(TapDance) Low Risk High Return (8) – AME Elite
Summary
Despite the tremendous opportunity, AME’s future prospect comes almost for free upon carving-out its property rental income portfolio, hence explains the Low Risk High Return investment payout profile.
AME is a hidden gem for an obvious trade-war beneficiary as global industrialists increasingly shifts supply chain towards Malaysia.
While analysts alike are amaze by the fast take-up rate of AME’s product, few connects the industrial property’s robust demand with global supply chain reshuffle. Earnings visibility is a lot clearer upon understanding the underlying driver.
AME’s recurring rental income alone worth more than its existing market cap if spin-off via tax-free REIT. Management is a brilliant strategist in its own right cultivating various synergies and cross selling opportunities amongst its divisions.
Spillover of the negative perception for the whole property development sector suggests AME is overlooked despite its entirely different value proposition as an industrial park developer.
Reference
Description
Market has to accept the fact that trade/tech-war between US and China is a new norm. Malaysia a major beneficiary as the global supply chain reshuffles.
Malaysia tech and EMS related companies have received their fair share of recognition as beneficiaries under the new norm. Unfortunately – fortunately for us – market failed to look far enough.
AME Elite (AME) is an industrial park developer. Its I-Park sales momentum is robust. Management has indicated healthy pipeline of sales from foreign companies hence faces fast land-bank depletion. The above explains AME’s recent acquisition of RM435m worth of land (170 acres) from UEM Sunrise weeks ago.
To further illustrate the point, AME secured a contract from Enics AG (to complement its Europe and China sites) during the MCO period demonstrates the urgent demand from foreign industrialists to actively diversify their supply chain into Malaysia.
Land/Property sales
VS Industry Bhd announced to acquire ~400k sqft industrial real estate from AME for ~RM100m. Simply an attempt to provide context although it is overly simplified, 170 acres = 7.4m sqft or 18x VS’s acquisition.
It is no coincidence that EMS companies are collectively expanding floor space and capacity.
The active industrial land sales/construction phenomenon is an evidence of a robust Malaysian industrial segment driven by the trade war led global supply chain reshuffle. Facts and figures to support the theme - AME’s current order-book ~RM300m vs. less than RM100m a year ago.
The ultra-low interest rate environment is friendly for asset-owner wannabes.
Recurring Income
For investors who shuns lumpy (construction) revenue, AME owns and operates purpose-build worker dormitories.
It currently owns 2 dormitories i.e. Ipark @ Senai (2,572 beds commenced in 2019) and Ipark @ Indahpura (3,206 beds commenced in 2014). Occupancy rates at 81% and 95% respectively.
The third dormitory will bring bed count up to ~8.5K (by CY2021) and ~10K after the forth dormitory completes in 2022/2023. i.e. bed capacity to increase by ~50 – 70% from 2021 – 2023.
Overall the Property Investment and management segment (i.e. rental from industrial units and dormitories) contributed ~RM35m revenue or RM23m core PBT in FY03/2020.
Currently 32 industrial units leased vs. 27 units a year ago. The portfolio is 50/50 split by leases of more than or less than 5 years.
Purpose-build dormitory demand will likely remain elevated because of the pandemic scare. Business owners alike will prefer purpose-build dormitory compare to the conventional shop-house model to minimize contamination risk.
On the other hand, AME’s well manage dormitory is also a tool to attract quality customers/tenants for its industrial park – as oppose to older industrial zones / ‘vendor’ without a dormitory ready-solution. New bed capacity ramp-up will be quick given the above factors.
AME is also setting up its solar division to tackle its own industrial park’s untapped solar opportunity, as another recurring income ignitor.
Industry reputation and management quality
Axis REIT – a reputable industrial property owner – has long business relationship with AME. I find comfort when AME maintains sturdy business relationship with admirable player like Axis.
Management intends to replicate its i-Park model (AME’s signature) across peninsular Malaysia out from its Johor stronghold territory.
On top of geographical expansion, AME enhances its value proposition first by offering construction design/technical know-how, then worker dormitories and now via its solar venture.
Tremendous synergies and value creation for its customers and tenants. Who would have thought an industrial park owner is an operation synergy and cross selling strategist?
AME’s corporate transparency is decent; solid disclosures are provided in the company’s annual report.
Potential corporate exercises amidst ultra-low interest rate environment
If AME management is as good as appraised will likely take advantage of the ultra-low interest rate environment to spin-off its investment portfolio upon attaining certain scale. A tracker stock or a REIT vehicle saves on taxes too.
Axis REIT yields ~4%. As a comparison, AME’s market capitalization at RM900m, its RM23m investment PBT capitalizes at 4% will be RM575m or equivalent to 64% of market cap.
AME’s other assets are literally free if incorporate the ~50 – 70% dormitory bed capacity increase from CY21 – 23.
Why the opportunity
Short listing history (listed in Oct 2019)
Spillover of the negative perception for the whole property development sector suggests AME is overlooked despite its entirely different value proposition.
Valuation
AME is currently trading at 16x trailing earnings or 1.4x PB.
On the surface it appears fair for a reputable industrial property operator. In actual it significantly undervalues the pivotal moment of the Malaysian industrial industry’s structural change.
Catalyst
Strong earning visibility with fast expanding order-book (~RM300m)
~50% - 70% increase in dormitory bed capacity in from CY2021 - 2023
More VS-like land sales – EMS collectively expands capacity
Mgmt.’s aggressive land bank accumulation
Fresh 170 acres of land-bank inventory
Potential corporate spin-off – tracker stock / REIT
Refence
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Disclaimer: The material provided herein is for informational purposes only. It does not constitute an offer to buy or sell any securities. We accept no liability whatsoever for any direct or consequential loss arising from any use of information in this report.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise may buy/hold/sell the mentioned securities at any time without further notice.
https://klse.i3investor.com/blogs/tapdance/2020-10-16-story-h1534674334-Low_Risk_High_Return_8_AME_Elite.jsp
