Glomac 2QFY09 : Weighed down by bond losses
· Below expectation
1HFY09 results were below house and market expectation. Annualised net profits were 11.3% and 7.3% below house and consensus estimates respectively. As expected, no dividends were declared for the quarter although management has reiterated its commitment to pay a 5 sen gross dividend per share for FY2009.
· 1HFY09 revenue +2.4% y-o-y, net profit -27.1% y-o-y
Revenue was marginally stronger due to maiden contribution from Glomac Tower as well as RM31m sales from the recently completed Suria Stonor condominium. Bottomline however was lower y-o-y due to (1) RM2.2m provision for impairment of subordinated bonds which were subscribed as part of the group’s participation in primary collateralised loan obligations (CLO), (2) 1HFY08’s profit boosted by RM9m gain from land sale, and (3) continued losses sustained by its construction division. Management has guided that the construction division may incur RM3.7m losses for FY2009 (losses up to 1HFY09 were RM3.0m).
· Subordinated bond impairment losses
Glomac participated in 3 primary CLO programmes and raised RM103m through unsecured term loans with bullet repayment after 5 years. All borrowers of the CLO programmes including Glomac received only 90% of the loan proceeds as the remaining 10% is set-off against the
compulsory participation in subordinated bonds with the purpose of enhancing the more senior bonds through over-collateralisation. Glomac has so far made RM3.3m provision for impairment due to default on interest payments by certain borrowers which will impact the recovery of
the sub-bonds. In the event of more defaults, Glomac is exposed to further impairment loss up to RM7.0m. There is no cash flow impact on Glomac and in the event for full impairment, the losses will effectively raise the cost of the unsecured term loans from 6% to 8%.
· Valuation and recommendation
We have reduced our earnings estimate for FY09 by 12.6% to account for construction and sub-bond losses. We maintain our HOLD call due to lack of re-rating catalyst in the near term. Our target price of RM0.62 (65% discount to RNAV of RM1.79) remains unchanged.
Entry filed under: Business, Finance, Stock Market. Tags: Below expectation, bond losses, Glomac, Glomac Tower, market expectation, net profits, over-collateralisation, recommendation, revenue, Suria Stonor condominium, unsecured term loans, Valuation.