SIGN - Selling Fast. Last Call?

Latest Market Development

SIGN has been under heavy selling by its ex-substantial shareholder, HSC Healthcare SB (HSC), especially throughout April. However, I view this a test to see the true strength of the share and market interest and the result is that SIGN's share price is still resilient with slight upward-bias throughout the month. HSC has on 14 APR cased to be a substantial shareholder after selling 3.5m shares on the same day. I believe the trend will go on where HSC will continue to sell the remaining 4m + share in the coming week riding on the high buying interest as witnessed from the resilient share price and high volume. It is high possible that HSC may eventually sell all the remaining shares before end of next week. After that, supply of SIGN share will become limited and this could possibly start driving the share price if the demand is sustainable.

Hence, I reiterate my Buy rating on SIGN based on 1) current cheap forward valuation at 6.3x FY16's EPS based on optimistic earning growth projection 2) expected end of HSC's selling 3) CIMB Investment Bank's recent regional promotion on Small Cap Counters


Diminishing Market Supply

Chart from ChartNexus software

 Share price is still resilient even though heavy selling by substantial shareholders.

HSC may finally dispose all their shareholding soon. 

HSC's disposal has been the major supply of share in the market for the past 1 week. Yet share price still surged at 2.7% indicating strong market demand. If this trend persist, supply from HSC should be ended by next week. 

Rising Demand due to

Cheap forward valuation and strong growth ahead 

As per my previous recommendation

CIMB IB's Promotion of Small Cap Counter

In a Strategy Flash Note publised on 13 Apr 2015, Nigel Foo, analyst of CIMB IB mentioned that they have been marketing smallcap stocks in Singapore, HK and KL since early of Apr. They have met 74 fund managers (FM) from 32 institutions. The note mentioned that interest in smallcaps was strong in Singapore and KL. As SIGN is one of their highlights at the promotional activities, together with other stocks like OWG, IFCAMSC and others, I believe this effort have created awareness and possibly interest among FMs, though how it has generated the actual buying is not known.   

Valuation

My TP remain at RM3.70 based on 10x FY16 EPS, which have not include SIGN's investment properties and their factory in Kota Damansara. CIMB IB has estimated the KD land alone is worth RM95m (RM0.79/share) based on RM300psf. Besides the KD factory, Together with their investment properties with Book Value of RM31m (as per 2014 Annual Report), this could increase SIGN's total value by RM1.05 per share. 

Risk

HSC's disposal is based on pessimistic outlook or possessing of insider knowledge 

However, HSC is only a shareholder but not involved in the day to day operation. Thus possibility of possession of insider knowledge is not high. The exit looks more like a earlier-planned action as Dr Lim Yin Chow, an ex-Non-Independent Non-Executive Director of SIGN who also has shareholding in HSC has resigned on 10 Jan 2014, much earlier than HSC's disposal. In conclusion, that is no material evidence supporting this risk, this make it a mere speculative concern. 

Other Business Operation Risk 

As per my previous post

Landmark Bhd - An Unhunted "Treasure" (TP RM2.74)

1.0 Investment Summary

Landmark Bhd (Landmark), the master developer of Treasure Bay Bintan(TBB), may see its share price enjoy better valuation soon with the opening of Phase 1 in Q2 this year. TBB is an ambitious RM11.6-billion waterfront resort city development project in Bintan, Indonesia that could potentially become the next island-and-beach tourism hotspot in SEA, just like Phuket and Bali. The coming opening and any news on new partnerships or SPAs signed may catalyze the stock price re-valuation. I am giving a Buy rating on Landmark with SOP Target Price at RM2.74(97% upside potential)  based on positive long-term outlooks of TBB as below:

TBB's Master Plan
Source: Company

Strategic proximity to Singapore - next to Bintan Bandar Telani Ferry Terminal, it is just 45-min ferry ride away from Singapore. This geographic advantage make TBB a convenient destination to Singapore's 15 million annual visitors, 5.4m population as well as 54m air passengers. Bintan is also set to attract more international visitors with the opening of new Bintan International Airport in 2016, which is 25-min drive away from TBB. Besides that, there have been increasing Indonesia-Singapore cooperation on the promotion and development of Bintan, which make Bintan a special economic zones (SEZ) that receives investor-friendly policies that help attracting FDI.

Source: williamfives.com

Emerging tourism hotspot with ambitious development  - Bintan share various tourism attractions, like clean-white-sand beaches with clear ocean water, tropicana weather and forests as well as its unique architecture and cultural value, with peers such as Langkawi Island, Phuket and Bali. Bintan is currently at the early-stage of various long-term and large-scale master-planned development, most notably are the 1300-hectares Lagoi Bay development by Gallant Venture Ltd of Singapore as well as TBB by Landmark. Compared to its peers, which are in more mature stage, BI offer investors an earlier opportunity to invest in this emerging development. 

Many developments are happening in Bintan Island

Bintan Resorts attracted almost half a million tourists in 2012. With more hotels rooms available, it should grow at a faster rate moving forward.

Source: Lagoi Bay Investment Guide

Fast-growing Tourism Industry in Indonesia -  Based on World Travel and Tourism Concil (WTCC), Indonesia's Tourism GDP is expected to grow by 5.3% pa from 2014's IDR325 trillion to IRD581 tn by 2025. Besides that, they forecast international tourist arrival to Indonesia and their expenditure to grow by 5.5% pa in the next 10 years. This growth will attract international investors interest to  invest in the industry and hence, Bintan should be one of the beneficial of this trend. WTCC also sees the industry's capital investment to grow at 7.1% pa over the next 10 years. With this positive investment trend, TBB have great opportunity to attract more investment to their development project through various methods such as land sales, partnership with hotel operators and build-and-sales properties.

Source: WTTC

The Buy Rating is also supported by:

TBB is entering fast-growth phase - TBB has finished the long gestation stage as a greenfield site previously and now is ready to enter the next phase of development. Started in 2006 with the land acquisition, TBB has been in gestation stage since then with few master plan revision and delay in development especially due to Global Financial Crisis in 2008. However, I believe TBB is entering a fast-growth phase soon with the opening of Phase 1 in Q2 2015. 

Source: http://thedevelopmentadvisor.com/

In 2014, Canyon Ranch, the world's leading wellness brand, announced it will develope Canyon Ranch Bintan(CYB) in TBB. The management mentioned that they are currently in talk with several interested parties for potential partnership or investment. Any new investment announcement is going to give more certainties on the prospect of TBB and support land valuation appreciation. That will eventually translate to Landmark's share price appreciation. 

Large discount to RNAV provide massive revaluation potential - Using 11 Apr 2015's closing price of RM1.37, Landmark is currently trading at 73% discount to my RNAV (RM5.15) or 64% discount to its Book Value(BV) of RM3.68. Landmark has been trading at steep discount to its BV in at least the past 5 years, which is not unreasonable as TBB was still a greenfield project in the past where investment risk and uncertainties were still high. However, with the opening of Phase 1 in this quarter, TBB's prospect will become more visible. Any announcement on new partnership, investment or S&P signed will catalyze the stock revaluation. One of the possible example is that following the announcement of CYB development in Jun 2014, Landmark share price surge over 40% in the following month, Aug. Though the share price has since retreated and the surge may just a market speculation, any more positive announcements in the future may sparks more long-term investors' interest.

Based on a Sector Update on Property Developers by Kenanga Research on Apr 2015, the sector is currently trading at an Overall Sector Average Discount of 50% to Kenanga's FD RNAV. The huge discount on the sector is based on pessimistic outlook on Malaysia's property market. However, Landmark beg to differ the sector average and should be trading at a lower discount because it's a very unique investment opportunity. Landmark is perhaps the only stock that provide direct opportunity to invest in such a large scale resort city project in Indonesia, compared to the many property developers in Malaysia competing in the same landscape. The next closer alternative is Gallant Venture Ltd(GV), the master-developer of Lagoi Bay Bintan, in Singapore. However, GV is in diversified business, Landmrk is a more straight-forward investment as Landmark other business (besides TBB) provide about 10% of its RNAV. Hence, my 40% discount to RNAV is reasonable.

Gaming license a possible future wildcard - Last but not least, Landmark, a 30%-Genting Bhd owned company, could potentially opened the first casino in TBB. In 2008, Landmark has received consent from Indonesia authority to operate gaming business in TBB. However, there are no much development after that and starting a gaming business in a country that do not have casino before can be challenging from politic and social point-of-view. Hence, it is safer not to incorporate this development into the valuation, but it can be a wildcard in the future.

2.0 Business Background

Landmark listed in Bursa Malaysia (known as KLSE that time) in 1990, is in the business of hospitality and property development. Prior to 2006, the company was involved in development of (1)3 hotels in Labuan and Langkawi (2) Bandar Baru Wangsa Maju township (through equity interest in MSL Properties SB, a subsidiary of IJM Corp) and (3) the new township of Cyberjaya (through a JV with Setia Haruman SB). The company also previously on Sungai Wang Plaza as their investment. Since 2006, the Group re-positioned itself to focus on the TBB project. The new focus make Landmark to dispose most non-core businesses. 

Currently, Landmark have businesses in these 3 areas:

1) TBB
2) The Andaman, a 170-room luxury hotel in Langkawi
3) The development of Bandar Baru Wangsa Maju through 20% + 1 equity interest in MSL

The Andaman has undergone some major refurbishment in 2013, which caused significant drop in revenue and loss-making in FY2013. After that, the strategy start to bear fruits with its revenue raise to its 5-years-high due to better room-selling-price and occupancy rate.

Shareholding structure

Genting  Bhd has on 2008 acquired 30% share in Landmark Bhd at share price of around RM2.00 per share (44% above current price) and has since become the largest shareholder of the company.

3.0 TBB

The latest known project GDV is at RM11.27 bil based on a news by TheEdge in 2014.

TBB Information:
- 45 min ferry ride from Singapore
- 75 mins car ride from Kijang Airport. 25mins away from new Bintan International Airport to be opened in end 2016
- To be fully developed in 20 years

Phase 1:
- 90 hectare with DGV of RM2.1bil
- Featuring Cystal Lagoon, 6.3-ha man-made lagoon with trademarked technology of Crystal Lagoon, which help made crystal clear inland lagoon (more info: http://www.urban-beaches.com)
- A center attraction for leisure, water activities and with surrounding F&B and retail outlets
- 1,700 room keys 
- 8 hotels and a wellness resort by Canyon Ranch

Phase 2: (ecpected to be launched in the next 3 years
- Launching and selling of Ring Resorts, Waterfront villas, Marina Private Residences
- Private Mangrove Park
- Commercial areas
- Second wellness resort by Chiva-Som

Phase 3:
- Town centre, Hospital, Education Campus, Retail, Residences

Current site condition
Source: Project Facebook Site

Various hotel/resorts in Bintan
Source: Bintan Resorts

 

Number of room keys are booming in the coming years and may reach 8890 room keys by 2018. 

With Lagoi Bay expected to have 5000 room keys before 2020 and 1700 room keys in TBB Phase 1, hotel rooms is expected to experience oversupply condition in the early stage. 

Possible source of return - TBB may generate return via the following means:

- Sales of hotel/resort development lands to hospitality investor or operator. This will generate immediate large amount of return.

- Lease of land for hotel/resort development; to generate recurring income

- Operate retail, F&B outlets and leisure activities

- Develop and own hotel to be operated by reputable hotel operators

- Build and operate hotel

- Build-to-sales villas, residential and commercial units

The choice of operandi modius will affect Landmark future income structure.

4.0 Finance

Landmark's Asset largely dominated by TBB's land which, together with Property Development Costs, were about RM2.0 bil. Net Cash dropped from RM146mil 2 years ago to current net debt of RM6mil. Net Gearing is nil..

Though the hospitality (The Andaman) and Property development business are profitable, Landmark has been loss making in the past due to high operating cost in developing the TBB land.


5.0 Risks

Unable to secure new partnership or receive new investment in the medium term or retreat of agreed investment - this will create doubt on the prospect of TBB. However, involvement Canyon Ranch and Chiva-Som give an early indication of TBB's ability to attract investment.

Drop in investment to Indonesia and the tourism industry - any negative change in future growth outlook may affect foreign investment. Rising cost of capital due to Fed rate hike and strengthening of USD against IRD will also discourage investment. However, this can partially offset by the easing monetary condition in Europe, Japan and possibly China. 

Oversupply of hotel rooms delay future new investment or Phase 2 - large amount of hotel rooms are going to be developed in the next 2-3 years on expectation of rapid-rising of visitors. If growth in visitors amount unable to match with growth in hotel room supply, overcapacity will pressure occupancy rate and selling price and  may eventually slow down new investment. However, hotel investor normally have long-term investment period and is expecting to make investment decision based on their confidence on the longer-term outlook.

Unfavorable global economy condition - the TBB project was previously delayed due to 2008 Global Financial Crisis. If global recession occur again before any significant development taken place, it will seriously affect investment.  



6.0 Valuation

40% discount to RNAV is given since TBB is at its early stage of development. The current market discount is at 73%, which is very low as I expect more positive news flow coming in the next 12 months, especially after opening of Phase 1 in Q2 2014. 

Based on Kenanga's report on Property Sector, the sector's stocks is currently trading at overall average discount of 50% of their FD RNAV. Landmark beg to differ as it's in resort city development project in Indonesia compared to the listed property developers that are mostly involved residential and commercial projects in a competitive environment. 

To incorporate the possibility that no new development (status quo) or partnership announcement in the next 12 months, I further adjust my TP based on Probability-weighted on these 2 possible scenarios. 

In conclusion, I give Landmark a Buy rating with TP of RM2.74, which provide 97% upside potential.


7.0 Summary

i) Buy rating on Landmrk with TP at RM2.74 based on 40% discount to RNAV and 15% probability of no new development 

ii) Positive long-term outlook on TBB due to its proximity to Singapore, growth in no. of 
visitors and tourism industry as well as rising investment in Indonesia Tourism

iii) Expecting revaluation for Landmark share price catalyzed by opening of TBB's Phase 1 and potential announcement of new partnership

iii) Despite current depressed valuation in Malaysia property sector stocks, Landmark offer unique investment opportunity to large-scale long-term resort city development in Indonesia. Hence, a niche. 

iv) The risk are a) no major development in the next 12 months or retreat of agreed development b) drop in investment in Tourism industry c) oversupply of hotel rooms d) unfavorable global economic condition

8.0 Technical Analysis

Landmrk is in long, medium and short term uptrend based on MA. Price Momemtum is bullish with RSI and Stochastic above 50% in the past 3 months with gradually rising average Volume. Immedite Resistance has turned to Support at RM1.38. The next 2 resistance is at RM1.55 and RM1.66. 

Chart from ChartNexus Software

9.0 References
1. http://whytoocare-y2k.blogspot.com/2015/03/1643-landmrk.html
2. http://thedevelopmentadvisor.com/
3. bintan-resorts.com
4. https://www.facebook.com/pages/Treasure-Bay-Bintan/250417141813719?ref=br_rs
5. http://gallantventure.listedcompany.com/misc/dbs_galv060411.pdf10.0 Appendix 

TP Sensitivity Analysis

Signature International Bhd (SIGN) - At the sweet spot of booming housing completion

1.0 Investment Summary

Signature International Bhd, a branded distributor, manufacturer and retailer of modular kitchen system under the brand name of Signature Kitchen, is at the sweet spot of booming number of service apartment/condominium (SA/Condo) completion in 2015-2017.

Housing starts for SA/Condo in Malaysia has plateuaed in year 2013-2014 while completion data is still below half-of-2008's peak. As historically, completion lagged starts 3 years, number of SA/Condo completion is set to boom beginning from year 2015 and is projected to overtake 2008's peak in 2016-2017. While this is a bad news for the property market, SIGN will be the clear winner from this development as 70% of SIGN's FY2014 sales is derived from Project Sales, where SIGN partners with Property Developers to provide kitchen systems to SA/Condo projects-near-completion.

I give a Buy rating on SIGN with TP of RM3.70 (64% upside) based on 10x FY16 earning, which is generally in line with forward PE given to furniture/particleboard and FBMSmallCap stocks. The Buy rating is based on:

i. SIGN's PAT is projected to double in FY15 and grow at 2-Years-CAGR of 24% for FY16-17 as a) strong sales growth in FY15-17 (CAGR 22%) riding on the booming number of SA/Condo-to-be-completed b) margin improvement from greater economic of scale (Q2FY15 EBIT Margin at 24.7% vs FY14 at 15.6%)

Source: NAPIC

ii. Average trading volume recently surged to 5 years high. SIGN's stock used to have low liquidity.. The improved market interest will provides better trading liquidity and will support better valuation.

Source: Yahoo Finance

iii. SIGN's stock is still undervalued. Though gaining 190% in 2 years time, with TTM PAT have grown 785% for the same period, valuation is still at 3-years-low at trailing TTM PE of 8.4x and FY16 PE of 6.1x. The current valuation is unreasonable given FY15 will be a record-breaking year for SIGN for its sales, profit and margin. SIGN is an undervalued growth stock.

Source: Yahoo Finance, Company

2.0 Business Description

The brand name of Signature Kitchen under SIGN is the largest and, in my view, most-well-known kitchen system provider in Malaysia. With over 20 retail showrooms in Malaysia as well as various marketing and branding activities, SIGN has built-up its name toward Malaysians. SIGN is also in the affordable kitchen market under brand "Kubiq" launched in 2009. Pricing of Kitchen set for Signature Kitchen starts from RM20,000 while Kubiq's starts from around RM5,000.

As in FY14, 70% of SIGN's sales derived from Project Sales where SIGN secures projects from developers to provide kitchen to SA/Condo units as part of the developers' promotional strategy to attract buyers. While there are others premium kitchen brands available in the market, the brand Signature Kitchen has a competitive edge over other competitors due to better branding and popularity. In the past, Project sales have been cyclical following housing market cycle. This is explainable as SIGN only come in to provide kitchen for a project near its completion stage. Hence, SIGN's project sales generally correlate with SA/Condo's completion volume as SIGN provide kitchen to SA/Condo projects.

The remaining 30% of sales contributed from retail business generated via its retail outlets. SIGN's key strength is its branding. As it adopt pull-marketing strategy, retail customers are generally walk-in customers. Hence, headcount in retail outlets can be minimized since sales activities are minimal for retail segment. This also provides better operational efficiency. Unlike project sales, retail sales are non-cyclical and have been stable at the range of RM40m-50m annually even during Global Financial Crisis in 2008-2009.

Over 95% of SIGN sales are from local market. Besides providing kitchen system, SIGN also provide kitchen white goods (appliances) to its customer under third-party brands as well as interior design services. These are mostly value-add service. Kitchen business is still the core income generator.

Based on Initiation report done by CIMB Research in Oct 2013, 75% of SIGN's production cost comes from raw materials, while the rest are subcontractor fees (14%) and kitchen white goods (11%). The major raw materials used are wood-based like chipboard and medium-density fibreboards (MDF), comprises of 40% of raw material cost. At the same report, also mentioned is that SIGN is able to adjust its production capacity quickly as most of the high-volume raw-materials (like MDF) are outsourced. Only the low-volume-high-value-added products are handled by own factory. SIGN is using sub-contractors for the kitchen installation.

2.1 SWOT Analysis

3.0 Financial

4.0 Projection & Valuation

5.0 Risks

Project delay 
SIGN come into a property development project at its final stage. Any delay in project completion will defer SIGN's sales.

Material cost hike
As time from securing projects to work start for project sales can be long, any increase of material cost during this period may not be transferable to the customers.