Trade Wise: Titijaya needs strong growth to justify cash call


  • Lim: There is still a lot of value which we can unlock from our land bank


-A +A
This article first appeared in The Edge Malaysia Weekly, on November 21-27, 2016.

 

IT is quite a challenge to keep abreast with the slew of corporate exercises that has been announced by Titijaya Land Bhd over the past six months. In total, the group may raise as much as RM1 billion from shareholders if all these proposals are fully subscribed and converted.

To put things in perspective, Titijaya’s existing market capitalisation is only RM709.9 million based on last Thursday’s closing price of RM1.76.

Titijaya has RM205.33 million in debt against RM80.95 million in cash. That translates into a relatively comfortable net gearing of only 0.23 times.

Hence, it begs the question: does the property developer really need to undertake such aggressive fundraising? The group’s funding needs could easily be fuelled by debt instead. On top of that, the structure of some of these exercises can be relatively complicated.

“Our intention to issue the convertibles — irredeemable convertible preference shares [ICPS] — in lieu of dividends, was to enable wider participation from our existing shareholder base and also to attract new shareholders,” deputy group managing director Lim Poh Yit tells The Edge.

“As opposed to a plain vanilla issuance, convertibles will benefit minorities by providing them an option to increase their exposure to Titijaya in a cost-effective way. At the same time, we will be able to realise future capital gains from the convertibles on the back of improved fundamentals,” explains Lim.

Back in July, Titijaya had finalised approval for a 10% private placement of 37.33 million new shares that would raise up to RM48.5 million. At press time, the private placement had yet to be completed.

Then in August, the company announced a massive three-for-two rights issue of up to 615 million ICPS. The ICPS issuance at 16.5 sen apiece could raise as much as RM101 million. If fully converted at RM1.485 for Titijaya share, the ICPS could raise an additional RM913 million.

Earlier this month, Titijaya announced a two-for-one share-split and bonus issue of 1.1 billion warrants. If fully exercised, the warrants could raise as much as RM276.2 million in the maximum scenario.

To be fair, the company has also been actively expanding its land bank.

On Sept 30, Titijaya finalised an RM115.6 million acquisition of 46.2 acres in Bukit Raja, Selangor. The land has an estimated gross development value (GDV) of RM2.4 billion and an estimated gross development cost of RM1.8 billion. This works out to an estimated profit of RM600 million.

However, the consideration for this acquisition is being settled entirely by an issuance of 79.7 million new shares at RM1.45 apiece. If anything, this should lower Titijaya’s gearing further.

Earlier this month, Titijaya also announced an RM80 million acquisition of a 6.06-acre piece of land in Seksyen 88, Kuala Lumpur. This acquisition will be settled in cash, but will only cost Titijaya RM56 million since the development will be a 70:30 joint venture with China Railway Engineering Corp (M) Sdn Bhd (CREC). CREC hogged the limelight late last year for partnering with Iskandar Waterfront Holdings Sdn Bhd, after taking a 60% stake in 1Malaysia Development Bhd’s Bandar Malaysia land.

Hence, the combined impact of both these exercises should only increase Titijaya’s net gearing marginally to 0.27 times. The 10% private placement alone would immediately reduce the net gearing to 0.19 times.

The subsequent ICPS issuance will easily add RM100.82 million (excluding costs) and reduce net gearing further to only 0.04 times. But if converted, the ICPS can prove to be highly dilutive for Titijaya’s earnings on a per-share basis.

This is because Titijaya is proposing to issue three ICPS for every two shares held. In effect, this will increase its equity base by almost 150% in the maximum scenario.

This comes on top of the 10% private placement and the issuance of new shares for the acquisition. Earnings and shareholding dilution could be massive.

Titijaya is currently valued at 9.13 times earnings, based on an earnings per share (EPS) of 19.13 sen and share capital of 357.24 million shares.

In the minimum scenario, the three exercises (ICPS, private placement and land acquisition-share swap) will increase the company’s share base to about 512 million shares. To maintain the same EPS, Titijaya would have to grow its net profit by 43% just to maintain EPS at 19.13 sen.

While Titijaya has five years to achieve this growth, or 7.5% per annum, this is technically standing still from an investor’s perspective. Keep in mind that the 9.13 times earnings multiplier also presumes additional growth.

Furthermore, this is only the minimum scenario. In the maximum scenario, the ICPS could expand the share base up to 1.26 billion shares. In this case, Titijaya would have to grow earnings by over 250% just to stay level in EPS, or 29% a year for five years. From an investor’s perspective, however, there would be zero EPS growth.

Titijaya is set to have a bigger war chest to expand its business, but the money would only trickle in when the ICPS are converted.

This may pose a challenge for Titijaya when it comes to planning growth. A sudden surge of conversion may leave the company cash rich but low earning per share. Conversely, if conversions are slow, it cannot plan for big acquisitions.

In simple terms, the ICPS make it very difficult for Titijaya to match its earnings with its growing shareholders’ funds.

A constant stream of new shares into the market would also exert downward pressure on the share price. Likewise, valuing Titijaya will also be challenging since the dilution effect will be subtle.

Bursa Malaysia adjusts share prices on ex-dates for share splits, dividend payments and warrant issuances. But for ICPS it might be more challenging.

This is because the ICPS can be converted in two ways. Firstly, 10 ICPS can be exchanged for one Titijaya share. Secondly, it can be exchanged one-for-one with a cash payment of RM1.485. Given the indicative issue price of 16.5 sen for one ICPS, that works out to a strike price of RM1.65 for shareholders, whichever method they choose.

The ICPS will be listed on Bursa Malaysia. Investors might choose to hold on to the preference shares for their intrinsic time-value.

But that is not the only result the ICPS is expected to produce.

Coupled with the share-split and warrants that Titijaya has proposed, the shareholding structure of the company becomes quite unpredictable. This is because the number of warrants issued depends on the company’s issued and paid-up share capital (excluding treasury shares) on the entitlement date.

Hence, shareholders who are willing to pump more money into the company to convert each ICPS by paying RM1.485 for one Titijaya share, will be entitled to more warrants. The ICPS would simply have to be converted before the warrant’s entitlement date.

In effect, the combination of ICPS, share split and warrants would provide shareholders with deep pockets to increase their shareholding in Titijaya. Especially, if minorities choose to utilise the first method to convert the ICPS.

It is interesting to note that the warrants were given an illustrative exercise price of 25 sen apiece or a 72% discount to the theoretical ex-price of Titijaya shares after the share split. It is not clear if the management intends to stick to such a steep discount in the final proposal.

Currently, the Lim family has a 64.22% stake in Titijaya through their vehicle, Titijaya Group Sdn Bhd. However, it will soon be diluted by private placement to third parties and the issuance of new shares for the acquisition of NPO Builders Sdn Bhd.

Looking ahead, Lim believes that the market is still under-pricing Titijaya.

“The market is discounting the company’s future growth potential — there is still a lot of value which we can unlock from our land bank,” he says.