Exciting times ahead for Ho Hup

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This article first appeared in The Edge Malaysia Weekly, on December 12 - 18, 2016.


LIKE most developers, Ho Hup Construction Co Bhd has been playing it safe in the past year due to a property market slowdown. The company did not launch any big projects, thus raising concerns about its earnings.

A small construction player with a market capitalisation of only RM259 million, Ho Hup’s ability to replenish its order book was also tested. But thanks to a 50-acre joint development with Malton Bhd in Bukit Jalil, south Kuala Lumpur, Ho Hup has managed to stay profitable since its PN17 status was lifted in May 2014.

The company’s net profit grew 9.8% year on year to RM56.64 million or 16.26 sen per share for the nine months ended Sept 30, 2016 (9MFY2016), despite a 6.3% decline in revenue to RM199.13 million.

While its earnings visibility has been a worry for investors, Ho Hup CEO Datuk Derek Wong Kit Leong tells The Edge that things are getting more exciting for the company. Other than a profit entitlement from its joint venture with Malton, the group will launch projects with an estimated gross development value (GDV) of RM1.7 billion, he says.

Wong also points out that Ho Hup’s quarry in Melaka, which commenced operations in October, will be a new income stream in the coming years.

Despite the soft market, he believes the demand for properties in Bukit Jalil is still strong and expects the group’s joint venture with Malton to generate RM372 million in the next four to five years, which means at least RM75 million a year. The earnings entitlement for Ho Hup from the project stood at RM78 million as at October and is expected to reach RM80 million for the full year. Under the joint-venture agreement on the project, Malton will bear the entire development cost while Ho Hup is providing the land and is entitled to 18% of the estimated GDV of RM3.4 billion.

Ho Hup will launch a serviced apartment project with a GDV of RM468.8 million on its own in the third quarter of next year.

Meanwhile, Wong reveals, Ho Hup is seeking a Chinese company to partner it on its hotel and serviced apartment project in Kota Kinabalu, Sabah. With an estimated GDV of RM502.7 million, the project is scheduled to be launched in 3Q2017.

To Wong, it will be a boon to team up with a Chinese partner that has strong balance sheet. The partner could also help promote Ho Hup’s properties to the mainland Chinese.

In the second or third quarter of next year, the developer intends to launch the first phase of its 15-year township development with a GDV of RM2 billion in Kulai, Johor.

“I am not so worried about the take-up in the weak Johor market as we are selling the shophouses at a very affordable RM350,000 each,” Wong says, adding that the group will launch its projects over several phases at the right time.

The group’s unbilled sales as at Oct 31 stood at RM149.3 million, which is expected to sustain it for two years. Property development remains Ho Hup’s main earnings driver, accounting for 55% of its turnover in FY2015.

As for its construction division, the developer is bidding for about RM1 billion worth of contracts and expects to secure at least 30% of them in FY2017, Wong points out. “Things are keeping us very busy at the moment. We should end the year with an outstanding order book of RM500 million, which can sustain our performance for the next two to three years.”

On top of the company’s traditional core operations, Wong highlights the tremendous earnings potential of its 260-acre quarry, which it acquired last year.

Ho Hup owns 75% equity interest in the quarry while the Melaka government owns the rest. The joint venture’s aim is to supply quarry products to the state, south Negeri Sembilan and north Johor.

According to Wong, discussions are ongoing to supply quarry products for state road maintenance; armour rocks to Melaka Gateway, Kota Laksamana and Merlima; and ballast for the double-track railway from Gemas to Segamat and rail-track rehabilitation from Gemas to Mentakab.

“This quarry will be the jewel in our crown as it is strategically located and a lot of infrastructure projects have been announced by the government,” he says, adding that the JV is the front runner to supply to two port projects that will be announced in Melaka as it is one of two quarries in which the state government has ownership.

Nonetheless, as most of these contracts will only be rolled out next year, the profit recognition from this division may not be significant next year, Wong notes. Underpinned by a better outlook for the three main divisions, Wong expects the group’s FY2017 earnings to improve year on year.

A fund manager opines that Ho Hup, which has traded at more than RM1 this year, has the potential to rebound if the group successfully implements its construction contracts and property projects. “Since the lifting of its PN17 status, the group’s financing ability to execute projects has always been a concern. Its previous rights issue to raise funds may also be pressuring its share price,” he says.

Ho Hup made a cash call in January to raise up to RM136.2 million to finance its construction and property developments. It proposed a rights issue of up to 85.14 million shares on the basis of one rights share for every five existing shares held and a renounceable rights issue of up to 85.14 million redeemable preference shares in the same ratio.

However, a weak stock market put paid to Ho Hup’s plan. It has been granted a six-month extension until April next year by Bursa Malaysia to complete the issue.

“We have basically delayed the rights issue in anticipation of better market conditions next year,” says Wong.

Ho Hup’s share price has been on a downward trend in the past three years. It fell from RM1.53 in April this year to 74.5 sen last Thursday — its lowest level since May 2013. Year to date, the share price has lost nearly 30%.

According to fund managers, Ho Hup’s poor performance may be due to its fundraising activities.

As at Sept 30, the group’s debt stood at RM185.52 million while its cash balance amounted to RM44.95 million.

Earnings aside, Wong indicates that Ho Hup is exploring ways to reward its shareholders next year. The company had a share premium reserve of RM32.34 million as at Sept 30, which it may want to utilise in the next two years, he says. One way to use the sum is to make a bonus issue.