Yoma Strategic Holdings - DBS Research 2018-05-31: Awaiting A Turn

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YOMA STRATEGIC HOLDINGS LTD SGX: Z59

Yoma Strategic Holdings - Awaiting A Turn

• Yoma Strategic's FY18 earnings fell 26% y-o-y due to soft real estate and lower fair value gains, mitigated by divestment gains.
• Revenue for non-real estate business grew 33%.
• Achieved FY18 target of 22 KFC outlets, en route to 32 in FY19; new businesses – Little Sheep Hot Pot and whisky JV with Pernod.
• Maintain BUY, but Target Price lowered to S$0.58.

BUY, Target Price lowered to S$0.58.

• We maintain our BUY rating but lower our Target Price to S$0.58, based on a 40% discount to RNAV. 
• The stock currently trades at an attractive 0.6x P/BV as it rides through the gestation period for its businesses.

Where we differ.

• Best proxy to the potential economic turnaround in Myanmar. Despite some disappointment on Myanmar’s economic growth, we believe Yoma remains the best proxy of a potential economic turnaround in Myanmar with the new government in place. With its diversified portfolio in property, consumer and automotive sectors, Yoma is well placed to tap into the growth.

Potential catalysts:

1. recovery in Myanmar’s property market,
2. its non-real estate businesses turning profitable.

FY18 net profit impacted by soft real estate market and lower fair value gains; supported by divestment gains.

• FY18 net profit fell 26% y-o-y to S$27m largely due to lower profit contribution from its real estate business, and lower fair value gains; mitigated by S$28m gain from the sale of its tourism business and currency translation gains of S$10m vs S$3m loss in FY17. 
• The non-real estate business recorded strong revenue growth of 33% y-o-y.
• Yoma has entered new business ventures:
  1. franchisor of Little Sheep Hot Pot,
  2. JV with Pernod Ricard on whisky.

Valuation:

• Maintain BUY, Target Price lowered to S$0.58. 
• We remain positive on the group's prospects and see it as a beneficiary of an improved economic outlook with the new Myanmar government.

Key Risks to Our View:

• Political and economic risk. Myanmar is still a developing country and its real estate and infrastructure sectors are in the nascent stage of the cycle. As such, continued supportive government policies on foreign investments are key to improving sentiment within the real estate space.

WHAT'S NEW

FY18 net profit impacted by still soft real estate market and lower fair value gains, mitigated by divestment and forex gains.

• Yoma’s FY18 net profit fell 26% y-o-y to S$27m largely due to
  1. lower profit contributions from real estate business (EBIT fell to S$8m from S$18m),
  2. lower fair value gains from edotco investment following the partial divestment of its stake (S$8.2m in FY18 vs S$28.8m in FY17), and investment properties (-25% y-o-y) and
  3. doubling of interest cost from higher borrowings; mitigated by S$28m gain from the sale of its tourism business and currency translation gains of S$10m vs S$3m losses in FY17.
• Excluding currency translation gains/losses, net profit fell 56% y-o-y to S$17m.
• FY18 revenue fell 7% y-o-y, largely impacted by the soft real estate business. Revenue from its real estate business halved to S$23m as the expected recovery of the real estate market was slower than expected.
• Yoma declared 0.25 Scents dividend per share, flat y-o-y.

4Q18 net profit hit by slow real estate market and lower fair value gains.

• 4Q18 net profit tumbled to S$4m vs S$24m in 4Q17 due to c.50% drop in revenue from real estate business and lower fair value gains from edotco investments and investment properties (S$14m in 4Q18 vs S$24m in 4Q17). This was mitigated by higher forex translation gains in 4Q18 of S$2m.

Real estate business remains soft; management believes to be near the bottom.

• Revenue from the real estate business in FY18 halved to S$23m, dragged down by lower sales of residences and land development rights (LDRs) due to the soft property market and a change in strategy to retain a residential block in Zone C, StarCity for long-term rental income.
• Despite the soft property market, The Peninsula Residences Yangon was launched in early 2018 and received encouraging interest largely from international buyers for the first 30 units released. We understand sales agreements for roughly half of the 30 units have been signed.
• Management believes that the property market could be near the bottom as the market awaits the Condominium Law to be effective. In addition, management believes a potential pick-up in the roll-out of infrastructure will further drive the property market. Recurring rental income remained relatively resilient y-o-y. 
• The loss of rental income from FMI Centre to make way for the Landmark development was compensated by rental income from its two Dulwich International Schools and the new office building in Pun Hlaing Estate.

Non-real estate business posted strong revenue growth; expect EBITDA to turnaround by FY2019 / FY2020.

• Its non- real estate business continues to do well with FY18 revenue increasing 33% y-o-y, contributing 60% of total group revenue, in line with management’s target to achieve at least 50% of revenue from its non-real estate businesses by 2020.
• Automotive and heavy equipment led with 34% y-o-y revenue growth while Consumer segment grew 30%.

Achieved FY18 target of 22 KFC stores; FY19 target of 32 stores.

• As at Mar18, Yoma achieved its FY18 target of opening 22 stores and has since opened its 23rd store in Yangon. The group targets to hit 32 stores by FY19. With a significant size and scale of more than 20 stores, management believes its KFC business could achieve EBITDA breakeven soon partially drawing from economies of scale and cost savings initiatives such as improvement in supply chain.

New venture to bring in Little Sheep Hot Pot to Myanmar.

• Yoma announced that it will be a franchisor to bring in Little Sheep Hot Pot into Myanmar to ride on the increasing hot pot trend in Myanmar, targeting the casual dining market. 
• Little Sheep, established in Inner Mongolia in 1999, now has close to 300 restaurants across 120 regions and cities including outlets in Shanghai, Hong Kong, Tokyo, New York, Toronto, Melbourne and Ulaanbaatar. Its first store is expected to open by 4QCY18 and targets to open some 6 stores in the future. Management expects capex per store could potentially be less than that of a KFC store.

JV with Pernod Ricard to expand whisky industry in Myanmar.

• Yoma recently announced its JV with Pernod Ricard to expand the whisky industry in Myanmar.
• Pernod Ricard is the world’s second largest wines and spirits company and its market entry represents the first time that a major global producer of wine and spirits has established a formal presence in Myanmar. Pernod Ricard will take the lead in management of the production facilities, extensive distribution network and brand portfolio of Access Myanmar Distribution Company. Pernod Ricard is expected to inject new capital for future expansions and expected to be the largest shareholder. Yoma is expected to own some 20% subsequently.
• While Pernod Ricard seeks to develop the local whisky industry in the near-to-medium term, the longer term aspiration is the potential to import Pernod Ricard’s range on wine and spirits into Myanmar when allowed.

Automotive and Heavy Equipment segment displayed strong revenue growth.

• The Heavy Equipment segment continues to achieve strong revenue growth riding on the mechanisation trend in the country and is a beneficiary of government contracts for agricultural machines. Management targets to double its market share in both the agriculture, construction and infrastructure sectors.
• In the automotive segment, Mitsubishi is showing good sales and awaits the opening of its Volkswagen showroom. Management believes this segment could potentially breakeven in the near-term.

New ventures – Grab and WaveMoney ongoing.

• New ventures previously announced such as Grab and WaveMoney are ongoing. The 50:50 JV with Grab is currently waiting to obtain the required licenses and approvals while WaveMoney continues to show rapid growth.

Maintain BUY; Target Price lowered to S$0.58 (from S$0.75).

• We maintain our BUY rating but lower our Target Price to S$0.58 from S$0.75 based on a lower RNAV of S$0.97 (previously S$1.08) and a higher discount to RNAV of 40% (previously 30%). 
• We lowered our FY19F-FY20F earnings estimates by 7% to 22% to factor in slower recovery from the real estate market, and higher expenses / start-up expenses for new businesses.
• Despite the lower Target Price and earnings estimates, we continue to believe Yoma is the beneficiary of potential economic turnaround in Myanmar with the new government in place. With its diversified portfolio in property, consumer and automotive sectors, Yoma could tap into the growth in various sectors in Myanmar.
• Key catalysts are
  1. pick-up in the recovery of the Myanmar property market,
  2. continued support from the government to facilitate farming mechanisation, and
  3. stabilisation and turnaround to profitability of operations at its KFC stores and its automotive segment.

Derek TAN DBS Vickers | Rachel TAN DBS Vickers | https://www.dbsvickers.com/ 2018-05-31

SGX Stock Analyst Report BUY Maintain BUY 0.58 Down 0.750