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Hold rating is maintained
We reaffirm our HOLD rating on Bandar Raya Developments Bhd (BRDB) at a higher fair value of RM1.94/share based on 25% discount to our revised NAV estimate of RM2.58/share. Although our discount is reduced, in-line with the more optimistic outlook in the sector, we retain our HOLD rating given the unexciting planned launches for the year and product mispricing.
Slightly below expectations
BRDB recorded a net profit of RM17 million for 4QFY09, bringing its FY09 earnings to RM116 million. This figure came below our expectation, accounting for only 89% of our estimates although largely in-line with consensus.
We believe the lower-than-expected earnings can be attributed to lower recognition of property sales for the year. Property sales grew by only 13% versus our estimates of 26% growth. The group declared a first and final dividend of 7.5 sen/share versus our estimate of only 3 sen/share.
* Stronger margins from property development
On a yearly basis, earnings grew by 12% despite registering 10% drop in revenue. Stronger margins from property division (29% versus FY08’s 23%) and reducing losses at Mieco offset the 50% y-o-y drop in Mieco’s revenue.
Stronger margins can be attributable to higher mix of high-margin products such as One Menerung and The Troika.
* Weak 4Q results
On a sequential basis, group earnings dropped by a massive 58%, caused by 22% and 50% drop in sales for property development and manufacturing units respectively. We understand the decline in sales for property development unit was due to lower progress recognition from One Menerung and a lumpy initial recognition from Cap Square Tower 2.
Accelerating pre-sales
* Launching 2nd condo in CapSquare
The group is accelerating its pre-sales for 2010, beginning with the launch of Cap Square Residences 2 middle of this year. The high-end condominium development would comprise of 176 units with NSA of 300,000 sq ft. Despite the robust property market this year, we are not too bullish on the take-up due to its rather steep pricing in a not-too-sexy location within Kg Baru and Jalan Masjid India/Jalan TAR area. We understand that pricing would start at RM800psf to RM900psf.
Cap Square Residences 1 launch price was only RM450psf to RM500psf. Although there were some transactions in the secondary market at RM750psf to RM800psf for Cap Square Residences 1, we do not think the transactions were liquid -- hence the hefty price tag not being justified.
* Also launching North Tower
Also in the pipeline is an eight-storey office tower i.e. North Tower with saleable area of 150,000 sq ft – to be launched in 2H 2010 -- to be priced at RM700psf to RM800psf.
Meanwhile South Tower, another 8-storey office block, is also in the pipeline. Nonetheless the launch date for this office tower will be delayed to 2011 but could be brought forward depending on sales reception at North Tower.
Reception for North Tower might be good given a stronger economy although it could face stiff competition from Sunrise’s Solaris KL, which has a more strategic location.
Furthermore, we understand that a non-listed entity, Khor Joo Saik Sdn Bhd is planning to build a 35-storey office block adjacent to G Tower -- to be completed in 2011.
* We like Dutamas project
But we are keen on BDRB’s planned launch of high-end condo in Dutamas - to be called Hartamas Sanctuary -- comprising of 698 units. To be built on an 11.5-acre site, units will be priced at RM500psf to RM600psf, which we think is fair. This project would be over a few phases with the 1st phase slated for launch this year-end -- with 298 units on offer.
This project will be boosted by Solaris Dutamas -- due for completion next year -- which will provide plenty of amenities for the area. Furthermore a few international schools are located within a short distance e.g. French International School, Sri Garden and Mont’Kiara International School.
* To launch about 80 units of semi-dees in Johor
There will also be about 80 units of semi-detached houses on offer in Permas Jaya, Johor with a GDV of RM80 million. This development would be done in phases with initial phase to be launched in March 2010, comprising 34 units.
Remaining 46 units will be launched tentatively in November this year.
Mieco recovering
Despite recording 50% y-o-y lower revenue to RM186mil, Mieco registered lower pretax losses of RM16.5 million versus RM36.3 million in FY08. This is mainly due to cost cutting measures and also lower material prices.
BDRB’s management is targeting Mieco to turnaround by end-2010 given an improved outlook in the sector and we understand that its third plant will reopen in the second half of this year.
Earnings revisions
We estimate earnings for FY10F and FY11F at RM117 million and RM118 million respectively. Earnings for FY10F and FY11F will be driven by the new launches -- mainly Hartamas Sanctuary and CapSquare developments.
Earnings will also be driven by the rental normalisation at Bangsar Shopping Centre (BSC). We expect rental to be stronger at RM10psf from RM9psf previously. Tenancy should be at 100% this year, and with 30% higher net lettable area we expect BSC to contribute RM102 million to RM120 million in net operating income.
Meanwhile, we introduce earnings for FY12F at RM154 million on back of RM1.2 billion in revenue. The 25% jump in earnings will be underpinned by more exciting launches of high-end products in Bangsar and Taman Duta, which have a combined GDV of RM1.6 billion.
Despite strong dividends in FY09 i.e. at 7.5sen/share or circa 23% payout, we have assume 15% payout ratio for FY10F-FY12F, to be conservative. This translates to a DPS of 4 sen to 5sen/share.
Valuation
At current level, BRDB is trading at 29% discount to our NAV of RM2.58/share with valuation at a decent PE of 7x. Nonetheless despite the cheap valuation, looking at BDRB’s planned launches and indicative pricing, as a whole, we think a HOLD rating is justified.
