#Warrants Update* HAPSENG-WA still at a discount despite price rally

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HAP Seng Consolidated Bhd’s shares may have risen 86% over the past year, but its warrants have done even better. They have almost quadrupled in price, from barely 45 sen to RM1.68 on June 17 (Tuesday).

Still, HAPSENG-WA is trading at a slight discount to the underlying share.

Based on their strike price of RM1.65 and closing price of RM1.68, the warrants were trading at a 1.48% discount to the mother share, which closed at RM3.38 on June 17 (Tuesday).

The diversified group had a price-earnings ratio of 11.21 times as at June 17 (Tuesday) — lower than peer Sime Darby Bhd’s 18.38 times.

Hap Seng’s asset size is about seven times smaller than Sime Darby’s, which is why it does not enjoy the same premium as the latter company. However, its double-digit growth and optimism about its biggest profit generator — its property division — could attract the attention of more investors.

Meanwhile, those looking for an alternative entry into Hap Seng, may consider its warrants.

The company is looking to reap a gross development value of RM1 billion from its planned property projects, which range from high-end serviced apartments in Jalan Tun Razak, to mid- to high-end developments in Balakong.

In its financial year 2013 ended Dec 31, net profit grew nearly 38% year-on-year to RM588.26 million, the bulk of which came from the property division.

Revenue, however, declined 11.93% to RM3.49 billion, due to lower contributions from the company’s fertiliser and automotive divisions.  

Recently, Hap Seng managing director, Datuk Edward Lee Ming Foo, was quoted as saying that the company still had a landbank of 2,350 acres, most of which was located in Sabah.

In FY2013, Hap Seng’s property division made an operating profit of RM255.75 million, on revenue of RM517.68 million, compared with a restated operating profit of RM441.51 million and revenue of RM635.47 million previously.

The declining performance was attributed to fair value adjustments to some investment properties and gains from the disposal of non-strategic properties in FY2012.

However, in 1QFY2014, the property division’s operating profit nearly quadrupled to RM137.24 million, from RM35.09 million previously, while revenue tripled to RM173.02 million.

At group level, Hap Seng made a net profit of RM125.41 million in 1QFY2014, which was 22% higher than in the previous corresponding quarter.

This story first appeared in The Edge weekly edition of June 23-29, 2014.