WBL CorporationThe Giant Awakens Initiate coverage with BUY and $7.64 price target We are initiating coverage on WBL with BUY and a 12-month price target of $7.64. We see long term value in its vast property development landbank in China, where good progress on redevelopment is being made. Management is also closely examining its property assets in other countries, such as the automotive tools of trade in Singapore and investment properties in Malaysia, with a view to redeveloping them if possible; if not, they will be sold. Now possible to confidently value WBL Despite the failure to merge its two PCB subsidiaries, WBL has not been sitting still. Instead, it has accelerated the streamlining process. In the last 12 months, solid progress has been made in reducing its hotch-potch mix of businesses, to the point where it is now possible to clearly identify each part and attribute a value. Our RNAV model values WBL at $8.49, while our price target factors in a 10% conglomerate discount. Converting China landbank to cash WBL has declared that it intends to make property development its long term core business. It has substantial landbank in China, Malaysia, Australia and Singapore. Arguably, the value case for WBL revolves around its property business, although it does not at present make up the bulk of its profits. By our estimates, the long term redevelopment value of the landbank is worth S$5.51 a share or 63% of our gross RNAV. Long term value in Tools of Trade Other than the development properties in China, WBL also has some hidden gems in its fixed assets, specifically 25,677 sqm of land in Singapore and almost 10 million sqm of freehold land in Australia that are now being used by going concerns of the group. The Singapore land could potentially be redeveloped into high-yielding projects within 3-4 years, while there is longer term potential for the Australian land as well. Speculative appeal to WBL as well Fundamentals aside, there is speculative appeal in WBL as well. Tecity, which owns nearly 14% of WBL, recently took over Straits Trading after failing to prevent Raffles Hotel and Robinsons from falling into outside hands. All four entities are ex-OCBC-related companies Tecity CEO Chew Gek Khims grandfather Tan Chin Tuan invested in when he headed OCBC, as well as F&N, GE, APB, UE and Bukit Sembawang Estates. Tecity may eventually try to take over WBL as well.Year End Sep 30 (S$'m) Revenue Pre-tax profit Net profit incl exceptionals Net profit excl exceptionals EPS (cents) incl exceptionals EPS (cents) excl exceptionals PER (x) EV/EBITDA (x) 2006 2103.5 150.1 58.9 54.4 28.3 26.1 20.2 5.7 2007 2063.7 3.2 -20.2 12.9 -9.6 6.1 86.1 14.0 2008F 2097.6 136.9 75.8 44.2 36.1 21.1 25.1 5.4 2009F 2267.9 138.1 66.8 66.8 31.8 31.8 16.6 5.6 2010F 2518.8 176.4 88.2 88.2 42.0 42.0 12.6 4.4
SingaporeConglomerates 26 May 2008
BUYInitiating Coverage Analyst:Gregory YAP firstname.lastname@example.org (65) 6432 1450
Price Target ST Index Historical ChartPrice ($) 6.00 5.50 5.00 4.50 4.00 3.50 28-May-07 20-Aug-07 10-Dec-07 17-Sep-07
$5.28 $7.64 3,122.15
Vol ('000) 1,000 800 600 400 200 0 26-May-08 03-Mar-08 12-Nov-07 04-Feb-08 25-Jun-07 31-Mar-08 07-Jan-08 28-Apr-08 15-Oct-07 23-Jul-07
Performance Absolute (%) Relative (%)
1m 3.1 5.3
3m 23.9 22.2
6m 31.3 42.3
Stock InformationTicker code Market Cap (US$m) 52-week high ($) 52-week low ($) Shares issued (m) 6m avg. daily vol (US$m) Free float (%) Major Shareholders (%) OCBC (25.8), Third Avenue (17.4) Straits Trading (10.7), Aberdeen (6.3) WEAS.SI WBL SP 803 5.56 3.79 210 0.3 34
Key IndicatorsROE (%) Net gearing (%) NTA ($) Interest cover (x) 6.7 9.4 2.93 8.6
Co. Reg No. : 198700034E MICA (P) : 056/11/2007
26 May 2008
Ready to goWe are initiating coverage on WBL Corporation with a BUY recommendation and a 12-month price target of S$6.79. Despite the aborted merger of the two PCB subsidiaries MFS (Singapore) and MFI (USA) in 2006-2007 (due mainly to a downturn in the handset industry which made the terms of the merger unrealistic), WBL has not been sitting still. Backed by a supportive turnaround by the PCB segment, which currently chips in the bulk of revenue and earnings, management has accelerated the streamlining process. In the last 12 months, solid progress has been made in cutting down its hotchpotch businesses, with at least one announcement related to operational streamlining every other month, to the point where it is now possible to separate each part and attribute a value. We also see tremendous long term value in WBLs vast property development landbank in China, Singapore, Malaysia and Australia, which management is in the process of converting into cash through the timely launches of high-end residential projects, starting with China. Management is also re-examining its longheld investment assets in other countries, with a view to redeveloping them if possible, such as the automotive tools of trade in Singapore and investment properties in Malaysia.
Wobbly startThe first initiative by WBLs management under CEO Tan Choon Seng after he came onboard in Dec 2004, was to privatise Wearnes International (WIL), the automotive distribution business of the group (for marques such as Jaguar, Bentley, Volvo and Renault). WIL is important to WBL for its strong cashflow (as it is primarily a trading company with high turnover and little capex) which enabled it to pay consistent dividends. Following that move, the next low-hanging fruit was quite obviously the merger of two substantial but redundant businesses MFI (or Multi-Fineline Interconnect), its US-listed flexible PCB business (but with manufacturing operations in China), and MFS, a similar business listed in Singapore (also with significant operations in China). That attempt was derailed because of a downturn in PCB industry fundamentals that made it no longer sensible to proceed on the terms offered.
But WBL has cleaned up nicelySince then however, WBL has cleaned up and sold off the majority of its other non-core businesses that it did not see any future in, such as biomedical, Wearnes Technology Solutions and water treatment, as well as major nonperforming operations such as the precision engineering business in Thailand and the technology solutions group (eg Bluetooth, IC design, etc). All non-recurring charges related to the diposals have already been recognised as at 2Q08.
26 May 2008
Figure 1: Significant corporate actions in last 24 monthsDate Mar 2008 Feb 2008 Dec 2007 Nov 2007 Oct 2007 Aug 2007 Aug 2007 Aug 2007 Aug 2007 Aug 2007 Action Details Liquidation/dissolution of Wearnes Technology Sdn Bhd, Wealco Malaysia, Wearnes Healthnet and Summer Palace Development Appointed KPMG as judicial manager of Wearnes Precision Thailand Sold for HK$223m against valuation of HK$168m, Completed sale of Kowloon property realised gain of S$21.4m WBL Peking University Biotech and Wearnes Biotech Completed sale of biomedical businesses & Medicals Took asset impairment charge of $26.6m in 3Q07, Ceased operations of Wearnes Precision Thailand retrenchment cost of $2.1m in 4Q07 Dissolved FIA Ltd, a dormant subsidiary Acquired 7% stake for US$1.4m; acquisition to Made Shenyang Huaxin Int'l Realty a 100% subsidiary facilitate development of Mumashan site Sold 80% stake in EPD Puretronics and EPD USA's Sold non-core water treatment businesses water assets for US$2.5m Sold for HK$223m against valuation of HK$168m, Announced sale of Kowloon property realised gain of S$26.3m Sold off non-core agricultural businesses in China Sold 51% stake in Wuhan Speedling for RMB3m Sold 50% stake in Tongcheng Medicinal Plants for RMB0.6m Entered JV with GIC Real Estate to develop Shenyang New Summer WBL will own 40% of the JV Palace site Disposed 100% stake in Wearnes Biotech & Announced sale of Wearnes Biotech & Medical Medicals for $2.1m Disposed 43% stake in WBL Peking University Announced sale of WBL Peking University Biotech Biotech (aka Wearnes Beida) for S$19.9m Made Summer Palace Management a 100% subsidiary Acquired 51% remaining stake for $11.8m Dissolved EdgePoint Networks, a dormant subsidiary Sold SW Parts & Service Sdn Bhd Sold venture capital business OCBC, Wearnes & Walden Closed down loss-making electronics component subsidiary in China Dissolved Wearnes Computer Systems Europe, a dormant subsidiary Announced cash or shares general offer by Mflex for MFS Announced voluntary delisting of automotive trading subsidiary Wearnes International Cash offer of S$1.15, or 0.0145 new Mflex shares for each MFS share Cash offer price of S$1.35 a share Hollingsworth Electronics Anqing; closure impact of $2.6m in 2Q06 Disposed 30% stake for RM0.7m
Jun 2007 May 2007 Apr 2007 Apr 2007 Mar 2007 Feb 2007 Oct 2006 Aug 2006 Mar 2006 Mar 2006 Jan 2006
While there are some non-core businesses within the group that we believe management will want to rationalise eventually, we believe it is not in any hurry at the moment. First, WBL is more likely than not to realise extraordinary gains than losses as these are profitable concerns. Second, they are currently benefiting from an upcycle in their industries, as well as internal improvements. In our view, these parts include: - The oil & gas group under Applied Engineering and 50/50 joint venture SPC Wearnes, and - The construction and building materials group under Polytek, Wealco and Welmate Lastly, WBL still have some investments in Speedling (100%), Chrontel (38%), GIH (22%) and RFNet (20%) assets that are still being reviewed, either because they are still in a start-up phase but not scaling up or loss-making. At some point, they may be sold or written down but we believe the carrying value is minimal. The latest carrying value (end-Mar 2008) of associate company investments is about $60m but we believe the bulk is related to 45%-owned Shanghai Olympic Gardens and GIH (probably more than 80%), both of which are profitable. Investments in Chrontel and RFNet combined are likely to be only about $12-15m.
26 May 2008
Notes: - Applied Engineering (100% equity) is a fabricator of steel pressure vessels, heat exchangers and other equipment supporting the petrochemical, oil and gas industries in Singapore and Malaysia. - SPC Wearnes (50%) distributes bottled and bulk LPG to companies, households and factories in Singapore. - Polytek (100%) distributes laundry and boiler equipment, toilet compartments and washroom accessories. Benefiting from boom in construction activities ahead of IR. - Wealco (100%) and Welmate (100%) distribute construction and industrial equipment, and consumable building materials, respectively. - Speedling (100%) is basically a producer of agricultural transplants, such as ornamental flowers and vegetables, and horticultural products. - Chrontel is a San Jose-based IC chip designer supplying TV-Out interface solutions. - Global Investment Holdings is a Taiwan financial services company. - RFNet is a Singapore-based ODM house specialising in radio frequency wireless products. In addition, WBL has been patiently obtaining land use rights to more than 1 million sq meters of land in China that had prevented it from converting the land to more profitable use. We understand from the management that such rights have been obtained, with the exception of one remaining site in Suzhou near Lake Taihu. The acquisition of the rights primes WBL as a beneficiary of the favourable demand & supply economics that will continue to drive the Chinese property market in the long term, despite near-term ups-and-downs. WBL currently has three high-end residential projects under development in Suzhou, Shanghai and Chongqing. While most are nearing completion, it has identified and prepared at least two more high-end residential projects that should be launched this year and next year, depending on market conditions. Maiden contributions are expected by 2009.
Now converting China landbank to $$$WBL has declared that it intends to make property development its long term core business. It has substantial landbank in China, Malaysia, Australia and Singapore (more than 11m sq m) that management has said is not for sale, unless there is little redevelopment potential, such as the agricultural land under Speedling in the USA and China. Arguably, the bulk of the value case for investing in WBL revolves around its property development and investment activities, although it does not at the present point in time make up the bulk of its profits. By our estimates, the long term redevelopment value of WBLs property landbank is worth S$5.51 a share or 63% of our gross RNAV for the group. We like managements conservative approach in China. WBL focuses on areas where there are no runaway price bubbles, such as Liaoning, Shenyang, Sichuan, Suzhou and Shanghai, places where it also has strong connections with the local authorities. Financial criteria includes a project IRR of over 18%. If management considers a project to be of high risk or too big for it to take on alone, it will also take on partners.
26 May 2008
Figure 2: Projects under developmentProject Shanghai Olympic Garden Ph 3 Shenyang Orchard Manor Ph 2 Chongqing Lakeside Garden Ph B3-2 Suzhou Horizon Resort Ph 3 TotalSource: Company, KE estimates
Site area (sqm) 116,760 47,607 20,153 44,000 228,520
Stake (%) 45 55 50 47
Eff book value (S$'m) 13.7 5.2 4.2 16.9 40.0
Dev surplus (S$'m) 3.8 0.8 1.2 3.1 8.8
WBL currently has four high-end residential projects under development in China. - Shanghai Olympic Garden (condominium), - Orchard Manor in Shenyang (villas), - Lakeside Garden in Chongqing (landed housing) and - Horizon Resort in Suzhou (landed housing). Shanghai Olympic Garden is a high-end condominium project that WBL first launched in 2000, with a total of about 5,800 units and 45% equity in the project. Currently in the third and final phase, WBL sold about 400 units in 2007, a number that it has already equalled this year. It is benefiting from strong demand and property prices in Shanghai, achieving an average price of RMB12,000 psm. Orchard Manor in Shenyang consisted of 40 villas in Phase 1 and 30 villas in the current Phase 2, with an average unit size of 350-400 sqm. Phase 1 is fully sold while Phase 2 is half sold at an average price of RMB13,000-14,000 psm. Although WBL only has 55% equity in the project, we understand that 11 of the remaining 15 units is fully owned (due to conversion of shareholders loans). Lakeside Garden in Chongqing is a high-end landed residential project (eg semi-detached, terrace housing, etc) about 30 minutes from downtown Chongqing via a new highway, targeted at city dwellers. The project is expected to be completed by 2009. According to management, half the units have already been sold. Originally launched at RMB7,000 ps...