Magna’s new projects underpin turnaround

Niche property developer Magna Prima (92.5 sen) is upbeat that its new projects will underpin the company’s turnaround and support earnings growth over the next few years. Its latest earnings results for 1QFY11 ended Dec 31 underscored these expectations.

Sales were up 47.8% year-on-year (y-o-y) to RM26.8 million in the first three months of the year while net profit improved to RM2.2 million, compared with RM100,000 in the previous corresponding quarter.

Despite the y-o-y improvements, this set of earnings results may still appear low at first blush — sales and net profit accounted for just about 10% and 7% of our previous full-year forecast for the company. However, we are not overly perturbed.

The results for 1Q11 consisted, primarily, of contributions from just two projects — the One Sierra @ Selayang and U1 Apartment Suites in Shah Alam. The former was launched in 3Q10 and is only beginning to contribute while the latter is its final leg and is on track for completion by end-2Q11.

Compulsory acquisition of land in Selayang
Earlier this week, Magna announced to the Bursa Malaysia that a piece of land belonging to the company in Selayang — on which it has launched the D’Sierra Anggun residential property project — will be compulsorily acquired by the Ministry of Higher Education.

As a result, Magna has ceased all earthworks that were being carried out — structural works was slated to begin in 3Q11.

To recap, the six-acre (2.4ha) land was acquired for RM16.5 million last August. The D’Sierra Anggun is a gated and guarded community project, consisting of 90 units of 2 and 2½-storey superlink homes with gross development value (GDV) of RM80 million. The project was launched October 2010 and is roughly 60%-70% sold.

It is uncertain at this point how much the company will receive in terms of compensation or whether it will suffer any losses. But a resolution is likely within the next few weeks.

Four projects soon-to-commence
We have taken the D’Sierra Anggun project out of our earnings forecast but have not included any compensation amount.

The company still has three other projects that are slated to commence construction this year, which will boost sales and earnings in the next three quarters — and beyond. Two of the new projects are gated and guarded residential developments — the Seri Jalil in Bukit Jalil and d’16 in Shah Alam.

The Alam d’16 project was launched in January 2011. Site clearing and earthworks are currently in progress and construction should begin very soon.

Elsewhere, construction for the Seri Jalil project is expected to commence in 2H11 and the project is targeted for completion by 4Q12.

Magna is also undertaking a mixed commercial-residential project along Jalan Kuching, called the Boulevard Business Park @ Jalan Kuching. Preliminary construction work has started.

The first phase consisting of 4-storey shop offices and retail podium are to be completed by end-2013. The second phase of serviced apartments is scheduled for a slightly later launch and should be completed by 2014. The entire project has an estimated GDV of RM572 million.

With a combined GDV totalling some RM970 million for its projects in hand, excluding U1 Shah Alam, we expect Magna’s sales and earnings to strengthen considerably over the next two-three years.

Net profit expected to improve sharply in 2011-2012
We estimate sales to grow to about RM245 million in the current year and further to RM359 million in 2012 on the back of progressive sales from the company’s current roster of projects.

Given that its residential projects are niche property developments for the mid to upper-end market segments, we expect fairly robust margins of up to 25%.

Thus, we should also see a strong turnaround for the company in the current year, from net loss of RM12.4 million in 2010. Net profit is estimated at RM27.8 million, which will rise further to RM50.7 million in 2012. That translates into fairly attractive valuations of 11.1 and 6.1 times forward earnings for the two years, respectively. As mentioned above, we have taken the D’Sierra Anggun project out of our earnings forecast but have not included any compensation sum.

Magna’s net assets stood at 49 sen per share at end-2010, which is forecast to expand to about 81 sen per share by end-2014, upon the completion of all the ongoing projects.

Magma’s share price has appreciated quite smartly since our last report (on May 25; 80 sen). We suspect sentiment for the stock will keep improving as its projects take off and the expected earnings turnaround materialises. Given its still relatively modest valuations, there is good prospect for future gains on the stock.

Magna has proposed a single tier tax-exempt final dividend of one sen per share for 2010. That would translate into net yield of 1.3% at the prevailing share price. The entitlement date is not yet fixed.

Two more projects on the drawing board
Looking further ahead, development plans for a 6.95-acre plot of land in Jalan Gasing, Petaling Jaya — acquired last year for RM48.5 million — are on the drawing board. Details are likely to be finalised by 2012.

Last but not least, Magna is in the midst of completing the acquisition of a 2.62 acre piece of land in Jalan Ampang — where the Lai Meng Primary School is currently situated.

Details for the development are still being worked out but initial reports suggest that the GDV could be at RM1.3 billion. Approval for the relocation of the school to a new site in Bukit Jalil — next to Magna’s Seri Jalil development — was secured in mid-2010 and construction works on the new building is expected to start later this year. The relocation of the school to its new home is targeted by end-2013.

The two future projects — in Jalan Gasing and Jalan Ampang — will underpin growth beyond 2013.

It bears to note that the Jalan Ampang land, currently pending completion, is expected to cost some RM174 million, including the cost of the Bukit Jalil land swap. That works out to about RM1,525 per sq ft.

By comparison, Sunrise acquired a piece of land in the vicinity for RM2,588 per sq ft in 2008, albeit with better frontage view. In 2009, Dijaya Corp paid about RM2,200 per sq ft for an adjacent plot. At this price, Magna’s land would be valued closer to RM250 million, or a revaluation surplus of roughly RM77 million.

Thus, assuming prevailing market value for the land, Magna could potentially add another 23 sen per share to its valuation upon completion of the acquisition, based on the enlarged share capital of 333.1 million shares.

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.