FIAMMA HOLDINGS BHD
I read an articles in i3 Investor.com which publish by KIASUTRADER its interesting......
Fiamma stands to benefit from the housing boom of the last 2-3 years.While its distribution business is experiencing annual resilient growth of 4-13%, property development is a new growth driver. A few strategic land parcels are now held at low costs, which mean high development margins. The company is also in a net cash position. Based on our SOP valuations, the stock could be valued at MYR3.20-3.30.
Distribution: a resilient business. Fiamma distributes home appliances and has a property development division, which indirectly and directly ride on the local property cycle respectively. Despite the housing market’s mini ups and downs, its distribution segment has achieved 4-13% growth per annum previously. It has been strong in the home appliances market with a wide distribution network nationwide. This segment typically yields 30-40% gross margins.
Property – a new source of growth. Fiamma will see a new growth driver led by its property development wing. The market may not be aware of this business as yet, but it contributes ~25% of total turnover.While Fiamma’s existing Centara project is expected to be completed in Oct/Nov 2014, it has >MYR1bn worth of projects in the pipeline, including MYR600m high-rise developments at Jalan Yap Kwan Seng (Kuala Lumpur) and the MYR400m VIDA residenz (Johor Bahru). By end-2015, management also plans to utilise its land behind Wisma Fiamma for development after an existing warehouse there is moved to Klang.
Low land costs creates RNAV re-rating angle. The property development division gives gross margins of 30-35%. This trend is expected to continue as Fiamma’s landbank is carried at low book costs.The most significant contributor to RNAV is the 1.4-acre Jalan Yap Kwan Seng land, with a land cost of only MYR631psf. The current market price for land parcels in the vicinity is already going at above MYR3,000 psf.
Net cash now. Fiamma is currently in a MYR54m net cash position. We expect it to gear up gradually to ~20-30% over the next two years in view of its upcoming slew of high-rise projects. Dividend payout should remain at about 30%, translating into a decent yield of almost 4%.
MYR3.20-3.30 FV. Fiamma’s land parcels are in deep value while the distribution segment provides stable income growth. Based on our SOP valuations, the stock could be valued at MYR3.20-3.30. It is currently trading at an undemanding 6.2x FY15f P/E.
A Beneficiary Of The Housing Boom
Company background
Fiamma started up marketing mainly the Elba brand of electrical home appliances in 1997. Since then, the company has managed to pick up a number of other brands to widen its distribution reach. Key brands currently carried include Elba, Rubine, Faber, MEC, Tuscani, Haustern and EBAC Home. It also handles agency brands (sole distributorship) such as Omron, Whirlpool and Braun. Given the number of brands it carries, Fiamma has a wide product range to cater for the mass and high-endmarkets. These cover kitchen appliances, pre-fabricated kitchen cabinets, electrical home appliances, bathroom accessories and sanitary ware. Currently, the company has a nationwide distribution network and these products are distributed mainly to electrical shops/outlets and hypermarkets.
While the distribution business has been generating resilient earnings, management decided to have property development exposure a few years ago. In Dec 2008, Fiamma completed the acquisition of two subsidiaries – Uniphoenix Jaya SB and Oaksvilla SB – that own landbank in Kota Tinggi, Johor. Note that property development is not a new venture for the company, as these subsidiaries were previously owned by its founders. Over the years, Fiamma acquired several other land parcels, such as the 1.12 acres at Jalan Tuanku Abdul Rahman and 1.4 acres at Jalan Yap Kwan Seng. Currently, the company’s distribution and property development segments contribute 75% and 25% of the company’s earnings respectively.
Fiamma is now managed by Mr Lim Choo Hong, who is the CEO/group MD of the company. Choo Hong, Mr Lim Soo Kong (non-executive director) and Mr Ngo Wee Bin are the founder members and major shareholders. Choo Hong has more than 30 years of experience in dealing in home appliances. He also has more than 15 years of expertise in property development.
Distribution segment – a resilient but high-margin business
Given the 10 brands and the wide range of products it carries, Fiamma’s distribution segment has managed to achieve an average growth of 4-13% per annum over the past 4-5 years. Earnings from this business have been rather resilient despite the yo-y changes in residential property units completion in Malaysia.
The home ware products are generally sourced from a few original equipment manufacturers (OEMs) and about half of them are distributed via external parties. Going forward, some cost savings can be expected when its existing warehouse is moved to Klang, Selangor, from Bandar Manjalara, Kuala Lumpur, as all products will then be distributed via its in-house logistics. Currently, transportation costs make up about 4-5% of sales. Hence, this move should enhance Fiamma’s current 30-40% gross margins by 2-3%. Among all the brands and products, Omron and the cooking range provide the highest profit margins'
More interesting property angle
We think Fiamma’s property angle is more interesting one and will contribute a new phase of growth to the company. We believe that the market may not be fully aware of this division as yet, due to the limited number of ongoing projects. However, Fiamma’s presence in the property market will likely be broadened going forward, given that it has over MYR1bn worth of property projects in the pipeline. Currently itsexisting Centara project at Jalan Tuanku Abdul Rahman is slated for completion in Oct/Nov, and 30% of the office suites at Menara Antara will be kept as property investment assets. This ought to strengthen its pool of rental income-generating assets in addition to the existing Wisma Fiamma building.
By end-2014, two service apartment projects will be rolled out. This includes the MYR600m GDV high-rise developments at Jalan Yap Kwan Seng and the MYR400m VIDA residenz in Johor Bahru. The Jalan Yap Kwan Seng project, with a plot ratio of 10x, is strategically located in the Kuala Lumpur city centre. Development order (DO) for the project was obtained two months ago and it is now pending finalisation.Indicative pricing for the property units will be at abou t MYR1,200 psf. W e think there is scope for another 8-10% upside, given the pricing of other recent launches in the vicinity such as The Mews by Eastern & Oriental (EAST MK, BUY, TP: MYR3.60).VIDA residenz is a joint-venture (JV) project, whereby the land owner has a 30% share of the profits from the development. The project is in a good location within the Johor Bahru central business district (CBD) at Jalan Muafakat, 7km from the Customs & Immigration Quarantine Complex (CIQ). This service apartment project will be rolled out in two phases. Phase 1 will comprise 267 units with a built-up area of 500-900 sqf at an indicative pricing of MYR500 psf. We believe this project will be well-received as the pricing is conservative, given the challenging market co nditions in Iskandar Malaysia and considering the fact that new high-rise projects launched by a few Chinese developers recently are mostly going at above MYR750 psf.
To further unlock value of its assets, management also plans to redevelop theexisting 3-acre warehouse land behind Wisma Fiamma in Bandar Manjalara into high-rise service apartments next year. The current warehouse will be moved to the 6.28-acre newly-acquired land in Klang once its new warehouses are built. With a plot ratio of 5x (pending approval), the potential GDV for the old warehouse land is estimated at about MYR250-300m, assuming an ASP. We foresee pent-up demand in this area, as Wisma Fiamma is located within a matured enclave, with schools, commercial precincts and houses already in place.
Management will continue to grow the property development division and is constantly scouting for landbank. Key targeted areas are still largely within the Klang Valley, as the market is more sustainable given the area’s 7.2m population and its business activities. VIDA residenz could be the only Johor project over the short term, as management holds a cautious stance over the Iskandar Malaysia market.Low land costs create RNAV re-rating angle
The property development division, of which Centara @ Jalan Tuanku Abdul Rahmanis the major contributor currently, gives gross margins of 30-35%, ie similar to the distribution wing. This trend is expected to stay as Fiamma’s landbank is carried at
low book costs, given that most of the development land parcels were acquired many years ago. The most attractive one is the 1.4-acre parcel at Jalan Yap Kwan Seng, which was acquired in 2007 at a land cost of only MYR631 psf. The current market price for land plots in the vicinity is already going at above MYR3,000 psf. We have assumed a market value of MYR3,000 psf in our RNAV estimate, which we think is reasonable, considering that Magna Prima (MAGNA MK, NR) is said to be looking to sell its Lai Meng school land at MYR3,300-3,500 psf. This comes with a plot ratio of 12x. Meanwhile, according to media reports, Oxley Holdings (OHL SP, BUY, TP: SGD0.91) paid the Loke Wan Yat estate MYR3,300 psf for a 3.1-acre parcel in Jalan Ampang while the KSK Group (KSK MK, NR) paid MYR3,299 for a 3.95-acre land in Jalan Conlay.
Besides these, Fiamma also plans to sell its 86 acres of leasehold land in Kota Tinggi, Johor, as this parcel is not contiguous with its other two parcels of freehold land in the same area (Taman Kota Jaya) that are currently being developed. Hence,it will have to incur major infrastructure capex if it starts development there. Some gains can be expected, given its book cost of only MYR4.50 psf.
Earnings forecasts and valuations
Forecasts. Fiamma’s distribution segment is expected to maintain a single-digit growth in FY14 while the earnings from its property development business will largely drive bottomline growth. Going into FY15, the Centara project will be completed, and earnings from VIDA residenz and the Jalan Yap Kwan Seng project will start to kick in. We, therefore, estimate 15% growth in FY15 . This growth is expected to be more material in FY16 as progress billings from the property developments come in higher.Valuations. We value Fiamma at MYR3.20-3.30, based on SOP valuations. Using our FY15 earnings projections, the stock is currently trading at an undemanding FY15f P/E of only 6.2x. We apply a P/E of 8.8x for the company’s distribution division, which is 30% higher when compared with Khind Holdings (KHIN MK, NR)’s 6.8x. This is justifiable given Fiamma’s ability to achieve much higher margins. We
believe the stock is undervalued, given its: i) resilient growth in the distribution business and earnings kicker from property development, ii) deep landbank value as land parcels were acquired many years ago – hence significant surplus in RNAV, and iii) high margins from both the distribution and property development businesses.Given Fiamma’s net cash position and consistent dividend payout of 30%, the company’s dividend yield of about 3-4% looks sustainable. We also think there is a scope for a bonus issue, considering its solid balance sheet and shareholders’ funds.This could potentially enhance the liquidity of the stock.
Source: RHB,http://klse.i3investor.com/blogs/rhb/59980.jsp
