'Build-then-sell' concept serves SHL well
02/02/2005 www. theedge.daily Investing Ideas: By Nadia S Hassan

Integrated developer SHL Consolidated Bhd's "build-then sell" concept and strong track record are just some of the reasons analysts are favouring this small-cap property stock.

"SHL has adopted the 'build-then-sell' concept for years. We are given to understand that SHL only launches its products when they are about 70% complete," says AmResearch analyst Low Yee Huap in a report dated Jan 13.

"This strategy has four advantages. First, there is a high degree of certainty in terms of construction and development costs, which limits the possibility of cost overrun that could affect margins. Second, there is flexibility to optimise pricing, which helps the developer withstand the cyclical nature of the property market. Third, consumers have a high certainty of timely delivery, quality and low abandonment risk, which enables SHL to price its products at a premium. Lastly, with funding in place and without the need to depend on project sales, solvency risk is low," he adds.

The "build-then-sell" concept also helps SHL to keep control of the supply of its products, which translates into better-than-average profit margins, says Chan Ken Yew, an analyst with Avenue Securities in his report dated Jan 26.

"Also, SHL's low holding costs and high GDV [gross development value] of its landbank result in fatter profit margins, which help SHL to ride out any unexpected downturns," says Chan.

The group's landbank — 846 acres with an estimated GDV of RM3.1 billion — is located mainly in the Klang Valley, according to reports.

Another of the group's competitive advantages is the fact that it owns its own construction and building material manufacturing divisions.

"This means that SHL has considerable control over its construction and raw material costs, which helps its margins," says Chan.

The company has been profitable over the past 11 years, even during the Asian financial crisis. In FY2003, it posted a turnover of RM231.6 million and net profit of RM11.8 million. Although turnover dipped in FY2004 to RM160 million, net profit almost doubled to RM21.2 million.

SHL reported a fairly healthy balance sheet and net gearing of 6% for FY2004. Chan warns, however, that the balance sheet could deteriorate in view of SHL's aggressive property development plans.
Most analysts have a "market perform" or "buy" call on the stock, pegging its fair value at just above RM2. The share price hit a 52-week high of RM1.95 last Tuesday and had been trading at a yearly average of RM1.52. It hit its lowest price of RM1.15 almost a year ago on Jan 27, 2004.

Currently, the group's flagship product is Bandar Sungai Long, a self-contained township that borders Kajang town. The township boasts amenities such as a golf and country club right in the heart of the development.

One of the township's main selling points is its accessibility to the Kajang Ring Road, South Klang Valley Expressway and Grand Saga Expressway.

Analysts, however, are more excited about the inflow of students from Universiti Tunku Abdul Rahman (UTAR), with the first batch expected to move in by the end of this month. While the initial population stands at around 4,000, the campus has the ability to increase its capacity to 7,000 students, according to Low. Both he and Chan agree that this will help to increase rental yields and also economic and social activities in the area.

According to Chan's report, Bandar Sungai Long will be the main revenue and profit driver for SHL in 2005 and 2006.

SHL has more than 40 years of experience in broad-based residential, commercial, civil and infrastructure development and construction activities. It has completed more than 40,000 units of properties, including a number of joint-venture projects, according to reports.

The group is well known in the market as an integrated property developer and also for its experienced management team, its close business relationship with leading engineering, consulting and architecture firms and its strategic partnership with the Marubeni Group.

It is best known to consumers for its trademark "red brick" houses and resort-living concept. Among SHL's completed townships are Taman Hot Spring Jaya in Tawau and Taman Putra Indah in Serdang.
According to Low, the group's next flagship project — U10 in Shah Alam — is targeted for launch in FY2006, and is expected to start contributing to SHL's earnings in FY2007. U10 sits adjacent to the new Universiti ITM campus and is next to the Batu Arang-Shah Alam Expressway.

Construction remains the second largest revenue contributor for the company, say analysts, with the group's order book standing at about RM1 billion for the next five years. SHL also sees small but stable contributions from its quarrying and brick manufacturing divisions. The group owns two fully automated brick manufacturing plants with an annual capacity of 80 million double bricks.

Chan says the rapid growth of the group's construction unit could cause the management to spin off this division for a separate listing, which would help to unlock the company's value.