Regal International Group Ltd - NRA Capital Research 2018-04-10: Cost Savings to Drive Profit Growth in 2018

Regal International Group Ltd - NRA Capital Research 2018-04-10: REGAL INTERNATIONAL GROUP LTD. SGX: UV1

Regal International Group Ltd - Cost Savings to Drive Profit Growth in 2018

Revenue grew strongly in 2017

  • For the whole of FY17, Regal International reported a 13% increase in revenue to RM168.6m.
  • Growth was mainly driven by an increase in construction revenue, arising from project management work undertaken by the group.
  • Due to local statutory reasons, Regal would undertake project management contracts to design, construct and sell properties at some projects and construction revenue refers to the value of building activity performed. As a result, construction revenue rose from RM12.7m in 2016 to RM46.7m in 2017.

Higher construction revenue weighed on gross margin

  • However, construction revenue has lower margin and group gross margin dropped from 46.4% in 4Q16 to 17.0% in 4Q17 and 25.5% in 2017 (9M17: 30.5%). Had Regal maintained its gross margin at 25% in 4Q17, the group’s gross profit would have been higher by RM5.3m and resulted in positive profitability in 4Q17.
  • Conversely, the group reported a net loss attributable to shareholders of RM3.24m in 4Q17.

Completed properties continue to weigh on balance sheet

  • Regal’s balance sheet included RM71.8m of inventories and RM17.8m of investment properties as at 31 December 2017. Cumulatively, these assets grew by RM52.7m in 2017.
  • In contrast, development properties fell from RM107.6m to RM63.7m (-RM43.9m). Regal has performed comparatively well in 2017, recognising RM110m of property development revenue while its peers’ property development revenue fell by 24% to 29% year-on-year.
  • Nonetheless, it will help to boost confidence if Regal can demonstrate higher balance sheet liquidity, e.g. by lowering receivables or inventories.

Business diversification to provide upside

  • We noticed that Regal has been looking beyond its traditional markets to grow. 
  • New ventures include a MOU to explore the development of education properties in Perlis and, within Sarawak, a MOU to develop and manage communal land within the Bako National Park. These niche projects will provide opportunities beyond the residential and commercial markets in Sarawak.

Valuation unchanged (High-return and high-risk classification)

  • In this update, we continue to value Regal at S$0.300 per share, based on the respective projects’ GDV and estimated profitability and excluding projects completed in 2017, e.g. Airtrollis Phase I. However, the realisation of such value will depend on the group’s ability to sell these projects and realise cash flows from them, which will likely take some time.
  • So far, Tondong Heights Phase 2 (GDV of RM23m) is about 70% sold, while Tropics City (SOHO and apartments GDV of RM199m) is about 50% sold. These projects will continue to contribute revenue in 2018.

Liu Jinshu NRA Capital Research | 2018-04-10
SGX Stock Analyst Report OVERWEIGHT Maintain OVERWEIGHT 0.300 Same 0.300