Capital World (formerly known as Terratech Group Limited) has slumped a whopping 46% from its intraday high of $0.240 on 29 Mar 2017 to close $0.130 on 1 Jun 2017. What has happened to cause such a massive fall? Will it fall further?
Capital World is an innovative property developer that works with landowners on a joint venture basis to create value added property developments. Such joint venture requires minimal capital outlay and maximises investment returns. It is currently developing Project Capital City, an integrated property project comprising a retail mall, hotel and serviced suites and serviced apartments along Jalan Tampoi, Johor Bahru, Malaysia. The Group has also entered into joint venture agreements to develop Project Austin, an integrated development project which is expected to comprise a retail mall, office suites, hotel and serviced residential apartments, and Project Sitiawan Wellness Hub, a mixed development project focusing on providing health and wellness services.
The Group is also engaged in the production and sale of premium quality marble blocks and slabs, aggregates and calcium carbonate powder from its quarry in Kelantan, Malaysia.
What’s interesting about Capital World?
Attractive business model
The most attractive aspect of Capital World is its innovative business model. In Malaysia, there are numerous landowners who have sizeable plots of land (perhaps due to inheritance). Such plots of land are typically in mature estates where the landowners do not know how to best maximise the returns on the land. Capital World fills this niche by working with the landowners on a joint venture basis to create value added property developments.
With reference to Figure 1 below, for a land entitlement of RM100m, there are several pertinent points.
a) Capital World puts in a fraction of the initial payment to start the project. Based on the numbers below, given RM40m of initial payment for a traditional developer, Capital World can theoretically scale up to do at least 50 projects of such size via its unique business model!
b) Due to the low capital outlay, Capital World does not need to borrow whereas a traditional developer may need to borrow RM60m with quarterly instalment of RM2.55m. Furthermore, Capital World pays the developer as it sells the properties. Thus, there is less pressure on cash flows.
c) It is noteworthy that Capital World will pay the land owner up to a cap of RM100m. i.e. it does not need to share the profits of the developments with the land owner.
d) Capital World typically targets land in mature estates where there is a sizeable catchment area which is ready for construction.
e) High margins for such business model as there are little or less interest costs. (See Figure 4)
Figure 1: Capital World’s business model
Good set of results
Capital World released a good set of results last Mon. With reference to Figures 2, 3 & 4, 3QFY17 revenue and net profit were RM75m and RM38m respectively which were almost on par with the revenue and net profit generated for the entire FY16! 9MFY17 revenue and net profit soared 72% and 71% to RM120m and RM62m respectively. Margins were robust with net margins holding steady above 50% since FY16.
In addition, typically at the start of the project, the percentage of completion is slowest as they do more foundation and piling works. Capital City (their current project) is now at the Mechanical and Electrical stage where the percentage of completion can be completed faster. This is corroborated from the percentage of completion where it has increased from 24.8% as of 30 Jun 2016 to 46.0% as of 31 Mar 2017. This percentage of completion is likely to trend towards 100% by around Jun 2018.
Figure 2: 3QFY17 revenue almost on par with FY16 revenue!
Figure 3: 3QFY17 net profit almost on par with FY16 net profit!
Figure 4: Impressive margins
During the results briefing on last Monday, I saw analysts from various houses such as CIMB, Daiwa, Jefferies, Lim & Tan and NRA etc. As of now, there are only unrated reports from Daiwa and Lim & Tan. If Capital World continues to deliver, it is likely to attract analysts’ attention.
Project Austin and Project Sitiawan in the pipeline
Besides focusing on delivery of Capital City, Capital World targets to launch Project Austin at the end of the year, or early 2018 subject to government approvals. It also has another Project Sitiawan Wellness Hub to be launched in the medium term. Given their current project pipeline, they seem to have enough business on hand even if it does not get any new projects in the next one year.
Based on Chart 1 below, the recent incessant selling has already pushed Capital World to trade at prices lower than the price when it first proposed the RTO on 9 Jun 2016 (price was S$0.204 on 9 Jun 2016). Price seems entrenched in a strong downtrend. However, there seems to be a bullish harami formation on 31 May 2017, coupled with a (bullish) gravestone doji formation on 1 June 2017. In addition, indicators such as RSI and MACD are oversold and exhibit bullish divergences. ADX is at an unsustainable level 50.9.
Given the current chart development, it is likely that Capital World should have limited near term downside with good supports at $0.120 – 0.130. However, it is noteworthy that a) we require a strong bullish candle or a gap in the next few days to confirm that selling has ended for the near term; b) The price continues to be entrenched in a medium-term downtrend until it makes a sustained close above $0.192.
Chart 1: Possible bullish harami formation and gravestone doji, coupled with bullish divergence
Source: Chartnexus 1 Jun 17
Near term supports: $0.130 / 0.128 / 0.124 / 0.120
Near term resistances: $0.138 / 0.145 / 0.148 / 0.151
Management will focus on realising synergies between marble and property business
Excluding the RTO expenses, Capital World’s marble business (i.e. Terratech) is still losing around S$4.2m for FY17 (FY16 lost S$3.6m). Management is aware and definitely plans to reduce the losses from the marble business. It is the midst of doing an in-depth review of Terratech’s business to see how best to derive synergies. However, as the RTO was only completed on 4 May 2017, it is natural that management needs some time to resolve this.
RTO expenses unlikely to be huge
Based on the RTO circular, Capital World has estimated RTO expenses of around S$3.3m, of which approximately S$2.0m have been booked in Terratech’s latest results. In other words, there is approximately another S$1m+ expenses to be booked in the subsequent quarter. However, it is noteworthy that their RTO expenses will not be as significant as the RM87.8m expenses (approximately S$28m+ expenses) booked by the likes of Hatten Land.
Conclusion / personal opinion
As Capital World continues to deliver and complete its Capital City project, it is likely that its results should be positive in the next few quarters. Based on an annualised FY17 earnings on Capital City (RM62.3m / 3 quarters x 4 quarters / SGDRM 3.1) and coupled with an estimated loss of S$6.8m core numbers (i.e. excluding non-recurring expenses, just a number plucked from the sky but it seems conservative), Capital World trades at an undemanding 8.2x FY17F PE as compared to the average FY17F PE of 20x for Malaysia developers.
P.S: As with all investments (most investments carry at least some degree of risk), readers should carefully evaluate each investment decision with care. I wish to emphasise that as I am not an analyst, the above annualised PE is just a simple back of the envelope calculation which may not be accurate. This is merely an introduction of Capital World. Readers should refer to SGX for more information and the unrated analyst reports from Daiwa and Lim & Tan.
Please refer to the disclaimer HERE