PJ Dev ready to go big into property
The Edge Malaysia, Monday, August 20, 2007
Siow Chen Ming

Wong: There is no use buying a big plot of land and waiting for 10 years to develop

Low-profile PJ Development Holdings Bhd (PJD) is set to unveil several major projects over the next few months. Armed with a strong balance sheet, strategic landbank and low land cost, the mundane stock is beginning to attract some interest.

From 50 sen in the beginning of the year, PJD rose to RM1.19 on June 25 before settling down at 75 sen last Thursday, which gave it a market value of RM342 million. What's interesting is that its market capitalisation is only half its net asset value of RM688.8 million. And that's understated as PJD has never re-valued its landbank. PJD has 114 million outstanding warrants convertible at RM 1.20 per share.

For investors, the bonus is that PJD is more than just a property development outfit. The company also runs a profitable power cable manufacturing business and owns the Swiss Garden chain of hotels, which together generated RM24.4 million in operating profit for the nine months ended March 31. Management expects the hotel business alone to generate a steady annual operating cash flow of about RM20 million a year.

After having spent the last few years concluding some land deals, PJD is ready to go big into property development. Early this year, it launched a RM160 million service apartment cum-commercial project in USJ. In the coming months, it will roll out several high-value projects with a total gross development value (GDV) of over RM950 million. That's not bad for a company that sold less than RM130 million worth of property in FY2006.

For the nine months ended March 31, property accounted for only a third of group total operating profit of RM39.6 million (net profit for the period was RM26 million). Operating profit from property development was RM12.5 million, which was not significant as other operations, such as the power cable business, generated RM16.5 million, hotel RM7.9 million and construction RM4.5 million.

But Wong Ah Chiew, managing director of PJD, says contribution from property development will grow significantly in the years to come.

New projects in the pipeline include an office tower on Jalan Tun Razak (near the Jalan Pahang roundabout) with a GDV of RM180 million, a high-end service apartment project behind Swiss Garden in Jalan Pudu (GDV of RM250 million), a mix-residential project in Sri Hartamas (GDV of RM335 million) and another semi-detached residential project in Johor Baru worth RM150 million. There are also other launches from the ongoing projects. Wong says these projects carry decent margins of between 20% and 36%.

"We are being conservative on the project margins. We can do better when property prices improve," he adds. Wong owns 21 % of PJD.

For instance. PJD took over the office tower project on Jalan Tun Razak from the liquidator a year ago for RM40 million. The project, formerly owned by Instangreen Corp Bhd (now LBS Bina Group Bhd), was abandoned although 10 storeys have been constructed. Wong says PJD needs to put in another RM70 million to finish the project, which means that total development cost will be RM110 million. The project, which has a net saleable or tenable area of 414.182 sq ft, however, has a much higher GOV of RM 180 million.

"The project has good potential. The government has demolished some flats (the Pekeliling flats) there and is redeveloping the area near the Jalan Pahang roundabout. We will either sell the building en bloc or retain some of it for recurring rental income," says Wong. He is the younger brother of Ong Leong Huat (alias Wong Joo Hwa). who is the managing director and major shareholder of investment bank OSK Holdings Bhd.

For the service apartment project behind Swiss Garden hotel in Jalan Pudu, the land measuring 1.7 acres was acquired from the descendants of Loke Yew two years ago for RM 19 million. There will be two blocks of 36 storeys, comprising 413 units of service apartments, with a podium block linked to the Swiss Garden. The project will carry a GDV of RM250 million and a development margin of 25%.

PJD also owns 30 acres of freehold land at Chain Ferry Road, Butterworth. The land is located near the RM2 billion transport hub called Penang Sentra that Malaysian Resources Corp Bhd is going to develop. The original GDV estimate for the 30-acre land was RM548 million, but management expects the value to go up when Penang Sentral comes into the picture.

PJD has a prudent capital management strategy. The company prefers to go into niche markets by acquiring smaller parcels of land that have good and immediate potential for development.

"There is no use buying a big plot of land and waiting for 10 years to develop. The borrowing cost is high and we will miss out on other good opportunities," says Wong.

As an example of its prudent capital management policy. PJD sold its office building on Jalan Raja Chulan, now called Menara Affin, shortly after its completion during the financial crisis for RM 100 millioncash. The building was initially meant to be PJD's corporate building.

"There was no point holding on to it, as things became very uncertain. We took the cash and acquired some land which we have developed. and managed to double our investment." says Wong.

PJD is also set to get a windfall from its 27.4 % interest in Australian-based Equity & Property Investment Corp Ltd (EPIC). The Australian company is disposing of its hotel businesses for A$135 million (about RM401 million), against the cost of investment of only A$33 million. EPIC is expected to pay out to shareholders the gains from its disposal of assets.

The strength of the Australian dollar is a loon to EPIC and PJD. PJD's share of the disposal works out to about RM110 million. Wong says the disposal is expected to be completed by yearend and the payout from EPIC to PJD will be used to pare down debts and to fund business expansion. PJD has net debts of RM222.2 million against its shareholders' funds of RM687.5 million.

EPIC was originally listed on the Australian Stock Exchange but was delisted in 2002. Wong's brother Ong Leong Huat holds a direct 28% stake in EPIC, according to a filing by the company in 2002.

Among the stocks most hit in the current volatile market are the property counters. This is due to them contagion effect from the meltdown in the US subprime property montage market. But the underlying strength of the property counters in Malaysia is strong. And when the subprime loan crisis is over, some of these counters will begin to realise their true value. PJD is hoping to he one of them.