Aspen (Group) Holdings Ltd - RHB Invest 2017-10-20: The Batu Kawan “IKEA” Transformation Play

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ASPEN (GROUP) HOLDINGS LIMITED 1F3.SI

Aspen (Group) Holdings Ltd - The Batu Kawan “IKEA” Transformation Play

• We initiate coverage on Aspen – which focuses on affordable residential and mixed-use property projects in Penang – with a BUY and SGD0.31 Target Price (41% upside). 
• Aspen is an early mover in the emerging Batu Kawan market with its flagship Aspen Vision City (AVC) project, which is jointly developed with Ikano. Ikano is also opening northern West Malaysia’s first IKEA store in AVC, which we expect to be a re-rating catalyst for property prices and demand. 
• Despite targeting middle-income buyers, its projects come with quality infrastructure and a cost-effective fully-furnished unit option – we believe this is its key differentiating factor.

An early mover in Batu Kawan’s transformation. 

• Aspen’s flagship project is Aspen Vision City (AVC), a mixed-use project jointly built with Ikano Pte Ltd (Ikano). The development sits on 245 acres of freehold land at Bandar Cassia, Batu Kawan, an upcoming growth area in Mainland Penang. 
• Aspen Vision City (AVC) has an estimated GDV of MYR11bn. It is envisioned to become an eco-metropolis with a mix of residential, office, commercial and retail spaces, as well as hotels, hospitals, international schools, and parks. 
• Key attributes are its attractive pricing and good location, i.e. its close proximity to the Penang Second Bridge. 

Strategic relationship with Ikano a key growth driver. 

• Ikano, which owns the franchise rights to own and operate IKEA stores in South-East Asia, is developing the first IKEA store in northern West Malaysia within AVC. The store is expected to be open by 1Q19. 
• Based on past observations, the opening of IKEA outlets in Malaysia has boosted population density, property demand and real estate values in the surrounding areas. We expect a similar effect on Batu Kawan property prices once the store opens.

Unique business model. 

• Aspen currently has four ongoing launched projects in Penang and three more in its pipeline. 
• It differentiates itself from competitors on three fronts. 
  1. Firstly, it is an early mover in affordable housing, where demand is growing. 
  2. Secondly, the group offers packages that add value, ie buyers can purchase fully-furnished homes in a cost-effective manner via convenient home loans. 
  3. Lastly, its projects feature “smart services”.

Formula to follow the IKEA mixed development model overseas. 

• One of Aspen’s key strengths is its partnership with Ikano. 
• Ikano currently operates five stores in Singapore, Thailand and Malaysia, with three more under construction. It also plans to double its business in the coming years. Aspen could grow along by replicating its strategy of building neighbouring projects in other parts of Malaysia and overseas (via potential JVs with local developers). 

MYR1bn in unbilled sales = Strong earnings visibility. 

• We estimate the group to rake in a healthy 2017 net profit of MYR70m (2016: net loss). Earnings can further grow by 74% and 45% in 2018F-2019F respectively, as earnings are progressively recognised upon project completion. 
• Aspen’s policy is to distribute at least 20% of the group’s PATMI as dividends from 2018 onwards. 

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VALUATION

• Initiate coverage with BUY and SGD 0.31 Target Price based on a 45% discount to our RNAV estimate. 
• The higher RNAV discount (compared to the typical 20-30% for developers) reflects Aspen’s smaller size, shorter track record and concentration risks. We believe our GDV assumptions are fairly conservative, as they: 
  1. Are based on current selling prices or comparable selling prices in neighbouring projects;
  2. Have not assumed any price appreciation for future sales in existing launches and upcoming developments.
• Key risks to our assumptions are an unexpected slowdown in Penang’s property market, the group’s inability to deliver the projects on time and a potential breakdown of its JV partnership with IKEA.

AVC assumptions. 

• Most of Aspen’s growth potential hinges mainly on the AVC development. In our GDV calculation for AVC, we used the proposed development plans for various plots, as indicated by management (based on Henry Butcher’s valuation reports as at 31 Mar).
• Our selling price assumptions for various types of developments in AVC are: 
  1. Office space: MYR600.00 psf;
  2. Condominiums: MYR550.00 psf; i
  3. Retail shops: MYR600.00 psf;
  4. Hotel:MYR550.00psf;
  5. Small office/home office (SOHO) suites: MYR575.00 psf; 
  6. Bungalow office:MYR450.00psf; 
  7. En bloc office: MYR425.00 psf; 
  8. Bungalows: MYR3m per unit.
• We assumed an 18% net margin for the development, which we believe is achievable due to the low land acquisition cost (around MYR45.00-50.00 psf). In our model, we assume that the entire AVC project is to be fully completed over a period of nine years, i.e. by the end of 2025.

Sensitivity Analysis

• As AVC accounts for the bulk (73%) of our RNAV estimate, we conducted a sensitivity analysis on our assumptions for its net margins and discount rates. In our analysis, every 1ppt change in its net margin (currently at 18%) for AVC would imply a c.4% increase or decline in our RNAV estimates.
• Similarly, every 1ppt change in the discount rates assumed would lead to a corresponding c.4% change (ie increase and decrease) to our RNAV calculation.

Discount rate assumptions. 

• We arrive at our RNAV net surplus by using a discount rate, i.e. cost of equity (CoE) of 10.5%. Our CoE is calculated based on a risk-free rate of 3.5%, beta of 1 and a market risk premium of 7%.

FINANCIALS

Expect multi-fold net profit growth as earnings are progressively recognised. 

• As at 1H17, Aspen unbilled sales stood at MYR1bn. The orderbook is backed by strong sales across its existing launches in Tri Pinnacle (82% sold as at 1H17), Vervéa (84% sold), Vertu Resort (60% sold) and Beacon Executive Suites (56% sold). The revenue for the units sold is recognised based on the percentage of project completion. As the bulk of the projects are still in the early stages of completion, earnings are expected to kick in progressively upon the different completion stages.
• For FY15-16, Aspen reported net profit of MYR5m and a loss of MYR300,000 respectively. The key reason for the FY16 loss was the lower earnings recognition and higher administrative expenses (+98% YoY) and opex (+113% YoY) incurred. This was on the back of elevated employee expenses, depreciation charges, and selling and distribution expenses, mainly due to the initial launch of AVC.
• With the increased pace of construction progress, we expect a jump in revenue and earnings contributions ahead. For FY17, we expect a near four-fold increase in revenue to MYR395.1m and a net profit of MYR70m, with Tri Pinnacle and Vervéa being the key contributors. In 1HFY17, Aspen recorded a revenue of MYR108m and a net profit of MYR18.5m with a better than expected gross margin of 46.6%.
• For FY18-19, we expect net profit to further increase YoY by 74% and 45% respectively. Our gross margin assumptions for FY17-19 are 36%, 34% and 32% respectively (FY16: 36%). We have also assumed 40% and 15% increases in administrative expenses for FY17-18 respectively to factor in higher staff expenses and other costs.

Gearing to remain low on the back of healthy presales. 

• As of 1H17, Aspen has net cash (net debt/total assets) of MYR13.5m. Overall, we expect the group to maintain a healthy balance sheet and its gearing level to remain low (ie less than 20%) over the next three years. This is due to the cash generation ability from its successfully sold phases in earlier launches, which should help fund its working capital for subsequent developments.
• As at 14 Jun, Aspen has total banking facilities of approximately MYR683.2m, of which MYR543.2m remain unutilised. The banking facilities comprise mainly term loans, bridging facilities and bank guarantees.

Dividend policy of 20% of its PATMI commencing 2018F. 

• Aspen (or its subsidiaries) has not declared or paid any dividends since its incorporation. In 1H17, Aspen announced a dividend policy of distributing not less than 20% of net profits from 2018 onwards. This translates to a healthy dividend yield of 4% and 6% for FY18-19 respectively, based on our calculations.

Taxation. 

• Under Malaysian taxation laws, income tax is charged on income accruing in or derived from the country, or received in Malaysia from outside the nation. The taxation of dividend distributions are under the single-tier system, whereby corporate income is taxed at the corporate level and this is a final tax.
• Single-tier dividends paid or credited by a company that is a tax resident in Malaysia (ie a “Malaysia Resident Company”) are exempted from the income tax. A company is a tax resident in Malaysia if the control and management of its businesses are exercised in the country. Resident companies are currently taxed at the rate of 24%.
• For the years of assessment 2017 and 2018 – subject to fulfilment of conditions – companies that achieve an incremental chargeable income may enjoy a reduction of income tax rate of up to 4%. Dividends paid by a Malaysian resident company from its tax- exempt income account are tax-exempt in the hands of its shareholders. There is no dividend withholding tax in Malaysia.

Peer comparison. 

• Aspen’s Malaysian-listed peers are currently trading at an FY17F average of 1.1x P/BV and 16.3x P/E. Singapore-listed property stocks that have exposure to Malaysia are trading at an average of 2.0x P/BV and 15.6x P/E for the same forecast period. 
• Aspen trades at a FY17F P/BV of 5.3x. The expected future net profit growth should lower this ratio down to a P/BV of 1.7x by FY19F.

KEY RISKS

• Highly reliant on IKEA relationship. Aspen’s project development success relies heavily on its relationship with IKEA for its development projects. Thus, a breakdown of the ties between the two parties would have a highly negative impact on the group’s future outlook and financials.
• Concentration risk. Aspen’s current and future development projects are almost entirely situated within Penang. Being highly reliant on the economic and industry conditions of the state, the group’s business risks include changes in the regulations made by the Penang State Government, supply and demand conditions, market sentiment and competition. Hence, if the state’s property market faces a downturn, the developer’s revenues would likely be adversely affected due to its lack of diversification.
• Execution risk. Aspen has a limited track record in terms of property development. Additionally, its business model is reliant on third-party contractors, where – despite stringent measures in the selection of such contractors – delays in projects or budget overruns may occur. This may affect the group’s project profitability and future prospects.
• Relationships with suppliers. Aspen has tied up with a lot of global suppliers to fully furnish the projects it currently undertakes. A loss of a key supplier could have a negative impact on its project development. Additionally, any substandard quality products from its suppliers could also hurt the group’s reputation.
• Loss of key management team. Aspen’s success heavily hinges on the execution of strategy by its key management team, in particular CEO and executive director Dato’ M Murly and executive director Dato’ Seri Nazir Ariff. Any premature departure of key management personnel would have an adverse impact on the group’s progress.
• Delays in surrounding ecosystem developments. Although Batu Kawan was chosen by the Penang State Government as the mainland site for a major industrial area and third satellite town of Penang, it is not an absolute certainty that these plans would ultimately be completed as planned. If these plans fall through, it may negatively affect property prices in Batu Kawan, where AVC is located. However, this risk is minimal, in our view, as most of the projects in the area have been successfully tendered out, with many currently undergoing their construction phase.
• Banking regulatory risks. Aspen’s success also depends on buyers successfully securing financing for its projects. Currently, banks are supportive of the group’s developments and are able to fund the total unit costs, which include furnishings as well. Any loan tightening by the banks could have a negative impact on buyers’ borrowing capabilities and, thus, hurt demand.
• Political governance risks. Aspen’s ability to secure timely project approvals depends on a stable political environment. Additionally, the pace at which Batu Kawan transforms is also heavily reliant upon the local government’s push in promoting and executing its infrastructure development plans.
• Forex impact. Aspen’s revenue, costs and borrowings are denominated in MYR, while the stock is quoted in SGD. The group does not currently hedge any of its currency exposure. Thus, an adverse movement of the MYR vs SGD could potentially result in lower earnings and dividends in SGD terms.

COMPANY HIGHLIGHTS

• Aspen was founded in Malaysia in 2013 as Aspen Vision Development Sdn Bhd (AV Development), with the vision of providing middle-income mass market purchasers with affordable residential and mixed development properties at strategic locations. 
• Initially, as a JV with Bursa Malaysia-listed Ivory Properties Group (Ivory Properties), Aspen Vision Land SB (AV Land) entered into a purchase and development agreement with Penang Development Corp (PDC) to acquire the land for the development of AVC.
• In 2015, AV Development acquired the remaining stake in AV Land from Ivory Properties. Aspen was then incorporated on 22 Dec 2016 in Singapore under the Companies Act under the Aspen (Group) Holdings Pte Ltd name. 
• The company was listed on the SGX catalist board in 28 Jul 2017.

Strategic JV with Ikano the game changer. 

• In Aug 2014, AV Land and Ikano entered into a master agreement to jointly develop AVC. We understand that the latter is part of the privately-held Ikano Group – with operations in 14 countries – which manages the IKEA franchise rights for South-East Asia. Based on Ikano’s 2016 data, it currently operates five IKEA stores – Malaysia (two), Singapore (two) and Thailand (one) – and has three under construction (including the one in Batu Kawan) in Malaysia and Thailand. Ikano also announced that it plans to double its business in the region in the coming years and has opened a small development office in Manila, the Philippines.
• As per the JV agreement, Ikano is to develop the only IKEA store in northern West Malaysia in AVC. Construction is currently underway and the store is set to be open by 1Q19. Ikano would also take the majority 70% stake in the neighbouring Bandar Cassia Shopping Centre (BCSC) and play a key role in the curation of the mall’s tenants. Additionally, Ikano is also taking a minority 20% stake in the mixed developments in AVC, with Aspen holding the majority 80% portion. We understand that this is the first residential/mixed development project that Ikano has taken a stake in – this is an endorsement to the growth potential and future developments in the region.
• We believe the JV partnership also provides a template for Aspen’s future growth by replicating a similar strategy. The group could potentially grow along by replicating a similar strategy of building mixed developments in other parts of Malaysia and overseas markets (via potential JVs with local developers). Management has identified Thailand and the Philippines as potential near-term target markets.

Aspen Vision City (AVC) project developments. 

• Aspen Vision City (AVC) is Aspen’s 245-acre flagship freehold project, which is located in Bandar Cassia, Penang. The project comprises the following: 
  • Mixed development. Aspen is to hold an 80% stake in AVC as the developer of the mixed development land (save for those lands sold to third parties). The remaining 20% is held by Ikano. The 170-acre mixed development land is expected to house residential homes, offices, medical facilities, a 20-acre central park, international school(s), hotels, and other retail and commercial components. There are two ongoing projects within the mixed development, namely Vervéa and Vertu Resort. Aspen is also expected to launch Viluxe – a 133-bungalow project in AVC – soon;
  • Bandar Cassia Shopping Centre (BCSC) is to be developed on Plot 4 of the AVC land parcel that sprawls across 51 acres and is very close to the linkage spot of the Penang Second Bridge. Ikano is to have a majority 70% stake in the development with Aspen holding the remaining 30%; 
  • IKEA store. The 24-acre IKEA store, the first in northern West Malaysia, is to be developed by Ikano Penang Pte Ltd (Ikano Penang);
  • Columbia Hospital and petrol station. In August, Aspen announced the completion of the sale of land, ie Plot 25, in AVC to Columbia Asia SB (CASB). This was for the purposes of constructing and operating a Columbia Asia Medical Centre – and its supporting amenities – for a total consideration of MYR17m (or MYR130 psf). The medical centre, scheduled to be completed by 2020, is expected to have 150 beds. The transaction would result in a net gain of MY8.8m. Separately, Aspen has also sold an acre of land in Parcel 1A to Pendang Pembangunan SB (PPSB) for MYR6.5m (or MYR150.00 psf), resulting in a net gain of MYR2.9m.

IKEA store a key re-rating catalyst for AVC. 

• Based on historical experience, the opening of an Ikano Power Centre and IKEA outlet in 2003 boosted the population density, property demand and real estate values in the Taman Tun Dr Ismail, Bandar Utama, Mutiara Damansara and Desa ParkCity enclaves.
• We expect the Batu Kawan area to experience a similar trend in the coming years. This is given the enhanced road infrastructure, pick-up in industrial and commercial activities, and establishment of more education institutions (eg GEMS International School in Pearl City and the KDU Penang University College campus) in the area.
• Among the catalytic developments, the premier shopping outlet by PE Land SB and CB Richard Ellis (CBRE) already kicked off operations in late 2016. We believe that once the IKEA store opens in 2019, we expect Batu Kawan to be able to pull in a bigger crowd. This is given its local population catchment of around 5.8m people, i.e. 2.1m from Kedah, 1.7m from Penang, and about 2m from North and Central Perak. This is in addition to the flow of foreign tourists and shoppers from Medan (Indonesia) and South Thailand.

Maiden foray into Selangor’s affordable housing market. 

• In September, Aspen announced the acquisition of freehold land in Bandar Batu, Selangor, from Tropicana Kajang Hill SB. The total purchase consideration for the land was MYR66.7m. The land has been approved for two blocks of residential properties, comprising SOHO and serviced apartments, one block of 9-storey podium car parks, 16 shop lots (retail units), and other facilities. Aspen’s estimated total GDV of the development is MYR500m.

Quality homes at affordable price levels. 

• Aspen’s aims to mainly cater to housing demand from middle-income mass market purchasers. As a developer of affordable housing projects, it is able to obtain certain beneficial planning approvals, such as those in relation to density plot ratios. This makes the group’s projects cost-effective and enables it to deliver healthy margins.
• Additionally, Aspen is able to further monetise its developments under the Penang Affordable Housing Scheme (PMM) by entering into quota-sharing agreements with other developers. The group currently has a quota-sharing arrangement with Ivory Properties for MYR19.8m and Tropicana Ivory for MYR62.3m in aggregate – payable upon the requisite milestones for units under construction at Tri Pinnacle.
• Despite keeping prices at affordable levels, Aspen’s projects provide condominium facilities and amenities, including – but not limited to – swimming pools, gymnasiums, landscaped gardens and conference room facilities. This boosts the attractiveness of its projects.

Unit customisation enhances value proposition. 

• The majority of Aspen’s property purchasers are end-users. Thus, to increase the appeal of its projects, the group allows its customers to customise the units with home appliances from reputable brands at cost- efficient prices. It is able to achieve cost effectiveness by tying up with suppliers and purchasing in bulk, and is looking to enter into partnerships with Teka Group (Teka) to supply kitchen and home appliances and Schindler for the provision of elevator solutions. The additional frills are provided through optional integrated additional costs in sale and purchase agreements. In addition, Aspen also intends to deploy smart services at its developments in order to target the younger generation of property buyers.

Partnership with established players to provide value-added smart services. 

• Aspen is collaborating with established players such as Antah Schindler SB, IBM Malaysia SB and Telekom Malaysia (TM) (T MK, BUY, TP: MYR7.30) to provide smart services in its projects. Through the provision of such services, the group aims to provide sustainable and urban “Smart City” developments for buyers. 

Innovative marketing strategies. 

• Aspen currently has the following marketing campaigns – Aspen My Deposit Scheme (AMDS) and Aspen Privilege Card (APC). It also provides progressive grants to buyers of certain developments for selected units.
• AMDS was introduced in Jul 2016, whereby Aspen provides certain first-time purchasers of Tri Pinnacle and Vertu Resort units with subsidies of up to 5% of the purchase price. In compliance with the prescribed form of the sale and purchase agreement under the Housing Development (Control and Licensing) Regulations 1989, Aspen collects a down payment of 10% of the purchase price upon signing the sale and purchase agreement from buyers – 5% of the purchase price shall be deemed paid under AMDS and the remaining 5% payable by buyers.
• There are four categories within the APC programme, namely the Gold APC, Platinum APC, Titanium APC and Titanium Reserve APC. The type of APC depends on the accumulated value of the property or products purchased by the APC holder or the pre- paid sum deposited. 

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-10-20

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