property cycles in the future if it morphs into a pure property developer, especially if its projects are not large township developments.

In a note last September, RAM Rating Services Bhd said the proposed asset disposal will have a mixed impact on BRDB's credit standing as it would cease to benefit from its more stable income from property investment.

"While the potential divestment may be an immediate positive to BRDB's financial profile, it would exert a negative effect on its business risk profile over the longer term," RAM said.

Last June, RAM Rating also revised the outlook on BRDB's debt facilities from stable to negative given BRDB's weaker financial profile resulting from slower than expected sales and delays in new launches.

BRDB is scheduled to release its 1QFY11 results on May 24.

According to its annual audited accounts, net profit for  FY11 ended Dec 31, fell 36% to RM87.27 million from RM136.57 million a year ago.

Revenue rose 7.24% to RM672.86 million from RM627.38 million a year ago.

Its property development division's net profit halved to RM25.2 million from RM52.8 million while revenue fell 23.66% to RM299.79 million from RM392.72 million a year ago.

BRDB's property investment segment, meanwhile, saw its net profit fall almost 38% to RM54.14 million from RM87.23 million, although revenue rose about 30% to RM61.43 million from RM47.26 million.

Nevertheless, another analyst said investors would likely react positively to BRDB in the short term if it manages to dispose of its assets at a good price.

"Most investors who want exposure to property stocks prefer to own shares in a pure developer rather than an asset owner. There is also the issue of asset allocation for BRDB," said the analyst with a bank-backed research house.

The analyst explained that BRDB can focus its resources on working its landbank of about 809ha if it can pare down the debt associated with its CapSquare asset.

BRDB has been trading at a significant discount to its net asset value (NAV) of RM3.68 per share as at Dec 31, 2011.

"This is not surprising as BRDB has not been timing the market right with a few delays in launches. The uncertainty in its asset sale may also continue to depress it valuations," AmResearch said.

BRDB's share price has not been trading beyond RM3 since late 2007. In the last 12 months, BRDB's stock hit a one-year high of RM2.48 on Sept 7, 2011, after Ambang Sehati's offer was announced. But it promptly fell shortly after that to a one-year low of RM1.82 on Sept 26, 2011. Last Friday, BRDB fell two sen to RM2.30, a 37.5% discount to its NAV.

Property analysts do not see any re-rating catalyst in sight for BRDB currently, even if the asset sale does materialise.

"The sentiment is just not with property stocks right now, unlike what we saw two years ago," said an analyst.