Berjaya Corporation Berhad - I3investor - Stock Investment ...klse.i3investor.com/files/my/ptres/res3554.pdf · junction of Jalan Tun Tan Siew Sin and Jalan Cheng Lock. It is conveniently

Please read carefully the important disclosures at the end of this publication.

This report has been prepared by CIMB for the CMDF-Bursa Research scheme. INITIATING COVERAGE

CIMB Research Report

28 March 2011

RECOM Hold Berjaya Corporation Berhad PRICE RM1.08

Gaming holds the aces MKT CAPITALISATION RM4,547.4m

BOARD Main

SECTOR Conglomerate

INDEX COMPONENT Nil

BC MK / BGRO.KL Tee Sze Chiah + 60 (3) 2084-9620 – [email protected]

Investment highlights

• Begin coverage with a HOLD recommendation. Berjaya Corporation’s (B-Corp) most valuable asset is its 50.1% stake in Berjaya Sports Toto. The gaming business is its single largest earnings contributor, accounting for more than 60% of the group’s FY10 EBIT. However, its dominance in the NFO market could be challenged by rising interest in Magnum’s 4D Jackpot game. On the property front, the group’s future earnings hinge on 1) the state of Vietnam’s property market where there is execution risk, and 2) the Berjaya Hills and Berjaya City (Socfin land) developments which are progressing slowly. Cosway on the other hand is on an aggressive expansion. We initiate coverage on B-Corp with a HOLD recommendation. Our target price of RM1.25 factors in a 40% discount to its SOP to account for its holding company status, volatile earnings track record and potential delays in the development of Berjaya City or the Berjaya Hills landbank. For big cap exposure to conglomerates, investors should opt for Sime Darby.

• Forecasting a 3-year EBIT CAGR of 2.1%... We are forecasting a modest 3-year

EBIT CAGR of 2.1% for FY10-13, mainly driven by growth of Cosway and the group’s property development arm, which will more than offset the lower contribution from B-Toto arising from stiff competition from Magnum and market saturation. Cosway’s “free store” concept allows the company to penetrate into both existing and new markets like Europe and China. As for property, development profits could more than double in 3-5 years’ time if the Vietnam projects take off according to schedule.

• … but actual earnings could be volatile. In the past, B-Corp’s earnings have been volatile due partly to write-offs, start-up costs of its businesses and its exposure to cyclical industries. Earnings from stockbroking, insurance and property investment and development hinge on the state of the economy. For the gaming division, luck can be a swing factor

Key stock statistics Per share data

FYE Apr 2010 2011F

EPS (sen) 2.3 2.7

P/E (x) 46.2 40.2

Dividend/Share (sen) 1.5 1.3

NTA/Share (RM) (0.04) (0.03)

Book Value/Share (RM) 1.48 1.49

Issued Capital (m shares) 4,021.9

52-weeks Share Price Range (RM) RM0.92/RM1.80

Major Shareholders: %

Tan Sri Dato' Seri Vincent Tan 19.9

Hotel Resort Ent 12.2

FYE Apr 2008 2009 2010 2011F

Book Value (RM) 1.87 1.76 1.48 1.49

Cash Flow (sen) 37.5 8.6 11.5 12.4

Earnings (sen) 20.5 (1.7) 2.3 2.7

Dividend (sen) 0.0 0.0 1.5 1.3

Payout Ratio (%) 0.0 0.0 65.2 49.7

P/E (x) 5.3 nm 46.2 40.2

P/Cash Flow (x) 2.9 12.5 9.4 8.7

P/Book Value (x) 0.6 0.6 0.7 0.7

Dividend Yield (%) 0.0 0.0 1.4 1.2

ROE (%) 0.0% -0.6% 1.0% 1.8%

Net Gearing (%) 47.0% 57.1% 49.3% 41.0%

Source: Company, CIMB estimates, Bloomberg

[ 2 ]

Background

Corporate profile A gaming-based conglomerate. Berjaya Corporation (B-Corp) is Tan Sri Dato’ Seri

Vincent Tan’s main investment holding company. It is a conglomerate with diverse business activities, including gaming and lottery, property investment and development, consumer, financial services, food and beverages as well as automotive. Within the group, B-Corp’s prize asset is its stake in Berjaya Sports Toto (BST MK, Neutral), one of the three number forecasting operators (NFOs) in Malaysia which commands 39.4% share of the NFO market.

Figure 1: Corporate structure – key units

Berjaya Corporation

Property investment

& development,

hotels & resorts

Consumer & retail Financial services Food & beverages Motor

56.6% Berjaya Land

100% Berjaya Hills

67% Cosway

13% Berjaya Retail

Gaming Other investment

100% BerjayaCity

70% Berjaya Sompo

100% Inter-Pacific

Securities

74.6% Berjaya Food

50% Berjaya

Starbucks

70% BerMaz Motor50.1% Berjaya Sports

To to

88.3% Berjaya

Philippines

39.3% Taiga

Buildings

18.2% Berjaya M edia

20.9% Silver Bird

34.2% Info rmatics

Education

26.3% Magni-Tech

Industries

31.5% TMC Life

Source: Company, CIMB Research

Gaming and lottery. The gaming division is the single largest earnings contributor, accounting for more than 60% of the group’s EBIT in FY10. B-Corp owns 50.1% of B-Toto, one of the three NFOs in Malaysia. The latter has 680 outlets throughout the country, offering a variety of games – digit-type games (namely, 4D, 5D and 6D) and lotto-type games (namely, Supreme 6/58, Power Toto 6/55 and Mega Toto 6/52).

Property development. Within the group, most of its property development projects are carried out by B-Land. It has more than 5,000 acres of landbank, 90% of which are in Vietnam, South Korea, China and Thailand. B-Corp also has two huge pieces of development land – Berjaya Hills and Berjaya City (Socfin land). Berjaya Hills, measuring 13,885 acres, is located at the foothills of Genting Highlands. It is a holiday resort with some tourist attractions. Meanwhile, the 13,202-acre Socfin land is located near Bukit Beruntung, a 40-minute drive from Kuala Lumpur.

[ 3 ]

Figure 2: B-Corp’s local projects, landbank and GDV

Stake Acres GDV (RM m)

B-Corp

The Ritz-Carlton Residences 100% 3.0 2,430.0

B-Land (56.6%-owned subsidiary)

Vasana 25, Kuala Lumpur 100% 4.9 157.0

Covillea, Kuala Lumpur 100% 2.9 150.0

Savanna 2, Kuala Lumpur 100% 1.2 21.1

KM 1 West, Kuala Lumpur 100% 3.7 263.0

KM 1 East, Kuala Lumpur 100% 3.9 176.0

Hazel 2, Selangor 80% 7.5 31.8

2 & 3 storey shop office, Berjaya Park, Selangor 80% 5.0 19.8

1Petaling, Kuala Lumpur 100% 1.7 74.0

Petaling Indah, Kuala Lumpur 100% 0.3 8.0

The Peak @ Taman TAR, Kuala Lumpur 100% 66.7 328.0

Kuantan Perdana, Pahang 100% 3.5 46.0

Total 104.3 3,704.8

Source: Company, CIMB estimates

Figure 3: Some of B-Land’s ongoing local development projects

Vasana 25 Covillea

Savanna 2 Hazel 2

[ 4 ]

1Petaling The Peak

Source: Company

Property investment. B-Corp, via its subsidiary B-Land, owns and manages two commercial buildings within the Kuala Lumpur Golden Triangle – Plaza Berjaya and Kota Raya Complex – as well as Berjaya Megamall in Kuantan, Pahang.

Plaza Berjaya is a mixed development comprising a retail podium, office tower and apartment block, situated in Jalan Imbi within the Golden Triangle commercial area.

Kota Raya Complex is a shopping complex located close to “Chinatown” at the junction of Jalan Tun Tan Siew Sin and Jalan Cheng Lock. It is conveniently accessible by bus and LRT, and is surrounded by financial institutions, hotels and learning institutions. Kota Raya Complex is a 6-storey building containing a retail podium and kiosks.

Berjaya Megamall is a shopping complex located in the heart of Kuantan's central business district that provides shopping and entertainment for the east coast of Malaysia.

Figure 4: Investment assets

Property Total NLA Average occupancy rate

(sq ft) @ 30/4/2010

Plaza Berjaya, Kuala Lumpur 386,535 (gross) 74%

214,459 (owned)

Kota Raya Complex, Kuala Lumpur 209,276 (gross) 79%

140,180 (owned)

Berjaya Megamall, Pahang 596,830 (gross) 92%

435,409 (owned)

Average 82%

Source: Company, CIMB estimates

Consumer. Cosway Corporation Limited (288 HK, Not Rated), is listed on the Hong Kong Stock Exchange. It is a multi level marketing (MLM) company which operates mainly in countries such as Malaysia, Singapore, Brunei, Hong Kong, Macau, Taiwan, Korea, Thailand, Australia, USA, UK and Japan. Cosway offers more than 2,000 consumer products covering healthcare, slimming products, personal care, skincare, cosmetics, household products and water filtration systems. The company has recruited over 1m members globally. It also has an extensive distribution network covering major cities in Asia. Currently, the company has 1,700 stores in total, thanks to the mushrooming of “free stores” under the free store concept where franchisees place a deposit with the company, which in turn, pays for all capital expenditure and monthly costs. Meanwhile, Berjaya Retail is engaged in the operation of the 7-Eleven chain in Malaysia and Singer Group.

[ 5 ]

Financial services. B-Corp is involved in stockbroking and general insurance. Combined EBIT from these businesses made up about 8% of the group’s FY10 EBIT. The stockbroking business includes stock & futures broking, online stock trading, share underwriting, share margin financing, nominees services, share custodian services, research, corporate finance, investment advisory, fund management and unit trust management. Its associate, SaigonBank Berjaya Securities Joint Stock Company, is licensed by the Vietnam authorities to provide a full range of stockbroking and related services. In Nov 2010, B-Corp’s subsidiary Inter-Pacific Securities Sdn Bhd (IPS) proposed to dispose of its stock and futures broking business to Kim Eng Holdings Limited, a leading SGX-listed broking group. In return, the group will get up to RM106.5m cash and up to 30% equity interest in an SPV jointly held by Kim Eng and/or key employees of the SPV. The collaboration will strengthen the stockbroking unit’s presence in the region. However, B-Corp will incur a nominal loss of about RM0.3m due to the charge-out of the carrying goodwill. Although Maybank is proposing to acquire Kim Eng, we gathered from management that the IPS-Kim Eng deal is still ongoing. Meanwhile, Berjaya Sompo Insurance Berhad is one of the leading general insurance companies in Malaysia with a network of 23 offices and an agency force of more than 2,500 throughout Malaysia.

Food & beverages. B-Corp holds the master franchise rights for Kenny Rogers Roaster restaurants (KRR) for the Asia-Pacific region and is the brand owner for KRR worldwide. There are currently about 250 outlets operating in USA, Malaysia, China, the Philippines, Singapore, Indonesia and Bahrain. Recently, the group injected the Kenny Rogers Roaster (KRR) restaurant chain in Malaysia into its subsidiary Berjaya Food (BFD MK, Not Rated). B-Corp also has Starbucks Coffee, Wendy's® restaurants, Papa John’s Pizza and Krispy Kreme under its stable.

Other divisions. The group operates eight local and eight overseas hotels and resorts. The average occupancy rate rose from 54% in FY4/09 to 57% in FY4/10 while revenue per available room also improved by 5% to RM158. But the industry remains highly challenging due to intense competition, weak market conditions and a decline in corporate events. B-Corp’s club and recreation division, on the other hand, saw a 3.5% increase in FY4/10 revenue due to higher membership recruitment. As at 30 April 2010, the group owned and operated seven clubs in Malaysia with a total membership of 22,000. B-Corp’s other business segments include vacation timeshare, charter services, motor trading and distribution, Borders bookstores and environment and clean technology services. It also has a strategic stake in Taiga Building Products which is listed on the Canada Stock Exchange, SGX-listed Informatics Education and Malaysia-listed Silver Bird, Magni-Tech and TMC Life Sciences.

[ 6 ]

Figure 5: List of hotels and resorts

Local Location Tenure Stake No. of rooms

@ 30/6/10

B-Corp

Colmar Tropicale, Berjaya Hills Pahang NA 100% 248*

The Chateau Spa & Wellness Resort, Berjaya HillsPahang NA 100% 211*

B-Land (56.6%-owned subsidiary)

Berjaya Tioman Resort Johor Leasehold 86% 268

Berjaya Langkawi Resort Kedah Leasehold 100% 350

Berjaya Redang Resort Terengganu Leasehold 100% 220

Berjaya Times Square Hotel Kuala Lumpur Freehold 100% 660

Berjaya Penang Hotel Penang Leasehold 100% 320

Piccolo Hotel Kuala Lumpur Registered lease 60% 168

Overseas

B-Land (56.6%-owned subsidiary)

Berjaya Singapore Hotel Singapore Leasehold 100% 49

Berjaya Eden Park United Kingdom Freehold 100% 113

Berjaya Beau Vallon Bay Resort & Casino Seychelles Freehold 100% 232

Long Beach Resort Vietnam Leasehold 70% 71

InterContinental Hanoi Westlake Vietnam Leasehold 75% 359

Sheraton Hanoi Hotel Vietnam Leasehold 70% 299

Berjaya Hotel Colombo Sri Lanka Freehold 93% 75

Berjaya Praslin Resort Seychelles Freehold 100% 79

* As t 31 Dec 2009

Source: Company

Figure 6: List of recreation clubs

Club Location

Bukit Kiara Equestrian & Country Resort Kuala Lumpur

Kelab Darul Ehsan Selangor

Staffield Country Resort Negeri Sembilan

Bukit Baneng Golf & Country Club Johor

Bukit Jalil Golf & Country Resort Kuala Lumpur

Tioman Island Golf Club Pahang

Berjaya Hills Golf & Country Club Pahang

Source: Company

Figure 7: Segmental breakdown for FY10

Revenue EBIT

8%

26%

6%4%

50%

6%

Financial services Consumer

Property investment & development Hotels and resorts

Gaming Others

7%

20%

8%

0%

65%

0%

Financial services ConsumerProperty investment & development Hotels and resortsGaming Others

Source: Company

[ 7 ]

Earnings outlook

Gaming is the core earnings contributor. Within the group, the gaming business contributed about 65% of B-Corp’s FY10 EBIT. B-Toto, the market leader which commands 39.4% market share, will continue to do well, thanks to strong interest in its flagship 4D game and a fairly recent addition, lotto variant 6/58 Power Toto which has a minimum jackpot prize of RM8.88m. However, we expect its lead to be eroded by strong interest in Magnum’s 4D Jackpot game. Our gaming analyst sees downside risks to our flat to 3% annual topline growth projections for B-Toto for FY11-13. Having said that, these negatives are cushioned by the stock’s attractive dividend yield in excess of 6%, which is supported by its minimum 75% dividend payout policy.

Growth is the key word in Cosway. Cosway is embarking on an aggressive expansion plan. Apart from penetrating the existing market, management is targeting new markets like Europe and China. This is evident from a 40% jump in its sales outlets to 1,480 stores in FY10 (1,058 stores in FY09). We are forecasting a 3-year revenue CAGR of 18% for FY10-13, driven mainly by the opening of new “Free Stores”, intensified recruitment activities and widening of product offerings. Besides having a strong distribution network, Cosway’s competitive edge over its peers lies in the wide variety and unique products it offers at competitive and highly affordable prices. Throughout the year, the company offers aggressive sales promotions to its members, which currently number more than 1m members globally.

Domestic property sector remains resilient. Within the group, B-Land undertakes most of the property development jobs, both locally and abroad. Our economic research team forecasts GDP to grow 5.5% in 2011, which augurs well for the property market. The government’s efforts to transform Malaysia into a high-income nation, the rollout of major infrastructure projects, low interest rates and ample liquidity in the system also underpin property demand in Malaysia. For the overseas jobs, earnings contribution could be insignificant in the early years as these projects will be developed over 10-20 years. The company also needs time to get up the learning curve overseas.

Figure 8: Growth is expected to be broad-based with positive contribution from all sectors

% yoy % share % pt contr.

2009 2010 2011B 2011B 2011B 2011F 2012F 2011F 2012F 2011F 2012F

Real GDP -1.7 7.2 5.0-6.0 100.0 5.0-6.0 5.5 6.5 100.0 100.0 5.5 6.5

Agriculture 0.4 1.7 4.5 7.4 0.3 4.0 4.0 7.3 7.2 0.3 0.3

Mining -3.8 0.2 2.9 7.1 0.2 2.5 2.5 7.0 6.8 0.2 0.2

Construction 5.8 5.2 4.4 3.2 0.1 5.6 7.0 3.3 3.3 0.2 0.2

Manufacturing -9.4 11.4 6.7 27.9 1.9 6.0 7.0 27.8 28.0 1.7 1.9

Services 2.6 6.8 5.3 57.3 3.0 6.0 7.2 57.6 58.0 3.4 4.1

% yoyMOF CIMB

% yoy % share % pt contr.

Source: BNM, MOF, CIMB Research

Figure 9: Overseas landbank and GDV

Stake Acres GDV (RM m)

Thach Ban Garden City, Hanoi, Vietnam 80% 78.3 1,792.2

Vietnam Financial Center, Ho Chi Minh City, Vietnam 100% 16.4 5,981.1

Bien Hoa City Square, Dong Nai Province, Vietnam 75% 6.4 561.9

Vietnam International University Township, Vietnam 100% 2,285.7 25,912.8

Nhon Trach New City Township, Vietnam 100% 1,482.6 19,387.9

The Great Mall of China 51% 75.9 2,323.3

Berjaya Jeju Resort, South Korea 51% 183.7 10,109.0

Clear Lake Colony, Thailand 40% 660.0 2,356.5

Total 4,789.1 68,424.5

Source: Company, CIMB estimates

[ 8 ]

Figure 10: Real GDP growth for key countries in the region

2009 2010 2011F

China 10.3 9.2 10.0

India 6.8 9.7 8.4

Indonesia 4.6 6.1 6.4

Malaysia -1.7 7.0 5.5

Singapore -1.3 14.7 6.0

South Korea 0.2 6.1 4.5

Thailand -2.3 8.0 5.0

Vietnam 5.3 6.8 6.8

Real GDP growth (%)Countries

Note: 2010 GDP number for India, Malaysia and Thailand are estimated figures.

Source: CEIC, Bank Negara Malaysia, IMF, CIMB Research

More M&A for B-Food? Berjaya Food (B-Food) made its debut on the Bursa Malaysia on 8 March 2011. It holds the exclusive master franchise rights to the Kenny Rogers Roasters brand in Malaysia with 52 restaurants nationwide as at 31 January 2011. Kenny Rogers is a full-service mid-casual dining restaurant offering good value-for-money meals. Management is in expansion mode, targeting to open at least 8-10 restaurants per year. According to a study by Converging Knowledge in 2005, the typical Malaysian spends about 31% of household expenditure on food and non-alcoholic beverages. Given the rise in national household income, consumers will spend more on food services which bodes well for B-Food. On a separate note, we gathered that there is a plan for B-Corp to inject more F&B-related businesses into B-Food. Potential M&As include Starbucks Coffee, which is 50% owned by B-Corp. Other F&B businesses within the group are Papa John’s Pizza, Wendy’s restaurants and Krispy Kreme.

[ 9 ]

Figure 11: Consumer spending habits

Composition of Malaysian household expenditure 2004/05 Household income

Food and non-alcoholic

beverages

20%

Restaurants and hotels

11%

69%

1,222

3,3544,269 3,881

5,617 6,268

7,425 7,809 8,157

1,0161,378 1,409

2,022 2,204 2,574 2,6632,957

377 524 592 807 865 995 1,0150

2,000

4,000

6,000

8,000

10,000

1980 1985 1990 1995 1999 2002 2004 2007

RMTop 20% earnersMiddle 40% earners not much better than bottom 40%Bottom 40% earners having the slowest growth

Source: Department of statistics

Unlocking the value of other assets. We gather that B-Corp plans to continue nurturing and potentially unlocking the value of its existing businesses. Apart from B-Retail and B-Food, another potential listing candidate within the group is BerMaz Motor, which is the sole distributor and retailer of Mazda cars in Malaysia. We understand that BerMaz has sold some 4,000 Mazda cars in FY11 YTD.

Privatisation of Berjaya Retail. Berjaya Retail received on 11 March 2011 a notice of an unconditional takeover offer from Premier Merchandise Sdn Bhd, in which Tan Sri Vincent Tan has an indirect 100% stake. The offer price of RM0.65 represents a whopping 30% premium over its IPO price of RM0.50. The move came less than seven months after its listing on 16 August 2010, making it one of the shortest listings ever. We think B-Retail's undervalued share price is one of the key reasons for the privatisation plan. Minority shareholders are likely to accept the offer given the steep premium over the IPO price.

Figure 12: P&L analysis (RM m)

FYE Apr 2008 2009 2010 2011F

Revenue 3,465.8 6,339.0 6,756.0 6,164.3

Operating Profit (EBIT) 468.1 689.2 869.8 678.5

Depreciation (109.6) (128.0) (145.9) (216.3)

Interest Expenses (342.3) (289.8) (295.6) (262.6)

Pretax Profit 1,193.0 274.6 601.4 439.8

Effective Tax Rate (%) -3.4% -60.3% -34.4% -30.0%

Net Profit (416.8) (32.0) 59.8 107.9

Operating Margin (%) 13.5% 10.9% 12.9% 11.0%

Pretax Margin (%) 34.4% 4.3% 8.9% 7.1%

Net Margin (%) -12.0% -0.5% 0.9% 1.8%

Source: Company, CIMB estimates

Figure 13: Balance sheet (RM m)

Balance Sheet (RM m) FY08 FY09 FY10

Total Assets 16,237.6 16,605.3 17,825.4

Fixed Assets 2,157.1 2,317.7 2,704.0

Current Asset 4,546.2 4,693.3 5,045.4

Other LT Assets 9,534.3 9,594.3 10,076.0

Current Liabilities 2,854.4 3,721.6 4,138.9

LT Liabilities 3,302.6 2,895.4 2,933.6

Share Capital 3,003.8 3,169.6 4,021.9

Shareholders' Funds 10,080.7 9,988.3 10,753.0

Source: Company, CIMB estimates

Investment risks

Competitive NFO market. Our gaming analyst sees downside risks to B-Toto’s FY11-12 earnings growth due to 1) competitive threat from Magnum’s 4D Jackpot game, 2) saturated NFO market, and 3) common draw days for the operators which will dampen the topline growth of the NFO sector. The group’s plan to ride on Berjaya Jeju’s casino venture could also be delayed as we gathered that more capital expenditure will be required to pour into the Berjaya Jeju Resort in Seogwipo City

[ 10 ]

before the regulators would even considering relaxation of the foreigners-only ruling.

Longer gestation for property projects. Unlike other established players like Mah Sing (MSGB MK, Outperform) which have large footprints in Malaysia, the majority of B-Land’s property development projects hinge on the state of Vietnam’s property market. The need to deal with different legal, regulatory and logistic systems will be a major drag. Meanwhile, management’s efforts to develop Berjaya Hills and Berjaya City (Socfin) have been slow.

Valuation

Earnings are volatile. In the past, B-Corp’s earnings have been volatile due partly to write-offs, start-up costs of its businesses and its exposure to cyclical industries. Earnings from its stockbroking and insurance businesses as well as the property investment and development hinge on the state of the economy while the gaming division is affected by the luck factor, i.e. the prize payout ratio.

Balance sheet remains fairly healthy. B-Corp’s net gearing stood at 45% as at Oct 10. Dividend income from B-Toto will be used to part-finance its debt obligations. We, therefore, expect the dividend payout from B-Toto to remain high at over 75%. The group, however, may have to gear up as B-Land’s property projects are capital intensive and Cosway needs funds for its “Free Store” outlets and expansion into new markets.

3-year EBIT CAGR of 2.1%. We are forecasting a moderate 3-year EBIT CAGR of 2.1%. Cosway’s expansion and more property launches will more than offset the lower contribution from B-Toto arising from stiff competition from Magnum and market saturation. B-Food should also benefit from the opening of more Kenny Rogers Roasters restaurants.

Figure 14: Comparative valuations

B-Corp Sime Darby

Share Price (RM) @ 25/3/11 1.08 9.15

Mkt. Cap (RM m) 4,547.42 54,986.6

Ave. Daily Vol. (m) 8.5 11.0

P/E FY09 (x) nm 0.2

P/E FY10 (x) 0.5 0.8

P/BV (x) 0.7 2.7

Yield (%) 1.4% 1.5%

Source: Company, CIMB estimates

Figure 15: Share price chart of B-Corp and comparables (RM)

0.6

0.7

0.8

0.9

1

1.1

1.2

1.3

Jul-10 Sep-10 Nov-10 Jan-11

BC Sime

Source: Bloomberg

[ 11 ]

Privatisation of B-Toto? On 23 December 2010, B-Toto confirmed that it was in preliminary discussions on a possible corporate exercise which may result in the entry of a strategic investor. Management indicated that while there had been initial contact with several potential investors, it was not in negotiations as it was still in internal discussions and the planning phase. We would not be surprised if B-Toto took a similar route as Magnum in its 2007 privatisation. A special purpose vehicle (SPV) could be set up, jointly owned by B-Corp and a new strategic investor which would then acquire the assets and liabilities of B-Toto on completion of its privatisation from B-Land. We note that B-Toto’s net gearing inched up from 0.56x at end-FY10 to 0.69x at end-2QFY11, again similar to Magnum which increased its borrowings despite being in a net cash position.

Recommendation

Trading at 48% discount to SOP. In view of the diversity of B-Corp’s businesses, we believe the appropriate valuation method for the group is sum of parts (SOP). In our SOP model, we:

(1) value B-Land at our SOP-based target price of RM1.24 per share

(2) value B-Retail at the GO price of RM0.65 per share

(3) value B-Corp’s property investment and development as well as hotel and resorts at their RNAV

(4) value the group’s holdings in listed investments at their latest market prices

(5) value other businesses on P/NBV, P/E or NBV basis depending on the most appropriate valuation methods for each business

(6) deduct the net borrowings of the investment holding company, excluding the listed subsidiaries’ net cash/debt

Based on this methodology, we arrived at a fully diluted SOP value of RM2.08 for B-Corp. This represents a 48% discount to its last traded price.

Initiate with a HOLD recommendation. We initiate coverage on B-Corp with a HOLD recommendation. Our target price of RM1.25 factors in a 40% discount to its SOP to account for its holding company status, volatile earnings track record and potential delays in the development of Berjaya City or the Berjaya Hills landbank. RM1.25 works out to 33x CY12 FD P/E. For big-cap exposure to conglomerates, investors should opt for Sime Darby (SIME MK, Trading Buy).

Financial summary

FYE Apr 2009 2010 2011F 2012F 2013F

Revenue (RM m) 6,339.0 6,756.0 6,164.3 6,637.6 7,247.9

EBITDA (RM m) 817.2 1,015.7 894.9 959.6 1,074.9

EBITDA margins (%) 12.9 15.0 14.5 14.5 14.8

Pretax profit (RM m) 274.6 601.4 439.8 583.2 736.7

Net profit (RM m) (32.0) 59.8 107.9 145.3 198.7

EPS (sen) (1.7) 2.3 2.7 3.6 4.9

EPS growth (%) -108.2% +238.9% +14.7% +34.6% +36.8%

P/E (x) nm 46.2 40.2 29.9 21.9

Core EPS (sen) (1.0) 1.7 2.7 3.6 4.9

Core EPS growth (%) -92.7% +264.6% +61.3% +34.6% +36.8%

Core P/E (x) nm 64.9 40.2 29.9 21.9

FD EPS (sen) (0.8) 1.4 2.5 3.4 4.6

FD P/E (x) nm 74.6 43.4 32.2 23.6

Gross DPS (sen) - 1.5 1.3 1.4 1.4

Dividend yield (%) 0.0% 1.4% 1.2% 1.3% 1.3%

P/NTA (x) nm nm nm nm 27.8

ROE (%) -0.6% 1.0% 1.8% 2.4% 3.2%

Net gearing (%) 57.1% 49.3% 41.0% 34.6% 26.9%

P/CF (x) -9.0 14.9 -3.6 33.0 20.5

EV/EBITDA (x) 8.3 7.4 7.8 7.0 5.9

Source: Company, CIMB Research, Bloomberg

[ 12 ]

Figure 16: SOP valuation of Berjaya Corporation

Description

Landbank Method Stake Size Unit Price Value (RM m)

(RM sq ft/ per unit)

Berjay a Hills Estimated RNAV 100.0% 13,884.6 ac 2.5 1,536.2

Berjay a City (Socfin Land) Estimated RNAV 100.0% 13,201.8 ac 2.2 1,288.2

Ritz Estimated RNAV 100.0% 3.0 ac 3,000.0 396.0

Colmar Tropicale Estimated RNAV 100.0% 248 units 200,000.0 49.6

The Chateau Spa Estimated RNAV 100.0% 211 units 200,000.0 42.2

Method Stake Price No of share

(local curr) (m)

Berjay a Land CIMB's target price 56.6% 1.24 5,024.4 3,526.3

Consumer Method Stake Price No of share

(local curr) (m)

Cosway Corporation Marked to market 67.0% 0.81 1,961.7 489.7

Berjay a Retail GO price 13.0% 0.65 1,409.5 119.1

Financial services Method Stake

Inter Pacific Buyout price 91.5% 131.5

Berjay a Sompo 1.4x BV 70.0% 376.06 368.5

Food and beverages Method Stake Price No of share

(local curr) (m)

Berjay a Food Marked to market 74.6% 0.60 148.8 66.6

Starbucks 10x CF 50.0% 83.0

Listed investment Method Stake Price No of share

(local curr) (m)

Berjay a Media Marked to market 18.2% 0.50 232.9 21.2

Taiga Products Canada Marked to market 39.3% 0.97 32.4 37.9

Silv er Bird Marked to market 20.9% 0.60 386.7 48.1

Magni-Tech Marked to market 26.3% 1.02 103.6 27.8

TMC Life Marked to market 31.5% 0.48 601.8 90.0

Others Method Estimated profit

Mazda franchise 10x P/E 30.0 300.0

Sanitary landfill NBV 60.0

Total v alue 8,682.0

Cash As at Oct10 (ex cluding cash of listed subsidiaries) 671.1

Debt As at Oct10 (ex cluding debt of listed subsidiaries) (351.5)

Total SOP 9,001.6

No of shares - basic (m) 4,021.9

No of shares - FD (share + cash option) RM0.50 + 1 ICULS (m) 4,178.6

No of shares - FD share option (2ICULS for 1 share) (m) 4,335.3

SOP (RM/share) 2.24

SOP - FD (share and cash option) (RM/share) 2.17

SOP - FD (share option) (RM/share) 2.08

Source: Company, CIMB estimates, Bloomberg

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[ 14 ]

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STOCK RECOMMENDATIONS

BUY: Expected positive total returns of 15% or more over the next 12 months

HOLD: Expected total returns of between -15% and +15% over the next 12 months.

SELL: Expected negative total returns of 15% or more over the next 12 months.

CIMB Research Pte Ltd (Co. Reg. No. 198701620M)