Dijaya's good results - and stronger growth ahead

The Edge Daily, 7 March 2008

DIJAYA Corp (RM1.29) reported a good set of final results for FY Dec 2007. Revenue for the year rose 43.1% to RM254.5 million while pretax profit increased 15.7% to RM71.6 million. Net profit rose 20.5% to RM48.8 million, or 18.8 sen per share.

Revenue and earnings were boosted by sales and progressive profit recognition of its ongoing developments, namely Casa Indah 2 and Villa Green at Damansara Indah, Casa Suites at Damansara Intan, Tropics Designer Suites at Tropicana City and Fortune Park in Kuala Lumpur.

Sales of these projects have been positive throughout 2007, and are almost fully sold out for Casa Suites, and over 70% sold for Villa Green, Casa Indah 2 and Fortune Park. The company's unbilled sales stand at around RM250 million.

Dijaya's balance sheet remains very strong. As at end-Dec 2007, net cash and equivalents of RM139.1 million, down slightly from RM164.1 million at end-2006 due to capital expenditure on the Tropicana City mall and office tower.

Its balance sheet will be strengthened further with the recently proposed rights issue, which should raise about RM155.8 million. This will fund the development of Tropicana City (the mall and office tower there cost RM250 million, and will be kept for rental and investment) as well as the recent acquisition of three large parcels of land.

Proposed rights issue
In mid-Jan 2008, Dijaya proposed a two-call rights issue of up to 214.11 million new shares with up to 142.74 million free warrants. This will raise RM155.8 million based on the current issued capital. The rights issue is on the basis of three rights shares at RM1 per share with two free warrants for every four shares held. The 10-year warrants have an exercise price of RM1.

Dijaya's major shareholder Tan Sri Danny Tan has undertaken to subscribe for his shareholding portion, with a minimum subscription of 126 million rights shares and 84 million warrants. This will raise a minimum of RM100.8 million.

The rights shares are issued at RM1 per share, with the first call at 80 sen cash payable on application. The second call of 20 sen will be capitalised from the company's share premium account. In effect, this means investors would only need to come up with 80 sen per rights share in cash, with the 20 sen funded or capitalised from the company.

As it currently stands, Dijaya's number of shares will increase by about 194.7 million — from 259.6 million to 454.3 million shares. This will come with 129.8 million free warrants. Upon full conversion, the company could have 584.1 million shares issued.

Outlook & recommendation
Dijaya is on the threshold of a strong growth phase, as the company turns far more aggressive. There is a pipeline of RM890 million in launches planned for 1H2008, its joint-venture (JV) project in India will kick off in April 2008, and the Tropicana City mall is slated for completion later this year.

Earnings momentum will accelerate sharply in 2008-2009 as Dijaya steps up launches at Tropicana, Sungei Buloh and India. Tropicana Mall will provide a new source of recurring income from 2009 onwards, with rental income of RM35 million. It has unbilled sales of RM250 million, and is in the process of selling out its ongoing projects.

The gross development value (GDV) of projects lined up for launch in 2008 total RM600 million in Tropicana (RM390 million from Tropicana Grande and RM210 million from Tropicana Avenue), RM290 million from the Sungei Buloh shops and indicatively around RM40-60 million from the Indian project.

Although the property cycle is probably peaking, Dijaya's strategically located landbank, very low land costs and less cyclical customer base of middle to upper income owner occupiers should ensure steady demand.

First phase of Sungei Buloh shops sold out
In early Feb 2008, Dijaya undertook a low-keyed soft launch of its shophouse project in Sungei Buloh, tentatively named TSB. Response was very strong. We understand all 40 units launched in the first phase were fully sold, with prices ranging starting from RM1.3 million for 3-storey shops and RM1.8 million for 4-storey shops.

Dijaya will build about 241 units of 3-4 storey shophouses on the 8.32 hectare land, located in the heart of Sungei Buloh, fronting Jalan Kuala Selangor and previously housing the Malaysia Sheet Glass factory. Incidentally, these prices were about RM200,000 above management's earlier proposed selling prices, indicating strong demand and the project's solid location.

With the higher prices, we estimate Dijaya's profit margins at over 40% and GDV will rise from RM240 million to RM290 million. This project is a JV between Dijaya and landowner Aliran Firasat Sdn Bhd, a private company owned by Tan Sri Danny Tan.

The terms are highly favourable for Dijaya. Dijaya does not need to pay for the land. It will fund the project's development up to RM40 million and take a 60% share of GDV and profits. The land is being valued very reasonably for the joint venture — at its original book value of RM65.6 million or RM72.40 psf.

Tropicana projects taking off, projects on track
The two projects in Tropicana Golf & Country Resort — Tropicana Grande and Tropicana Avenue — are expected to be launched by April 2008.

Located on 2.08ha, Tropicana Grande comprises 241 condos with built-up space of 2,500-4,500 sq ft, indicative pricing of RM450-RM500 psf and GDV of RM390 million. Tropicana Avenue comprises 9-11 storey shop offices on 2.8ha of land, with GDV of RM210 million and indicative pricing of RM300-350 psf for office space, and RM600-700 psf for the shops.

Over at Tropicana City, the development of the shopping mall is progressing well. The Indian joint venture project is also on track to start in April 2008.

Expanding land bank
In the last two months, Dijaya has been aggressively expanding its land bank at low prices for longer-term use. It acquired a total of 74.48ha of agricultural land for RM95.7 million, but within or nearby established areas, to be converted to residential status and launched at a much later stage.

The recent purchases are: (1) 26.4ha land in Kajang, Selangor, for RM47.5 million or RM16.50 psf, (2) 37.36ha of land in Jenjarom, near Klang, for RM29.5 million, or RM7.25 psf and (3) 10.72ha in Cheras for RM18.7 million cash, or RM16 psf.

Maintain buy call
We maintain our buy recommendation. We expect the company's net profit to rise 16% to RM56.7 million in 2008 and 70% to RM96.3 million in 2009. Our forecasts include the impact of the rights issue, but not contributions from the new lands, as they are much longer-term plans.

Despite the dilutive impact of the rights issue, ex-all valuations of Dijaya remain very attractive. On an ex-all basis, Dijaya's shares are trading on 9.5 times and 5.6 times 2008-09 earnings, respectively. We estimate its ex-all RNAV at RM2.68 per share.

The dilutive effect is mitigated by potential capital gains from the free warrants, as well as 7.4% in "adjustment price gains" from the 2-call rights structure.

The ex-all price adjustment will be based on the rights issue price of RM1, rather than the 80 sen cost to shareholders. Based on the cum price of RM1.29, the adjusted ex-all price is RM1.166 while shareholders' cost is RM1.08 per share after undergoing the rights exercise (see table 2).

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.