Excerpts from analyst's report

NRA Capital analyst: Liu Jinshu

dominicsu 10.16Dominic Su, executive chairman of Regal International.
Photo: Company.
♦ 3Q16 results show marked improvement. Regal reported positive 3Q16 EBIT of RM0.8m versus RM0.9m in the six months of 1H16, despite a net loss of RM1.0m in 3Q16 due to RM0.4m from discontinued operations, RM0.5m of tax and RM0.6m of finance costs.

Revenue almost doubled from RM18.7m in 2Q16 to RM37.2m in 3Q16. The high revenue growth and positive EBIT demonstrate the viability of Regal’s business and pave the way for higher profitability and hence shareholder returns in the future.

Rapid addition of new projects in 2015 and 1H 2016 now paying off. We understand that 3Q16 revenue was evenly split, at about RM7m each from Tropics City, Airtrollis Phase 1, Tondong Heights Phase 1, Serapi Maju, and other smaller projects. Regal’s results today show that it was astute to add many new projects earlier as these projects are now generating economies of scale and covering overheads, even though they are in varying stages of sales and completion. Regal would not have grown as fast had it focused on selling the remaining units at older projects in the current market.

Regal International
Share price: 
14.8 c
Fair value: 
31.5 c

Projecting >RM450m of revenue over FY17 – FY18. Regal Corporate Park Phase 1 is expected to contribute RM20m to RM30m of revenue on completion in 1Q17, out of GDV of about RM49.4m as it is about 50% sold. Tondong Heights Phase 2, Tropics City, Airtrollis Phase 2 and Block 2 of 72 Residences are also expected to contribute towards revenue in 2017.

Treetops@Kemena has already obtained 20% to 30% registered interests since July and construction will ramp up in 2017, leading to improved revenue contribution. These projects have a total GDV of about RM729m. Hence, we revised our forecasts to expect 20% to 30% per annum revenue growth and project revenue of RM210m in FY17 and RM255m in FY18.

Recommendation and valuaton
liujinshu2.17"In a nutshell, Regal offers high growth potential, but is also exposed to all the risks typical of small and medium sized companies. Hence, we maintain our high return / high risk view of Regal. We have previously updated our valuation, but did not revise our forecasts to factor in new projects, higher costs and the disposal of the Precision Business.

"In this update, we have updated our forecasts to better reflect the current circumstances of Regal. For instance, we now estimate PATMI of RM3.7m and RM11.0m for FY17 and FY18, as opposed to RM18.2m and RM23.7m previously. As for our valuation, we have factored in the weaker RM currency and reduced our fair value estimate of Regal from S$0.330 previously to S$0.315.."

-- Liu Jinshu (photo)

Disposal of Precision Business to improve profitability and strengthen balance sheet. Based on the projected revenue, we expect Regal to be profitable in 4Q16 and FY17, excluding any losses from discontinued operations – its legacy Precision Business.

FY16 PATMI is estimated to be negative RM21.3m due to RM21m of loss from its Precision Business, whose disposal is subject to shareholders’ approval on 15 December and completion three months thereafter. The disposal will yield Regal with S$7m (RM22m) in cash to be mainly used in the repayment of borrowings.

Preparing for next stage of growth. In 2H16, Regal has been aggressively entering into collaborations with partners from a wide range of industries, e.g. hospitality, tourism, industrial park and asset management. While these moves seem haphazard and are unlikely to be immediately profit accretive, we realised that Regal is building its capabilities and branding via these partnerships, which will allow Regal to grow faster than other domestic centric competitors. Maintain Overweight (high return / high risk).

Full report here.

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