IDEAL (9687) - Part 3 - The "Penang Condo King" and property tycoon who has been the driving force behind IUBIB's roaring success


IDEAL UNITED BINTANG INTERNATIONAL BERHAD (IUBIB)
 
This post is the THIRD of FOUR parts on the first pick for our Undervalued Bursa Gems series - Ideal United Bintang International Berhad.
 
But first and foremost, we would like to congratulate those of you who took the time to read our first two articles, was diligent enough to do your own research, and then did not hesitate to invest in IUBIB prior to the QR release earlier today. Indeed, we made it quite clear in Part 1 that due to the consolidation phase the stock and its warrants were currently undergoing, it was primed for a breakout with Q2 results likely to replicate that of Q1 and that it would be wise to buy into IUBIB before the QR announcement. And sure enough, IUBIB rose 30% to hit limit up by the end of the afternoon session after the stellar results had been released during the lunch hour trading break.  
 
The figures for Q2FY18 was also exactly as we had predicted in Parts 1 & 2 with 1HFY18 net EPS coming in at 51.48% of our conservative FY18 full-year forecast. Assuming IUBIB undertakes no further corporate exercises or asset injections for the remaining 2 quarters in FY18, our target price (based on a forward PE valuation of 5.0x)* remains unchanged at RM2.12. As with all our other investments, we look forward to continue holding without exception until it reaches our target price at the very least before we re-assess if our position is still tenable and if our investment is undervalued/overvalued in light of the circumstances at that point in time.
 
In Part 1 (link), we provided a financial overview on IUBIB and in Part 2 (link), we looked at the primary drivers of its steadily increasing revenue and PAT growth. This article (Part 3) will be dedicated to understanding the relationship between Tan Sri Alex Ooi, IUBIB and his private development entity, Ideal Property Group (IPG). It will be brief as we would like to save the best for last in Part 4 when we take a look at IUBIB’s future growth catalysts including IPG’s role as the project delivery partner (PDP) for the RM46 billion PTMP and why we think that there is still ample opportunity for shareholder value creation in IUBIB.
 
* By comparison, the industry average PE for the KLSE property development sector is approximately 7.3x.
 
Current Price : RM1.32 (24/08/18)
Target Price : RM2.12 - based on a FY18 Forward PE valuation of 5.0x (under the most conservative scenario assumption that q-on-q revenue/profit growth for Q3 & Q4 of FY18 is stagnant at 0%)
Potential Upside : RM0.80 (60.61%)
 
Acronym Reference
IUBIB - Ideal United Bintang International Berhad
TSAO - Tan Sri Alex Ooi
IPG - Ideal Property Group
EC - Executive Chairman
 
To understand IUBIB’s success story thus far, we think it is first crucial to understand the background and motivations of the man who has led the company from being a loss-making heavy machinery dealer to one of the fastest growing companies in terms of revenues and profits listed on the KLSE - its executive chairman, Tan Sri Alex Ooi Kee Liang (TSAO).
 
So, who exactly is Tan Sri Alex Ooi?
 
TSAO is no stranger to the property development scene. He is widely known in his hometown state of Penang as the “Condo King” and for good reason. By the time he acquired his initial 31.48% stake of IUBIB on 17/10/13, he was already a seasoned third-generation developer who had overseen over RM1.12 billion worth of local projects in GDV (total sales value) over the span of 10 years. Most of these projects were conducted on a JV-basis under the umbrella of his privately-owned entity, Ideal Property Group (IPG).
 
it is very important not to confuse IUBIB (the listed entity being discussed) with IPG (TSAO’s private company). As of 24/08/18, IUBIB had a market cap of approx RM145 million while IPG’s 6 main property projects launched in 2018 itself had a staggering GDV of RM2.98 billion. It is difficult to accurately estimate IPG’s valuation due to a lack of available information as it is a privately-held company. However, what we can be certain of is that IPG is one of Penang’s largest property developers (in terms of land bank size and total GDV). To date, TSAO has successfully developed 18 projects and sold over 12,000 residential units in Penang alone. He aims to hit 20,000 units by 2020, a target that he is well on his way to achieving if he is able to successfully deliver the 4,900 units that he has targeted for 2018.
 
Since 2010, IPG has also been aggressively acquiring residential and commercial development land across Penang. This includes an enviable 12-acre seaside parcel near Queensbay Mall in Bayan Lepas. By 2013, it had amassed a sizeable 70-acre land bank of prime residential land and by March 2018, that figure had increased nearly 3.5x to 250 acres. The group have an extremely diversified property portfolio consisting of affordable high-rise homes, luxury condos, landed residential property and even industrial parks. You can view a comprehensive list of their past, current and future projects here.
 
So it comes then as no surprise that upon his appointment as EC of IUBIB on 23/10/13, TSAO chose to immediately divest its legacy heavy machinery business and pursue the development of affordable homes as the company’s core business. In fact, we strongly believe that TSAO’s initial acquisition only served as a reverse merger (backdoor listing) for his private entity, IPG. What’s interesting is that based on IUBIB’s corporate actions over the past 3 years, we have noticed that TSAO sees little need for public fundraising (which can explain to some extent why he did not bother to take IPG public). This is evidenced by the fact that ever since becoming chairman, he has personally invested heavily in IUBIB via his investment holding vehicle, ICT Innotech. We have tracked each and every one of TSAO’s equity injections in the table below :
 
DATE
SECURITY TYPE
INITIAL SHAREHOLDING
# OF SECURITIES (Amount Paid)
FINAL SHAREHOLDING
17/10/13
Shares (Off-Market)
0 %
17 million (N/A)
31.48 %
18/12/15
Shares
(Private Placement)
15.39 %
13 million
(RM13 million)
27.16 %
22/01/18
RCPS *
(Private Placement)
27.16 %
136.35 million (RM77 million)
67.39 % (upon full conversion)
23/04/18
Shares (Off-Market)
27.16 %
29.7 million (RM16.04 million)
54.06%
* For a detailed description on the rationale of the RCPS issue, refer to the asset injection table in Part 2.
 
Between 21/11/13 and 22/12/15, there were 3 private placement exercises proposed and completed with IUBIB’s paid up share capital and outstanding number of shares roughly doubling from 54.186 million to 110.47 million. It is interesting to note that of the 56.284 million new shares issued in that period, TSAO would eventually come to control approximately 42.7 million (75.86%) of those shares by April 2018, shortly before the announcement of last quarter’s stellar results. Further, by analysing the company’s shareholdings in its annual reports, we have even conclusively traced where a further 3.5 million (6.22%) shares of the initial private placement ended up - none other than Mr Ooh Kier Heng, Ideal Group’s IT Manager (according to his LinkedIn at least).
 
Thus, with that knowledge that approximately 82% of the shares issued in the past 2 years ended up with insiders of the company, it strengthened our conviction that management was likely to create value for its shareholders in a big way since they would stand to gain the most from any appreciation in the share price.
 
In fact, we have tried very hard to figure out why TSAO would invest heavily in IUBIB considering (a) it had nothing to do with property development at all until his own arrival in Oct 2013 and (b) his private entity, IPG is already very successful in its own right. So why takeover a public company and then start cherry-picking assets to inject from the private entity into the public one?
 
One of our hypothesis is that TSAO views IUBIB’s listed status as a medium of prestige to leverage his flagship Ideal brand even further. This can be evidenced by the fact that he chose to add the word “Ideal” into company’s original name, “United Bintang Berhad” on 13/06/14, barely half a year after taking over as EC (an action that almost certainly confirmed our “backdoor listing” theory). The word “International” was later included during the reorganisation exercise, thus lending further credibility to the organisation and perhaps, even giving us some idea of the direction in which he intends to steer IUBIB towards in the future.
 
We also found another incident of particular interest. Having bought out the 2nd and 3rd largest shareholders to increase his stake from 27% to 54% on 23/04/18, TSAO turned down the opportunity to take the company private by intentionally making a deeply undervalued offer for the remaining shares and warrants in the subsequent MGO. At RM0.54 per share and RM0.01 per warrant, it was a steep discount to the market price at the time. Further, IUBIB was only thinly traded (average daily volume for April 2018 - approx. 2,000) with prices hovering around the RM0.60 mark. Knowing fully well the earnings quality of the assets he had injected into IUBIB just a few months prior, he could’ve easily opted to take IUBIB private by paying a premium over the market price and still profit in the long run. We think even an offer of RM0.80 would’ve easily convinced most shareholders to surrender their shares. And yet, he chose not to - which to us, was another sign that he saw more value in staying listed than going private (an intent he had reaffirmed even during the prior RCPS issuance by providing an irrevocable undertaking not to exercise conversion of the RCPS any time In the near future as it would trigger an MGO).
 
Moreover, taking the company private would also mean putting the ESOS scheme that management first proposed on 17/08/17 and have since worked hard to implement at risk. If IUBIB were to be taken private, there would not be a market for employees with stock options to realise the value of their potential shareholdings.
 
But perhaps the most fundamental question we have to ask ourselves is - having personally spent approx. RM117.94 million* on turning IUBIB into IPG’s publicly-listed “sister company” to enjoy the prestige and all the relative merits of being listed without (a) having to go through the long, costly and complicated process of an actual IPO and (b) having to dilute his ownership stake in his flagship company - would TSAO now think of jeopardising his own vested interests by taking the company private OR allow IUBIB to cease to be a going concern by not injecting any further assets in the future? Esp when his current effective ownership of IUBIB now also stands at 54%?
 
We certainly think NOT as he stands to lose so much more than he stands to gain by doing either. And it’s precisely why we did not hesitate to invest in IUBIB when last quarter’s results were announced having done our own due diligence. We believe that as long as key members of management continue to stay invested in a big way, it is in their best interest to maximise shareholder value and by doing so, allow even minority shareholders like ourselves to benefit from any value creation exercise in the long run.
 
* We computed TSAO’s initial off-market transaction on 17/10/13 at RM0.70 which represents a RM0.10 discount to the closing price on that day.
 
[END OF PART 3]
 
If you liked what you read in Part 3, you can read Part 1 here and Part 2 here.
 
We have saved the best for last in Part 4 as we analyse IUBIB’s future growth catalysts including IPG’s project delivery partner (PDP) stake in the RM46 billion Penang Transportation Master Plan (PTMP) and why we think that there is still ample opportunity for asset injection and shareholder value creation in IUBIB.
 
This article is NOT a buy or sell recommendation and should not be treated as such under any circumstances. Our findings merely serve as an educated opinion to encourage discussion and help retail investors make better informed choices. You’re always encouraged to conduct your own thorough research before deciding to invest in ANY & ALL counters and we will not be held liable for any of the investment decisions (good or bad) that you make. We also make it a point, out of principle, to disclose if we have a position in the company and stand to benefit/lose from any fluctuations in price.
 
If you are keen to get in touch with us for any reason, we are reachable @ iquantumapex@gmail.com.


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