Companies to watch in Penang property play

16 July 2007 - The Edge

By Siow Chen ming and Ng Kar Yean

Penang, which has a land area of 1,046 sq km (about a third bigger than Singapore), is being rezoned, which means that some of its most prized assets will become even more valuable. The main catalyst comes from the government, which has pledged some RM5.7 billion for three projects to improve the island's infrastructure. These projects are the RM3 billion second bridge linking Penang and Seberang Prai, the RM1.6 billion monorail system and the RM1.1 billion outer ring road.
"The government correctly recognised that transportation is one of the major issues facing Penang," says chairman of the Penang branch of the Real Estate and Housing Developers Association Datuk Jerry Chan. He expects the new infrastructure will make travelling within the island easier and living in Penang more pleasant, thus driving up demand for property.
Since the government relaxed rules on foreigners buying residential property in Malaysia, Penang should become more universally appealing. Property companies such as Hunza Properties Bhd and E&O Properties Bhd are capitalising on this by marketing their properties overseas in countries such as Singapore, Hong Kong and the Middle East region, says an analyst.
In fact, there are those who believe it could be easier for the government to unlock the value of land and property in Penang than in the Iskandar Development Region (IDR). This is because in Penang, the basic infrastructure and industries are already in place, whereas for the IDR, the government has to start from scratch.
Then, there is also the mammoth project to redevelop Penang Turf Club, which is sitting on 249 acres of land, into Penang City Park.
The project comprises service apartments, healthcare facilities, residential units, shopping malls, a hotel, a convention centre and offices, and is said to have a gross development value of RM25 billion. Equine Capital Bhd is the developer and has a 25% interest in the land.
Thanks to all these factors, investors are betting that property companies with land in Penang and Seberang Perai will benefit from higher selling prices for their properties.
In the past one-and-a-half years, land prices in Penang have appreciated by 25% to between RM150 and RM280 psf. A high-end condominium in Gurney Drive can fetch up to RM450 psf now. Industry players reckon prices could go up further.
Below are some of the potential beneficiaries of the redevelopment of Penang:

Sime Darby Bhd
It is believed that Sime Darby, which mapped out the masterplan for the Northern Corridor, is the front runner for the job to upgrade the Penang International Airport. The work will involve shifting the cargo area of the airport and extending the existing runway that will involve the reclamation of land. In return, Sime Darby will get the right to develop the existing cargo area and the surrounding space into an integrated commercial project.
The contract sum to upgrade the airport, which will be funded by the federal government, and the estimated gross development value (GDV) from the redevelopment of the cargo area have yet to be finalised.

Equine Capital Bhd
The company holds a 25% stake in a project to redevelop 249 acres of prime land currently occupied by the Penang Turf Club.
Named Penang City Park, the project is to be developed over 15 years with an estimated GDV of RM25 billion, comprising residential and commercial units. Similar to the concept of the Kuala Lumpur City Centre, a metropolitan park will be a key feature of the project.
It has been reported that Equine may get Malaysian Resources Corp Bhd to take part in the project through equity participation in the company.
With this mega project in its bag, Equine's market value has shot through the roof. Its share price has risen 7.6 times since the beginning of the year, which has increased its total market value to RM879.1 million (including the value of its irredeemable convertible unsecured loan stocks). Equine has a net debt of RM88.8 million.

Oriental Holdings Bhd
The Loh family of Boon Siew fame is a major landowner in the state. While most of the landbank is privately held, some parcels are held under listed motor group Oriental Holdings. The company owns 118 acres of vacant freehold land on Penang Island alone, mainly in the northeast as well as in Bayan Lepas. These properties were acquired many years ago and Oriental is carrying them at a low cost of RM54.3 million in the balance sheet, or RM10.56 psf.
The Lohs tend to develop their land slowly. But perhaps now, Oriental will unlock the value of the land in view of the government's plan to develop the Northern Region. The company has a market cap of RM3.08 billion and net cash of RM1.06 billion.

E&O Property Development Bhd
While it is more of a niche developer in the Klang Valley, E&O Prop is a major developer in Penang. It has acquired the rights to reclaim a big piece of seashore land near Tanjung Tokong for the development of a marina township called Tanjung Pinang. The company now owns 136.07 acres of leasehold reclaimed land in Tanjung Pinang, booked at a cost of RM464.9 million. It has the right to reclaim another 740 acres in the area.
In addition, E&O Prop owns 355.58 acres of vacant freehold land in the South West district, which is booked at a cost of RM120.5 million, or RM7.78 psf. The redevelopment of the Penang International Airport may improve the development potential in the South West district.

Mah Sing Group Bhd
Starting from the development of niche projects in the Klang Valley, Mah Sing is now venturing aggressively into Penang Island. It has recently proposed the acquisition of 86.78 acres of freehold landbank in the South East district of the island for RM115.75 million or RM30.61 psf. The land will be developed over five-to-seven years and is expected to generate a total GDV of RM1.28 billion. The project, to be called Southbay Penang, is expected to benefit from the government's plan to redevelop the Penang International Airport, which is less than 2km away.

Hunza Properties Bhd
An established developer in Penang, Hunza owns a three-storey market/hawker centre with a car-park complex in George Town. This complex covers an area of 29,042 sq ft and is only carried in the company's balance sheet at a net book value of RM2.4 million. The complex may have redevelopment or expansion potential from the likely spillover effect of the Penang City Park project.
Hunza also holds 10 acres of first-grade freehold land in George Town for mixed development purposes. The land comes at a cost of RM97.9 million. It owns another one acre of freehold land in George Town booked at RM3 million, and another 18 acres of first-grade freehold land in the North East district, booked at RM16.4 million, for mixed residential development.
Hunza has a market value of RM500.8 million. It has a net debt of RM184.5 million.

Sunway City Bhd
Besides the development of the 124.46-acre South Quay project in Petaling Jaya, which is its core project, Sunway City also owns 38.61 acres of vacant freehold land in Penang Island. The plots, located in the South West and North East districts of Penang, are carried at total cost of RM102.9 million, or RM61.25 psf.
The company acquired the land between 2004 and 2005, just before the current property boom hit Penang. Sunway City may benefit from the spill of asset reflation play in the state. Sunway City has a market value of RM2.25 billion. It has a net debt of RM480.9 million.