This article first appeared in The Edge Malaysia Weekly on October 22, 2018 - October 28, 2018

UNDER the leadership of its chief executive of two years Brian Iskandar Zulkarim, Damansara Realty Bhd (DRealty) has embarked on a strategic restructuring exercise, which ended a three-year losing streak in just one financial year.

The group registered a net profit of RM17.02 million in the financial year ended Dec 31, 2017 (FY2017), with its integrated facility management (IFM) and property and land development (PLD) businesses turning around. This is a remarkable achievement, given that in FY2016, DRealty’s net loss amounted to RM27 million.

Following the turnaround, the group continued to streamline its businesses. This strategy involves the disposal of non-core subsidiaries, including Metro Parking (S) Pte Ltd (MPS) and Healthcare Technical Services Sdn Bhd (HTS).

However, the proposed disposals have raised a few eyebrows.

In the case of MPS, while it was loss-making as at June 30, 2018, the company had secured a parking management contract with the Singapore Sports Centre for five years in August last year. The contract value was RM56.54 million.

Meanwhile, the construction of a 500-bed government hospital in Port Moresby, Papua New Guinea, for which HTS had secured a project management consultancy (PMC) contract in 2015, will commence this year.

HTS also secured several PMC contracts with local developers and contractors last year. These contracts are expected to commence this year, which is likely to boost the revenue and profitability of the segment.

On the surface, both companies could be developed further. However, DRealty begs to differ, especially on its decision to dispose of its stake in MPS.

“When we received the offer to buy MPS, it gave us the opportunity to consider how to maximise value generation for DRealty.

“We see Singapore as a mature market, which will require substantial capex in the near term.

“Having the chance to weigh MPS’ capex needs against the opportunities we see in other areas, we decided that it fits our strategy to streamline our businesses by focusing on high-growth markets in order to maximise value generation,” says Brian in email responses to The Edge’s questions.

To recap, DRealty entered into a share sale agreement with Indian businessman Selvakumar Baalu for the disposal of a 70% stake in MPS for S$100,000 (RM302,400) on Sept 18. As at June 30, MPS registered a net loss of RM1.14 million despite a 14.85% increase in revenue.

The cost of operating MPS is high partly due to expensive rent of 80% to 90% of revenue payable to the building management, says Brian. DRealty also estimated that MPS will require capital expenditure of RM10 million over the next five years.

“To grow the IFM segment, our strategy is to expand our capabilities while conserving capital expenditure and taking an asset-light approach. Reducing the need for capex will bring about improved cash flow and allow the reinvestment of funds in Metro Parking Malaysia and Philippines,” says Brian.

DRealty sees Singapore as a mature market, in which MPS is not a market leader. This is one of the reasons why it is exiting Singapore and focusing on building up Metro Parking businesses in high-growth markets where the company is a market leader.

In Malaysia, Metro Parking (M) Sdn Bhd is the second largest parking management service provider with a market share of 20% to 25%, says Brian. In the Philippines, Metro Parking Management (Philippines) Inc is the market leader with a 50% market share.

Last year, Metro Parking Philippines contributed RM32.6 million or 15% to the external revenue of DRealty’s IFM segment. The operation made a profit after tax of RM2.23 million during the year.

For the PMC segment, DRealty is disposing of its 70% stake in HTS to Johor Corp for RM11.04 million, which will be fulfilled via a set-off against a sum of RM15.03 million owed to JCorp.

What is perplexing is that the credit facilities do not bear interest, and the disposal does not contribute to any reduction in DRealty’s gearing. As at end-FY2017, DRealty’s gearing was 0.21 times.

It is not clear how much HTS contributes to the earnings of DRealty’s PMC segment. However, with the disposal of HTS, the group will be out of the healthcare facility PMC sector.

“On the PMC front, we are expanding our scope of services beyond the original niche we occupied in hospital planning and design,” says Brian.

“We are exploring the construction industry and developing a more comprehensive set of services related to commercial, residential and infrastructure developments.”

In FY2017, the PMC business recorded an 11.9% increase in revenue to RM11.25 million. However, its profit fell 69.3% to RM502,000 due to the completion of high-margin consultancy contracts in FY2016.

HTS secured several PMC contracts in the second half of 2017, which will contribute to the earnings of the segment in FY2018.

Property segment to remain subdued

The IFM business brings stable and recurring income to DRealty while the PLD segment is expected to rake in big but lumpy earnings. However, at the moment, DRealty is not too sanguine about the PLD business.

“While we have continued to push for growth in all our operational areas, we foresee IFM offering better near-term potential for growth as we expect the property segment to remain subdued for the time being,” says Brian.

“With that, we are assessing what we can do to tap unmet demand. Before we proceed, we will ensure that any project we embark on will improve the group’s margins, cash flow and bottom line.”

DRealty is currently developing Aliff Square 1 and 2 in Tampoi, Johor Baru, and Damansara Hills in Kuantan. The group is also partnering Country Garden Holdings Co Ltd to develop Central Park, a 53-acre project in Tampoi with an estimated gross development value of RM4.6 billion.

DRealty owns an indirect 30% stake in the JV company — DAC Properties Sdn Bhd — through Damansara Realty Johor Sdn Bhd.

The slowdown in the PLD segment had resulted in DRealty slipping back into the red in the second quarter ended June 30. The losses during the quarter were also due to MPS’ poor performance, says Brian. However, he is confident that FY2018 will be better than last year.

“With stable and recurring income from IFM and the potential of a new income stream from PMC, we will be able to smooth over the impact of lumpy income generated from PLD. We remain optimistic that we will close this year within our projections,” he says.

“We are also continuing to streamline our businesses, such as the divestment of non-core businesses, while assessing potential investment and collaborations for the rest of 2018.”

Over the last year, DRealty has lost 41.6% of its value. The counter closed at 33 sen per share last Thursday, giving it a market capitalisation of RM101.5 million. As at June 30, DRealty had net assets per share of 48 sen.

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