Tropicana degears, but more needs to be done to reduce debt 

The Tropicana City Mall and Tropicana City Office Tower were sold for RM565mil.

PETALING JAYA: While Tropicana Corp Bhd has just sold two key assets, Tropicana City Mall and Tropicana City Office Tower for RM540mil, the group’s gearing remains high and more needs to be done to reduce its debt levels, analysts opine.

Last week, Tropicana completed the sale of the said assets to CapitaMalls Malaysia Trust (CMMT), and out of the sales proceeds, some RM460mil went to repaying Tropicana’s debts, reducing its total borrowings to RM1.95bil from RM2.41bil previously. This will reduce its gearing level to 0.52 times from 0.72 times previously.

A property analyst said that Tropicana got “a good deal”, considering it sold the mall at a capitalisation (cap) rate of 5.1%. The cap rate is the ratio of net operating income (NOI) to a property’s asset value.

The analyst said while the cap rate was not at the top end in the commercial property market, it was still relatively high considering that Tropicana was not a mall operator.

The property analyst pointed out that CMMT had a cap rate of between 6% and 7%, while some of the other real estate investment trusts (Reits) and owners of big malls had cap rates of 7%.

“I think Tropicana sold it with the best possible valuation, considering they aren’t mall operators and also because there aren’t many big brands in the mall,” said the property analyst.

The four-level Tropicana City Mall has a net lettable area (NLA) of some 448,000 sq ft and currently has an occupancy rate of 89.2%. Big name tenants in the mall include AEON Big, Golden Screen Cinemas and UNIQLO. 

Meanwhile, the office tower has an NLA of more than 101,000 sq ft, and is currently fully occupied with main tenants like CIMB Securities and radio broadcaster Star RFM.

Another analyst pointed out that the sale of the two assets will mean that Tropicana will suffer a loss in some of its recurring income for its financial year ended Dec 31, 2015. The analyst estimated the income loss to be RM27.6mil at the operating profit level.

However, the impact of this will be cushioned by interest savings of around RM23.5mil per year, as sales proceeds are being used to retire some of Tropicana’s debt.

“The gearing of the company is still high. I believe they are exploring a few ways to unlock value for the company. It could be through outright sale of land, or they could be mulling a corporate exercise,” said an observer.

The property analyst said the best strategy for Tropicana would be to stop increasing land-bank for now and focus instead on growing its operational profits.

In recent years Tropicana acquired a significant land-bank which it earmarked for a gross development value (GDV) of more than RM70bil. This included valuable parcels of land in the Klang Valley, Iskandar Malaysia and Penang. Tropicana’s massive GDV puts it second only to UEM Sunrise Bhd in the local property developer scene.

Last year, Tropicana said it had identified RM2bil worth of assets to be sold over the next two years, to raise cash and pare down debts.

The assets are land, property investments as well as non-core assets sited primarily in the Klang Valley and Iskandar Malaysia.

At the time, Tropicana group chief executive officer Datuk Yau Kok Seng said the group intended to reduce its then gearing ratio of 0.616 times to 0.3 times by 2016.

“What we have seen in the last few years are high headline revenue figures. However, the development profits are low. We see a lot of expenses and finance costs eating into the profits. I think investors want to see Tropicana deliver its development numbers. With today’s market environment, I think investors prefer efficiencies to net asset plays,” said the analyst.

For the third quarter to Sept 30, 2014, Tropicana’s net profit was up 24.45% year-on-year to RM29.52mil while revenue was down 2.86% to RM353.06mil. Hence, this would point to net margins of around 8.3%.

For the nine-month period, net profit was up 19.7% to RM126.8mil while revenue was down 2.2% to RM1bil. Net margins were better at 12.58%.

“Perhaps Tropicana could consider embarking on a REIT exercise, as this would achieve the objectives of de-gearing and value creation,” the analyst said.

The analyst cites the example of Multi-Purpose Holdings Bhd’s de-merger exercise in 2012, when the company divested its non-gaming assets and businesses to MPHB Capital Bhd.

However, the analyst added that the same may not apply to Tropicana, which does not have any sizeable investment properties.

Last March, Tropicana announced its third management change and named former CIMB Group banker Kok Kong Chin as its second group managing director.

Apart from Kok’s appointment, Datuk Dickson Tan, who is the son of Tropicana’s major shareholder Tan Sri Danny Tan Chee Sing, was promoted to deputy group chief executive officer. His deputy, Edmund Kong Woon Jun, was appointed group managing director.

Yau, the current group CEO of Tropicana, was appointed to the position in January 2013. Tropicana is 58.8% owned by Danny Tan.

Tropicana’s move to degear began last year when it sold its land-bank in Canal City, Selangor, to Eco World Development Group Bhd, less than a year after buying it from Permodalan Negeri Selangor Bhd.

Tropicana acquired the land from the Selangor government in April 2013 for RM1.3bil, a deal which drew much attention as it was concluded just before the May general elections.

Then last March, Tropicana surprised the market when it announced it was selling 128ha of that land to Eco World for RM470.67mil cash. Tropicana was expected to generate a net gain of about RM170mil for the land.

Tropicana trades at a historical price/earnings (PE) ratio of 3.24 times at its last done price of RM1.05.

Over the last one year, the stock has been trending down from the RM1.60 level.

For the stock to trade closer to its sector PE valuation of nine times, the asset divestments, debt reductions and operational profits must grow, points out an analyst.

Otherwise, investors will still view Tropicana with some caution. - The Star