REGAL INTERNATIONAL: Initiating coverage with 73% potential upside

Excerpts from analyst's report

» Unusual property developer business model. Unlike developers in Singapore and Malaysia, Regal develops properties without first acquiring the land in Sarawak. Instead, Regal enters into Development Agreements with the existing land owner, whereby in consideration of the group undertaking and completing the development project at its own costs and expenses, Regal is entitled to a major portion of the sales proceeds from units developed on the land parcels, and the remaining minority portion allocated to the land owners. The benefit from this business model is Regal does not need to gear up heavily to acquire land, the development and construction costs is also mainly funded by the proceeds from the presales launched.

» Property Outlook for Sarawak in 2015 remains bright. Sarawak has Malaysia’s second highest state GDP per capita of RM41,115 in 2013, after Kuala Lumpur topping with RM79,752. The state aims to achieve gross domestic product (GDP) growth of up to 5% in 2015 compared with 4.7% in 2013 and around 5% in 2014. Sarawak has seen GDP rise in the past two decades and now contributes around 10% of Malaysia’s total GDP.

» Familiar with the business operations and strategies in Sarawak. Regal’s main operations are based in Kuching, Sarawak, which has seen constant growth in the property sector over the last few decades. The group’s model is generally to launch its development projects for sale as soon as the group obtains the sales permit. In line with the its marketing strategy, the group does not over-build and usually aims to sell at least 20% of the development first before it proceeds to the construction phase.

» Outlook for another core business, precision engineering, remains positive. After strong growth of 12.9% in 2014, worldwide semiconductor capital spending is projected to grow only 0.8% in 2015, according to Gartner, Inc. However, equipment spending will increase 5.6% in 2015, down from the 11.3% forecast in 3Q14, as the largest spenders adopt conservative investment strategies. Equipment spending outperformed capital spending in 2014 and will continue to do so in 2015.

Full report here.