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| Small-Cap Corner: TA: Decision time for warrant holders |
| Commentary | |||
| Written by Choong Khuat Hock | |||
| Monday, 08 June 2009 00:00 | |||
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The company is still controlled by Datin Alicia Tan Kuay Fong (MD and CEO) and her husband Datuk Tony Tiah Thee Kian, who is the executive chairman and major shareholder of TA. Although TA is no longer the largest stockbroker in Malaysia, it continues to be a formidable force in retail stockbroking with over 400 remisiers. In good years like FY2008 ended Jan 31, the stockbroking division posted an operating profit of RM156.5 million. This had declined to RM39.2 million in FY2009 but with the recent recovery in the Kuala Lumpur Composite Index and market volume, its stockbroking division could rake in an operating profit of RM100 million this year. The firm’s focus has now shifted to property and hotels. Property development was its largest contributor in FY2009, with an operating profit of RM165 million. Hotel operations chalked up RM15.7 million while property investment made RM15 million. With choice landbank like a 2.27-acre freehold parcel opposite KLCC and three acres at the junction of Jalan Imbi and Jalan Bukit Bintang (opposite Dorsett Regency Hotel), TA is well placed to develop these projects even in difficult times because of the good location of the properties and the company’s low entry price. For example, TA paid RM599.76 psf for the land opposite KLCC while Sunrise had forked out RM2,588 psf for the adjacent land where Wisma Angkasaraya is located. TA’s other notable parcels include 48 acres in Bandar Sri Damansara (after The Curve), 7.35 acres in Bukit Kiara and Dutamas, 3.16 acres in Ukay Heights, 2.74 acres in Cheras, 1.4 acres in U Thant and 0.7 acre in Ceylon Hill. In total, TA owns 69 acres of strategic landbank in the Golden Triangle of Kuala Lumpur and the Klang Valley, all of which are linked to the existing public transport network and infrastructure. It had acquired the landbank at attractive prices (see Table 1). The estimated revaluation gains shown in the table exclude those from TA’s Australian and Canadian properties. As many of TA’s existing projects, such as Damansara Idaman Phase 3, Idaman Villas and Idaman Residence, are at the tail end, there is likely to be a decline in its property development profits before the launch of new projects. Fortunately, lower property development profits will be offset by higher stockbroking earnings and steady income from its hotel and investment property divisions. In the longer term, TA hopes to cushion the volatility of its earnings by investing in businesses with recurring income like hotels and investment property. It owns choice hotels in Australia, including the award-winning Westin Melbourne — a 262-room five-star hotel located in the central business district of Melbourne — and the Radisson Plaza Hotel , a 363-room five-star hotel located in the central business district of Sydney. It will open the Aava Whistler Hotel (193 rooms) at the Whistler skiing resort in Canada ahead of the Winter Olympics. TA’s current investment properties consist of Menara TA One, a 35-storey office building opposite the KLCC in Kuala Lumpur, three blocks of 7-storey office buildings in Subang Business Centre, a 3-storey shop-office in Taipan Business Centre, Subang Jaya, and the Terasen Centre, a prestigious 24-storey AAA-grade commercial building in Vancouver’s core financial district. The purchase of Terasen Building was well timed as TA bought the building for only C$94 million (RM169 million) in 1995 when the exchange rate was around RM1.80:C$1. In 2008, TA received an unsolicited offer of C$178 million for Terasen Centre. With the Canadian dollar appreciating to RM3.10:C$1, the property is estimated to be worth RM542.5 million or RM373.5 million above cost. In an effort to crystallise value for shareholders, TA is looking to incorporate all its property landbank, investment and hotel properties in Malaysia, Australia and Canada into TA Global (TAG). Based on the proposed issue of 3.6 billion ordinary TAG shares and 1,215,363,632 irredeemable convertible preference shares (ICPS), upon conversion of all ICPS, TAG will have an enlarged share capital of 4,815,363,632, with a market capitalisation of RM2.4 billion, assuming a share price of 50 sen for each TAG share. The assets of TA to be acquired by TAG are expected to be valued at RM2.4 billion compared to the book value of RM1.2 billion for TA’s entire property portfolio. The revaluation exercise for the proposed listing of TAG is expected to boost TA’s revalued net asset value (RNAV) from RM2.1 billion at Jan 31, 2009, to RM3.3 billion, representing RM2.31 per share if TA warrants are not converted to shares. RNAV per share would be lower at RM1.99 if the existing 473.65 million warrants are converted to shares, thereby enlarging TA’s outstanding number of shares from 1,427.41 million to 1,901.06 million (see Table 2). Under the proposed terms, for every five TA shares, shareholders will be entitled to three TAG shares priced at 50 sen each and three ICPS at 50 sen each. Assuming that none of the 473.65 million warrants are converted, but the 30% bumiputera offer for sale and RM10 million pink forms for employees are taken up, TA will hold a 45.94% stake in TAG. Upon full conversion of its ICPS, TA’s stake will be diluted to 41.8%. If all the existing 473.65 million warrants are converted, TA’s stake in TAG will be lower at 38.04% and upon full conversion of its ICPS, its stake will be diluted to 29.99%. TA will have a minimum 30% stake in TAG, which could exceed 50% if none of its warrants are converted and the bumiputera offer is not fully taken up. The 1,215,363,632 ICPS which expire after five years can be converted to TAG shares on a one-for-one basis in the fourth and fifth years without additional cash payments. The ICPS is similar to a share but not earn dividends or enjoy voting rights before it is converted to shares. The last day of trading for the warrants is June 8, 2009, after which warrant holders will have until June 24, 2009, to decide whether they want to convert their warrants to shares at RM1 per warrant. If the share price appreciates above RM1 per share, warrant holders who convert will stand to gain from the conversion. The problem is, TA is trading just above RM1 per share and below its RNAV per share of RM1.99 assuming full warrant conversion and RM2.31 assuming no warrant conversion. TA’s discount to its RNAV per share could narrow if interest in property and property stocks increases as investors shift towards real assets to hedge against inflationary fears arising from printing money. Another way to value TA is to examine the residue value of TA after the listing of TAG. If we assume a value of 50 sen for each TAG share and 44 sen for each ICPS (assuming six sen of dividends foregone in three years), for every TA share, investors will get back 56.4 sen (0.6 TAG share worth 50 sen each and 0.6 ICPS worth 44 sen each). Subtracting 56.4 sen from TA’s share price of RM1.05 will yield a residue value of 48.6 sen for each TA share, which appears quite reasonable as TA’s NTA per share post-TAG listing is estimated at RM1.17 assuming no exercise of outstanding warrants or RM1.01 assuming exercise of all outstanding warrants. After the listing of TAG, TA will still own the stockbroking business and is expected to have a minimum stake of around 30% in TAG. There does not appear to be any consensus forecast for TA but if we assume higher stockbroking earnings and a non-recurrence of a RM55.8 million provision for doubtful debts and RM34.5 million provision for impairment losses on investments for FY2009, net profit for the current financial year could be higher at around RM120 million despite lower property development profits. This would translate to a PER of around 12 times for the current financial year, assuming no warrants are converted to shares. Profits could be higher if better market conditions warrant a write-back of some provisions made in the previous financial year. If the warrants are converted to shares, there would be some dilution in the earnings per share unless the proceeds are reinvested in earnings-accretive assets. On this front, TA’s track record in property investment has been relatively good and the current downturn has provided the group with good investment opportunities. In the unlikely event that all the warrants are converted to shares, TA will have a war chest of RM473 million. TA paid dividends of 4.5 sen per share for FY2009 and if the dividend payment can be maintained, investors could enjoy yields in excess of 4% from dividends paid by TA and TAG. Indeed, it is decision time for TA’s warrant holders. The important thing is whether investors believe the large discount to diluted RNAV per share of RM1.99 will narrow once TAG is listed and whether the group will continue to identify profitable hotel and property investments, which it has done so successfully in the past. Choong Khuat Hock is head of stock research and a partner at Kumpulan Sentiasa Cemerlang Sdn Bhd, a fund management company. KSC may own shares in some of the companies covered by the writer. This article appeared in The Edge Malaysia, Issue 758, June 8-14, 2009
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