MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048 IPO Thursday, 09 Feb 2012 FBM KLCI: 1,553.18 Sector: Property Sentoria Group Berhad Fair Value: RM 0.80 Competition Bites! Main Market Listing THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* Not rated TA Research Team Coverage +603-2072-1277 ext:1664 cwthiam@ta.com.my www.taonline.com.my Background Sentoria Group Berhad (Sentoria) is principally involved intwo complementary core business divisions, namely property development and leisure and hospitality. Its property development business division specialises in township developments and resort city developments, while the leisure and hospitality business division owns / leases, manages and operates the hotels / resorts and theme park facilities and attractions. IPO Statistic Sentoria's IPO entails a public issue of 60mn new ordinary shares, and an offer for sale of 40mn promoters' shares. Public issue: 20mn for public balloting; at 85sen/share; 10mn for eligible directors, employees and business associates of the group at the IPO price of 85sen/share; 30mn shares for private placement at a price of 87sen/share. Offer for sale: 40mn for MITI investors, priced at 87sen/share. Main Key Concerns 1. The sustainability of Bukit Gambang Resort City s (BGRC) attractiveness; 2. Established property developer in Pahang, but it is still relatively small in Malaysia in terms of property sales; and 3. Unclear near-term earnings visibility. Valuation We benchmark Sentoria to small-cap property stocks listed on the main market of Bursa Malaysia. We value Sentoria at 6.0x CY12 EPS and derive a fair value of RM0.80. We believe the discount of 0.4x multiple to average small cap PER is fair given 1) its smaller market capitalization of less than RM400mn; 2) rising competition in the theme park industry; and 3) unclear earnings visibility. Earnings Summary (RM mn) FYE Sep 30 2009 2010 2011* 2012F 2013F Revenue 91.4 123.2 172.4 209.1 242.7 Gross Profit 25.4 38.6 61.3 75.3 87.4 EBITDA 21.4 27.8 46.6 63.0 74.4 Interest cost (0.4) (2.1) (2.4) (2.1) (2.8) PBT 19.2 22.6 40.3 56.7 66.3 Tax (5.8) (3.3) 5.6 (5.7) (6.6) Minority interests (0.0) (0.0) (0.0) (0.0) (0.1) Net Profit 13.3 19.3 45.8 51.0 59.6 EPS# (sen) 3.3 4.8 11.5 12.8 14.9 PER (X)@ IPO price 25.5 17.7 7.4 6.7 5.7 DPS (sen) - - - 2.6 3.0 Dividend Yield (%) - - - 3.0 3.5 Source: TA Securities Share Information Listing Main Market Enlarged Share Capital (mn) 400.00 Market Cap @ RM0.85 (RM mn) 340.00 Par Value (RM) 0.20 Issue price (RM) 0.85 Oversubscription rate N/A Estimated free float (%) 25 Tentative listing date Tentative Listing Dates Event Opening of the IPO Closing of the IPO Balloting of Applications Allotment of Shares Listing Ratio & Analysis Tentative Date 14-Feb-12 15-Feb-12 NTA per share (post IPO) (sen) 39.0 Price to NTA (x) 2.2 Proforma ROE (%) 28.7 Proforma ROA (%) 28.3 Proforma Gearing (x) 23-Feb-12 31-Jan-12 10-Feb-12 23-Feb-12 Net cash Utilisation of Proceeds RM(mn) % Repayment of bank borrowing 11.2 21.7 Purchase of property, plant and equipment 9.0 17.4 Working capital 27.7 53.7 Estimated listing expenses 3.7 7.2 TOTAL 51.6 100.0 Page 1 of 10
Background Established in 1998, Sentoria is principally involved in two complementary core businesses, namely property development and leisure and hospitality. Its property development business division specialises in township development and resort city development, while the leisure and hospitality business division owns / leases, manages and operates the hotels / resorts and theme park facilities and attractions(see Appendix A). Figure 1: Corporate Structure IPO Statistic Sentoria s IPO entails a public issue of 60mn new ordinary shares, and an offer for sale of 40mn promoters' shares see Figure 2. Of the 60mn shares under public issue: 1) 20mn are allocated for public balloting; 2) 10mn for eligible directors, employees and business associates of the group at the IPO price of 85sen/share, and; 3) the balance of 30mn shares will be allocated for private placement at a price of 87sen/share. The 40mn promoters' shares will be allocated for bumiputera investors approved by the Ministry of International Trade and Industry, and priced at 87sen/share. Figure 2: IPO Structure Utilisation of proceeds The estimated gross proceeds of RM51.6mn raised are expected to be utilized for 1) working capital; 2) repayment of bank borrowing; 3) purchase of property, plant and equipment. Page 2 of 10
Table 1: Utilisation of proceeds Description Estimated timeframe for utilisation upon Proposed Listing Amount (RM'000) % of Total Gross Proceeds Repayment of bank Within 6 months 11,200 21.7 borrowing Purchase of property, plant Within 12 months 9,000 17.4 and equipment Working capital Within 12 months 27,700 53.7 Estimated listing expenses Immediate 3,700 7.2 Total proceeds 51,600 100 Main Key Concerns 1) The sustainability of BGRC s attractiveness According to the independent market research, the size of theme park industry in Malaysia is estimated at RM300-350mn revenue/year with approximately 7.4mn visitors (2010). With 521k visitors in Bukit Gambang Water Park (BGWP) in FY10, BGWP is the 3 rd most popular theme park in Malaysia, with approximately 7.0% market share of the domestic theme park industry, after Resorts World Genting (53.8%) and Sunway Lagoon (11.3%). Not really a tourist hot spot.bgrc is located in Gambang, Pahang, which is within the East Coast Economic Region (ECER). It is one of the largest integrated resort cities catering for the residents from East Coast of Peninsular Malaysia, as 70% of its visitors are local residents from that region. However, we are less bullish on these due to 1) local residents will hardly pay a second visit to the theme park within a year unless there are substantial new attractions added to the theme park. As such, the growth prospect of visitor arrivals could be limited; and 2) unlike Pulau Langkawi and Port Dickson, Gambang is not a tourist hotspot and as such it will be less appealing for foreigners who usually have higher spending power. Not really a recognisable and in-demand brand. Table 2 shows the top 10 largest amusement parks in the Asia-Pacific region by annual attendance. Note that 3 out of the top 10 amusement parks carry Disney brand name. This suggests local residents and tourists will opt for branded amusement park in choosing destinations for holidays. Furthermore, the top 3 largest amusement park corporation by annual attendance are those theme park operators that own a recognisable and in-demand brand see Table 3. Although Sentoria is now engaging in aggressive marketing campaigns to create brand awareness via TV, Radio and newspaper advertisement, we do not think these marketing activities could enhance the brand name in a short period of time. Table 2: Amusement parks in Asia-Pacific by annual attendance ( 000) Rank Amusement park Location 2008 2009 2010 1 Tokyo Disneyland Tokyo, Japan 14,293 13,646 14,452 2 Tokyo DisneySea Tokyo, Japan 12,496 12,004 12,663 3 Universal Studios Japan Osaka, Japan 8,300 8,000 8,160 4 Everland Yongin, Gyeonggi-Do, South Korea 6,800 6,169 6,884 5 Lotte World Seoul, South Korea 4,236 4,261 5,551 6 Hong Kong Disneyland Hong Kong, China 4,500 4,600 5,200 7 Ocean Park Hong Kong Hong Kong, China 5,030 4,800 5,100 8 Nagashima Spa Land Kuwana, Japan 3,734 4,700 4,465 9 Yokohama Hakkeijima Sea Paradise Yokohama, Japan 4,555 4,500 4,023 10 Happy Valley Shenzhen, China 3,180 2,800 3,050 Source: Themed Entertainment Association Page 3 of 10
Table 3: Top 3 largest amusement park corporation ( 000) Rank Amusement park corporations Country 2010 Major theme parks 1 Walt Disney Parks and Resorts United States 120,600 Disneyland 2 Merlin Entertainments Group United Kingdom 41,000 Alton Tower UK, Gardaland Italy, Legoland Parks 3 Universal Studios Recreation Group United States 26,300 Universal Studios Source: Themed Entertainment Association Rising competition in the amusement park industry. Currently, there are 11 active theme parks in Malaysia. With Legoland Malaysia scheduled to open by end-2012, the competition in the amusement park industry is getting stiffer. Legoland Malaysia, the world s sixth Legoland and Asia s first, aims to attract more than 1mn visitors for the first twelve months of operation. Table 4compares some of the key features of BGRC and Legoland. The expensive ticket price of Legoland could deter local residents, the close proximity to Singapore and airports should be a draw factor for tourists from overseas. In addition, Legoland could become a must visit destination for tourists as well as local residents, given its unique theme park offering. Table 4: Comparisons Bukit Gambang Water Park Legoland Iskandar Total land size (acres) 45.8 76 1- Day Ticket price (Adult, RM) 21.9 140 Owner Sentoria Group Bhd Merlin Entertainments Group Travel time from KL (hour) 2.5 3.0 Travel time from Singapore CBD (hour) 5.7 0.75 Travel time from closest airport (minutes) 27 20 Source: Company websites 2) Established property developer in Pahang, but it is still relatively small in Malaysia in terms of property sales. Affordable housing will remain as an important part of the group s property development business as the group believe affordable housing is less susceptible to those cooling measured introduced by the policy makers.in addition, as the government aims to create home ownership among first-time buyers, we believe demand for affordable homes will remain resilient. As such, we are positive on the group s involvement in the affordable housing segment. As one of the established developer in Kuantan, the group s property sales display resilience even during recent downturn. In the past 3 financial years, the property division has been consistently generated more than RM80m revenue/year to the group. Going forward, we expect its affordable housing (township development) to generatestableearnings to the group. According to NAPIC, Pahang launched 3,546 units of new residential units in 2010. In terms of property sales, a total of 2,080 units of newly launched residential units in Pahang were sold in 2010. Sentoria s new launches and new unit sold of 907 units and 504 units, translating to a market share of 25.6% and 24.2% respectively. While we reckon that Sentoria is an established developer in Pahang, its property development operation is relatively small if we were to compare it with the Malaysian residential property market. Based on total 47,698 new launches and 21,799 new unit sold in Malaysia during 2010, Sentoria only captures market share of 1.9% and 2.3% respectively. Page 4 of 10
3) Unclear earnings visibility The management expects the leisure and hospitality division to have an equal contribution with property development division by 2020 when the entire 537 acres of land is fully developed. Premised on: 1) 500k visitors per theme park; and 2) average spending per visitor of RM100 (vs. RM32/visitor currently), the four theme parks are expected to generate recurring income of RM200mn by 2020. However, we are less convinced by the management s projection due to 1) the ability to sustain 500k visitors per theme parks; and 2) the ability to increase entrance fees and F&B charges for the theme parks. Financial Highlight The property development division contributed more than RM80mn revenueover the past 3 financial years. In FY10, the group achieved a YoY net profit growth of 44.2% on the back of 34.8% surged in revenue, due mainly to the first full-year contribution from the leisure and hospitality division. For FY10, property development and leisure and hospitality divisions contributed 69.1% and 30.9% respectively to the group s total revenue. Figure 3: Revenue breakdown by segment Sentoria s 10MFY11 net profit of RM38.2mn has surpassed its previous financial year net profit of RM19.3mn. The net profit waspartly boosted by its low effective tax rate.going forward, we expect the property development division to serve as a major earnings contributor, generatingthe bread and butter sales to the group. Earnings Forecast We expect earnings to grow 10-18% for FY12-13. Our earnings projections are premised upon the following assumptions: New property sales of RM155mn for FY12 and RM130mn for FY13; Number of visitors to theme park increased by 1.5k per year for FY12 and FY13; average revenue per visitor to increase 10% YoY for FY12 and FY13; Earning contributions from Arabian Bay resorts and Night Safari are expected to begin in 3QFY12 and 2QFY13; Resorts operation: 5% YoY growth in average room rate; occupancy rates:31-32% for FY12 and FY13. Page 5 of 10
Valuation There are no direct listed local competitors that are comparable to Sentoria. However, for valuation purposes, we benchmark Sentoria to small-cap property stocks listed on the main market of Bursa Malaysia. At IPO price of RM0.85, Sentoria is trading at 6.4x CY12 PER, which is at par with its peers see Table 5. We value Sentoria at 6.0x CY12 EPS and derive a fair value of RM0.80.We believe the discount of 0.4x multiple to average small cap PER is fair given 1) its smaller market capitalization of less than RM400mn; 2) rising competition in theme park industry; and 3) unclear earnings visibility. Table 5: Peer comparison Price (RM) Market Cap (RM mn) PER (x) Dividend yield (%) CY11 CY12 FY11 FY12 YNH* 1.87 766.1 12.0 7.5 3.7 4.6 KSL 1.59 621.0 6.2 5.4 3.1 3.1 Plenitude* 2.10 567.0 5.8 6.0 4.0 4.5 Glomac 0.85 514.6 6.8 5.3 5.4 5.9 UMLand* 1.56 471.2 10.1 7.6 4.3 4.8 Crescendo 1.66 304.1 4.6 4.3 6.6 8.4 Hunza* 1.55 301.4 5.8 9.1 5.8 5.2 Bolton* 0.92 283.6 18.0 8.4 2.0 2.4 Hua Yang 1.56 224.6 4.6 3.7 3.6 4.4 Ivory* 1.05 195.3 4.0 6.6 7.4 4.8 Average 7.8 6.4 4.6 4.8 Sentoria 0.85 340.0 7.2 6.4-3.0 * Based on CY12 concensus estimates Source: Bloomberg, TA Securities Earnings Summary (RM mn) FYE Sep 30 2009 2010 2011* 2012F 2013F Revenue 91.4 123.2 172.4 209.1 242.7 Gross Profit 25.4 38.6 61.3 75.3 87.4 EBITDA 21.4 27.8 46.6 63.0 74.4 Interest cost (0.4) (2.1) (2.4) (2.1) (2.8) PBT 19.2 22.6 40.3 56.7 66.3 Tax (5.8) (3.3) 5.6 (5.7) (6.6) Minority interests (0.0) (0.0) (0.0) (0.0) (0.1) Net Profit 13.3 19.3 45.8 51.0 59.6 EPS# (sen) 3.3 4.8 11.5 12.8 14.9 PER (X)@ IPO price 25.5 17.7 7.4 6.7 5.7 DPS (sen) - - - 2.6 3.0 Dividend Yield (%) - - - 3.0 3.5 Sales Growth (%) 7.7 34.8 39.9 21.3 16.1 EPS Growth (%) (6.0) 44.2 137.9 11.3 16.9 EBITDA Margin (%) 23.4 22.5 27.1 30.1 30.7 PBT Margin (%) 21.0 18.3 23.4 27.1 27.3 Net Margin (%) 14.6 15.6 26.6 24.4 24.6 Tax Rate (%) 30.1 14.6 (13.8) 10.0 10.0 * Annualised # Based on enlarged share capital of 400mn shares Source: TA Securities Page 6 of 10
Appendix A: Business Overview Leisure & Hospitality Sentoria is the developer and operator of Bukit Gambang Resort City (BGRC) in Kuantan, Pahang. Built on 547 acres of land, BGRC is one of the largest integrated resort cities with theme park, MICE (Meetings, incentives, conferences and exhibitions) facilities and accommodation in Malaysia. BGRC is located 35km from Kuantan town and 218km from Kuala Lumpur and is easily accessible from the East Coast Expressway see Figure 5. Figure 4: Aerial View of BGRC Figure 5: Route to BGRC Attractions in BGRC: i) Bukit Gambang Water Park (BGWP): Opened in mid 2009, the 45.8-acre BGWP is one of the most popular theme parks in Malaysia, attracting more than 520k visitors per year since 2010. Within 2 years of opening, BGWP is the 3 rd most popular theme park in Malaysia ranked by visitor arrivals. ii) Active Academy: Served as a complementary attraction to BGWP, active academy offers a wide range of outdoor teambuilding activities for corporate and families. All the activities are conducted by certified facilitators. iii) MICE facilities: It has ample MICE facilities to accommodate multiple functions simultaneously. The facilities have accommodated more than 500 groups thus far, the largest being 16 different groups totaling 2,400 pax in one day. Page 7 of 10
iv) Accommodation rooms: 998-room carribean Bay Resort is able to house more than 2k pax, supporting the theme park play-and-stay proposition. The group is continuously invest in BGRC s attractions, MICE facilities and accommodation to attract more visitors, increase length of stay and enhance revenue per visitors. Currently, the leisure and hospitality segment contribute about 30.9% of the group total revenue. The group expect contribution from this segment to have an equal contribution with property development division by 2020, when the entire 537acres of land is fully developed. Figure 6 and 7 shows the master plan and pipeline developments in BGRC. Figure 6: BGRC Master Plan Source: BGRC website, TA Securities Figure 7: Pipeline developments in BGRC Property Development Since inception, the group has completed and delivered RM419.2mn worth of affordable residences mainly in Kuantan see Figure 8. The group has a proven track record of delivering its properties ahead of schedule, whereby 90% of the properties completed ahead of schedule and 59% delivered 6 months ahead of schedule. Page 8 of 10
Figure 8: Completed Projects Current and future development Currently, Sentoria has 4 on-going projects with an estimated GDV of RM212.4mn see Figure 9. It has also lined up RM541.7mn worth of new launches within and outside BGRC, as well as its first foray in Selangor (SalakTinggi) see Figure 10. Beyond 2015, the group still has RM938mn worth of projects to elevate the group to the next level see Figure 11. Figure 9: On-going projects Page 9 of 10
Figure 10: Upcoming Projects Figure 11: Future Projects Figure 12: 10-year key milestones Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. forta SECURITIES HOLDINGS BERHAD(14948-M) (A Participating Organisation of BursaMalaysia Securities Berhad) KaladherGovindan Head of Research Page 10 of 10