Dijaya Corporation - At The Stage Of Transformation

We initiate coverage on Dijaya with a Buy rating and fair value of RM2.00. Dijaya is entering the transformation phase after the completion of its amalgamation exercise in 3Q12. We are confident that the current ongoing de-gearing exercise led by Dato’ Yau will be successful. FY13 will see quantum leap earnings growth backed by RM50bn GDV in the portfolio. This will translate to massive PE compression.

A total makeover of balance sheet. Dijaya is actively disposing of its non-core assets, including small land parcels and investment properties, to reduce its gearing to 0.5x from the current 0.8x. This is the right strategy, as de-gearing will lead to margin expansion via interest cost savings. Meanwhile, the management will be more focused on its anchor projects. Based on our forecast, Dijaya’s net gearing is expected to lower to 0.6x in FY13 and 0.48x in FY14.

GDV of about RM50bn to back quantum leap growth. We expect FY13 earnings to jump 185% to RM170m, on the back of RM2.9bn worth of launches this year, as well as RM951m unbilled sales. Dijaya has about 900 acres of landbank but yielding RM50bn worth of GDV, as the popular water/sea-fronting projects make up almost half of the portfolio GDV.

De-gearing enables inorganic growth; M&A a wild card. Dijaya is likely to embark on inorganic growth to build up the size of the company. The de-gearing exercise is, therefore, necessary to strengthen its war chest, not only for normal landbanking activities, but also exploring the M&A angle.

Forecasts. Land sale/trading is a new business division for Dijaya starting this year. We estimate FY13-14 earnings to grow at 185% and 17%.

Investment case. We initiate coverage on Dijaya with a Buy recommendation and fair value of RM2.00, at 35% discount to RNAV. Despite the recent re-rating in the stock, we believe the market has yet to price in the full prospects of the company, considering the sharp improvement in earnings that will result in a massive PE compression to 7.6x in FY13 from 20x in FY12.

Source: RHB