KUALA LUMPUR: While better known for its pipe business, JAKS Resources Bhd is aiming for property development to be one of its main earnings contributors going forward, according to a company spokesman.

In addition to its venture with Star Publications (M) Bhd that was announced on Wednesday, JAKS is due to announce its participation in another property project in Subang Jaya.

“The difference is that this time around, we will be going in as a contractor. For the project with Star, we are expecting to factor in returns as a developer and a contractor,” said the spokesman.

As such, he said JAKS’ order book, which currently stands at round RM400 million, could reach RM1 billion with the Subang project, which has a construction value of around RM300 million, on board. Inclusive of the Star project, JAKS’ order book stands at RM721 million.  

However, the spokesman said this would not mean that JAKS would lose focus on its core business as it continued to eye a portion of the Pahang-Selangor interstate raw water transfer project.

“We felt that it was the right time to enter the property market and that it was an attractive proposition,” he said.

To recap, Star has entered into a joint development agreement with JAKS Island Circle Sdn Bhd (JIC) to develop a mixed residential and commercial development, which comprises three office blocks and a 15-storey residential block. The project has a gross development value (GDV) of RM370 million.

JIC is to be the developer of the project, while Star will contribute a 24,568 sq m leasehold land in Petaling Jaya. The project is expected to be completed in two to three years.  

JAKS holds 51% of JIC and Island Circle Development (M) Sdn Bhd the remaining 49%. It is Island Circle which is currently getting approvals for the Subang Jaya project, where JAKS is looking to be the contractor.

While JAKS’ foray into property raised eyebrows, it should be noted that JIC has had previous experience in USJ Sentral.
“Also, if needed we will bring in additional technical expertise to support our construction division in this venture,” said the spokesman.

Based on the development portion alone, AmResearch estimates that the new project could contribute 12% to 14% to JAKS’ FY2011 and FY2012 earnings.

“The project represents JAKS’ first foray into large-scale property development. JAKS’ management appears confident that the project will achieve a good response given its strategic location within the matured Section 13 enclave near the Jaya One commercial area,” said AmResearch.

It has a hold on JAKS with a fair value of 98 sen. The counter fell three sen to 79 sen yesterday, with nearly eight million shares done.

ECMLibra Investment Research said Star would be entitled to office units in the development based on 30% of the GDV or  RM111 million, whichever is higher.

It will first be satisfied by delivery of Tower C (220,000 sq ft) and other units if necessary. If JIC increases the plot ratio beyond 1:3.5, Star will be entitled to a further 5% of the increase in GDV. Star plans to house its three radio stations and its new multimedia division there.

ECMLibra maintained a hold on Star at RM3.44, with a target price of RM3.36.

“As the impact to our earnings estimate is less than 2%, we leave them unchanged. That said, as the RM111 million is RM86.9 million more than the book value of the Section 13 land as at Dec 31, 2008, it will accrete 12 sen or 7% to book value per share.

“As Tower C will not in itself contribute to earnings via rental income or sale, we continue to value Star utilising PER methodology. We reiterate our view that it needs to utilise its net cash pile of RM474.2 million or 64 sen a share as at Dec 31, 2009 constructively in order to warrant a re-rating,” ECMLibra said.

Its target price is based on 15 times financial year 2011 forecast price-to-earnings ratio (PER).

RHB Research, which has a “market perform” on Star with a fair value of RM3.60, said the company could potentially recognise RM3.9 million in annual rental income, which represents only 0.4% of FY2012 revenue, and is thus insignificant. Star fell three sen to RM3.41 yesterday, with 1.35 million shares done.

This article appeared in The Edge Financial Daily, March 5, 2010.