Regal International Group Ltd - NRA Capital Research 2017-03-19: Turnaround Remains On Track

REGAL INTERNATIONAL GROUP LTD. SGX: UV1

Regal International Group Ltd - Turnaround Remains On Track

Regal International recently announced its 4Q16 results. Revenue was constant quarter-on-quarter at RM35.6m, but net profit from continuing operations swung from a net loss of RM0.4m in 3Q16 to a net profit of RM0.5m in 4Q16. The gains were driven by improved gross margin which rose to 46.4% in 4Q16 or 26.8% in FY16 versus 3.15% in FY15.
We reckon that the high gross margin was due to the finalization of costs for some of the completed projects and greater mix of revenue from property development.

In 2016, seven projects with an estimated GDV of RM138.8m were completed. Since our the 3Q16 results update, 72 Residences Block 1 and Ashraf Avenue 2 worth approximately RM63.4m were completed.
Heading into 2017, we can expect Regal Corporate Park Phase 1, Airtrollis Phase 1 and 72 Residences Block 2 to be completed. Large projects Tropics City and Kemena Heights will also contribute towards revenue. These projects have a total GDV of RM 525.6m based on our previous estimates.

According to the National Property Information Centre, residential property prices in Sarawak rose by 3.6% year-on-year in 3Q16. Volume was flat or lower by 1.4% year- on-year, but the value of residential properties transacted rose by 8.1% year- on-year in 3Q16. Therefore, growth in the market was mainly driven by price inflation over volume growth. Against this context, Regal may take some time to fully sell its launched properties.
Nonetheless, buyers will eventually take up units from earlier launches as bargains, compared to the higher priced new launches in the future.
Regal is mitigating this risk by entering into “underwriting” arrangements with partners e.g. ANGKASA who will purchase all unsold units upon project completion for a fixed sum.

Hence, we have forecasted revenue of only RM178.8m (20% revenue growth) and PATMI of RM2.5m in FY17.
Administrative expenses rose by RM5.4m in FY16 partly due to additional professional and advisory expenses incurred to explore new business ventures and to strengthen capabilities and capacity of Regal’s property portfolio. We expect administrative expenses to normalize by 5% in FY17 to RM31.1m.
We also raised gross margin from 20% to 22.5% (mid- point of 20% to 25%) across our forecast horizon of FY17 to FY19 given the higher than expected gross margin in FY16 of 26.8%.

We continue to like Regal for its growth potential as major projects near completion over the next 12 months, which should be conducive for sales.
In this update, we removed the completed projects from our model and yield a valuation of S$0.300.

Liu Jinshu NRA Capital Research | http://www.nracapital.com/ 2017-03-19

SGX Stock Analyst Report OVERWEIGHT Maintain OVERWEIGHT 0.300 Down 0.315