DIJAYA Corp’s (cum: RM1.20, ex-rights: RM1.11) recent 1Q FY Dec 2008 results were below expectations, largely due to one-off costs relating to its recent land acquisitions, and higher taxes. We had expected a relatively flat first half, since all its earlier planned new launches in Tropicana and India will only take off in mid-2008. However, these projects have now been delayed, and Dijaya’s expected strong growth for this year will be pushed to 2009.
  For 1Q FY Dec 2008, revenue declined by 6.6% to RM47.9 million. Gross profit margins were relatively stable but a 15% rise in operating costs reduced pretax profit by 20% from RM10.2 million to RM8.2 million. A sharply higher effective tax rate of 37.7% dampened net profit further to RM3.3 million, down 48.4% year-on-year (y-o-y).
We understand much of the cost increase was due to expenses relating to its recent land purchases, some of which were not tax deductible.
Operationally, revenue and earnings were supported by sales and progressive profit recognition of its ongoing property developments, namely Casa Indah 2 and Villa Green at Damansara Indah, Casa Suites at Damansara Intan and Tropics Designer Suites at Tropicana City.
Balance sheet remains very strong. As at end-March 2008, net cash and equivalents stood at RM122 million, down marginally from RM141.3 million at end-2007. The proposed rights issue will raise about RM155.8 million to fund Tropicana City (where the mall and office tower will be kept for rental) as well as the recent land purchases.
Tropicana and India projects to be delayed
External economic issues and political uncertainties in the post-election environment have resulted in a softening of the property market. Given the softer property market environment, Dijaya is planning to delay the launch of its two Tropicana projects - Tropicana Grande and Tropicana Avenue - for a few months from their earlier scheduled launch in 2Q2008.
Located on 5.2 acres of land, Tropicana Grande will comprise 241 condominiums with a large built-up space of 2,500-4,500 sq ft, housed in two 35-36 storey tower blocks with indicative gross development value (GDV) of RM390 million. Tropicana Avenue comprises three blocks of nine- and 11-storey shop offices on seven acres of land, with GDV of RM210 million.
The Indian property market has also softened. As a result, Dijaya will also delay its RM800 million joint-venture project in Hyderabad, earlier scheduled for launch in April. There will be no major holding costs for the delay, as the land belongs to the Indian joint-venture partner.
Construction of Dijaya’s ongoing projects is progressing well, including Tropicana Mall at Tropicana City, which will be completed in November 2008. Tropicana Mall will provide a new source of recurring income from 2009 onwards, with rental income of RM30 million from the shopping mall and RM5 million from the office tower.
Sungei Buloh shops selling well
On a positive note, sales of its shophouse development in Sungei Buloh, TSB Sungei Buloh, have been pushed forward and are doing well.
Dijaya has so far undertaken two soft launches - the first phase in February 2008, and second phase about three weeks ago. The first phase of 40 shops was fully sold out, while the second phase of about 96 units was over 60% sold. To date, it has sold about 70% of the total launch of 136 units. The third and final phase of about 105 units will be launched at the end of the year.
The project consists of 241 units of three-four storey shops on 20.8 acres of land in the heart of Sungei Buloh, fronting Jalan Kuala Selangor. Prices range from RM1.3 million for three-storey shops and RM1.8 million for four-storey shops, with total GDV of around RM290 million. We expect high margins of over 40% from this project.
Forecasts reduced
Dijaya’s earlier expected strong growth for 2008 will be pushed forward to 2009 instead, given the delays. We have now assumed the two Tropicana projects are launched in late 2008 and the Indian project in mid-2009. We have also assumed lower margins due to rising building material costs.
The current year will see some impact from the Sungei Buloh shops, which will start contributing when construction begins at the end of the year, as well as its ongoing projects. The company’s unbilled sales have increased from RM250 million at end-2007 to around RM300 million.
As a result of the delay in launches and lower margin assumptions, we have reduced our 2008-2009 net profit forecasts by 27% and 16.5% respectively. We now expect the company’s net profit to decline 15.5% to RM41.2 million in 2008 and rise 95.1% to RM80.4 million in 2009.
Buy call maintained
We maintain our buy recommendation. Even after the earnings downgrade, ex-all P/E valuations for the stock are still not too demanding at 12.3 times and 6.3 times 2008-09 earnings. Balance sheet is very strong and the stock is trading well below its NTA and RNAV.
Its NTA per share will fall to RM1.75 at end-2008, from RM2.33 at end-2007, after the rights issue. We estimate its ex-all RNAV at RM2.68 per share - more than twice the ex-all share price of RM1.11.
Given the lacklustre outlook for the property sector and unexciting earnings for this year though, Dijaya’s shares may not perform much in the near term - until the strong earnings growth kicks in next year. They do, however, offer good value for longer-term investors.
In mid-January 2008, Dijaya had proposed a renounceable two-call rights issue on the basis of three rights shares at RM1 per rights share (but shareholders only need to pay 80 sen) and two free warrants for every four ordinary shares held. The proposals received SC approval on March 28, 2008, but have yet to be implemented.
The dilutive effect is partly mitigated by potential capital gains from the free warrants, as well as 7.6% in “adjustment price gains” arising from the two-call rights structure, as shareholders will need to pay only 80 sen for each share in the rights issue, which are issued at RM1.
The ex-all price adjustment for the rights issue will be based on the issue price of RM1, rather than 80 sen. Based on the cum price of RM1.20, Dijaya’s adjusted ex-all price is RM1.114 while shareholders’ effective cost is RM1.029 per share after undergoing the rights exercise.
Despite the current property slowdown, Dijaya is well positioned in the cycle. Its landbank is strategically located in the prime Tropicana-Damansara area, with very low land costs and less cyclical customer base of upper income owner-occupiers. More importantly, its balance sheet is very strong - and will be strengthened further by the upcoming rights issue.
In particular, the two Tropicana projects, we believe, should be quite well received. There is currently a lack of large-sized condos in the area as well as in Petaling Jaya, where most condos are sized around 1,100-1,200 sq ft. Thus, Tropicana Grande will cater to those moving from bungalows to a secure, but large living environment, as is evident in the Mont’ Kiara area.
There is also strong demand for suburban retail and commercial space for yield purposes, as evidenced by the strong take-up rates at TSB Sungei Buloh. Thus, we think Tropicana Avenue should also be quite well received.
Expanding longer-term land bank
Dijaya has also put into place a longer-term footprint by enlarging its landbank at low prices. Between December 2007 and February 2008, it acquired 186.2 acres of mainly agriculture land, but within or nearby established areas, to be converted to residential status and developed later.
The land includes 66 acres in Kajang, Selangor, for RM47.5 million (RM16.50 psf); 93.4 acres in Jenjarom, near Klang, for RM29.5 million (RM7.25 psf) and 26.8 acres in Cheras for RM18.7 million (RM16 psf). With this, Dijaya would have a total landbank of around 967 acres. Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned. |
