This article first appeared in The Edge Malaysia Weekly on May 29, 2023 - June 4, 2023

RADIUM Development Bhd will be the first property developer to list on Bursa Malaysia in two years when it makes its debut on the Main Market on May 31. Its initial public offering (IPO) will raise RM434 million, which will be used for land acquisition, working capital and to repay borrowings.

The last property company to list was Melaka-based Teladan Setia Group Bhd. It made its debut on the ACE Market on March 16, 2021, at a market capitalisation of RM386.54 million after raising RM96.89 million from its new issue and offer for sale shares. Its IPO had an oversubscription rate of 17.47 times.

So, the IPO of Radium has understandably generated some excitement in the local market. Radium is aiming for a market capitalisation of RM1.73 billion upon listing, based on an enlarged share capital of 3.47 billion shares at the offer price of 50 sen per share.

At this price, Radium is valued at a trailing price-earnings ratio (PER) of 17.1 times to its earnings per share (EPS) of 2.9 sen for the financial year ended Dec 31, 2021 (FY2021).

Compared with its peers, Radium’s PER valuation is rich. In an IPO note on May 15, TA Securities ascribes a market-capitalised weighted average implied target PER of 13.2 times for its listed peers on Bursa with a market capitalisation of above RM1 billion.

Retail investors have been lukewarm to its public offering as the retail portion, which entailed a total of 273 million shares, was oversubscribed by a mere 2.2% — a shadow of recent IPOs, particularly tech offerings. Market observers attribute the rich PER valuation of Radium shares as the reason for the low demand.

It is worth noting that Radium’s market capitalisation when it lists of RM1.73 billion will place its worth close to the market value of Matrix Concepts Holdings Bhd, and put it above Mah Sing Group Bhd and UEM Sunrise Bhd.

Bloomberg data shows Matrix Concepts has a market capitalisation of RM1.8 billion, based on its closing share price of RM1.43 last Friday. Mah Sing and UEM Sunrise were valued at RM1.4 billion and RM1.2 billion, based on their closing share price of 58.5 sen and 24.5 sen, respectively.

However, some market observers contend that Radium’s track record is relatively short and does not warrant such valuations. They say given that Radium has only been around for 10 years — it has positioned itself as a developer of high-rise residential properties in Kuala Lumpur — they deem the stock relatively expensive compared with other listed developers that are far more established.

Since its inaugural project launch in 2017, Radium has completed four projects comprising condominiums and affordable housing, with a total gross development value (GDV) of RM2.13 billion.

Market observers also highlight the upcoming listing of property developer SkyWorld Development Bhd on the Main Market of Bursa. Both Radium and SkyWorld share similarities in developing high-rise residential properties, but SkyWorld is said to be valuing its stock at a lower PER of less than 10 times.

Group managing director Datuk Gary Gan Kah Siong argues that Radium’s premium valuation is justified based on a combination of factors. One is that the company has one of the lowest gearing ratios among listed property companies, of 0.24 times as at Oct 31, 2022.

“According to the company’s prospectus, it is stated [that] after listing and after utilisation of IPO proceeds of RM434 million, the gearing ratio of Radium will drop to 0.12 times in accordance to pro forma combined statement of financial position,” he says in an email response to questions from The Edge.

After utilising the IPO proceeds to pare down debt, Radium will be in a net cash position of RM323 million or 9.3 sen per share. This will provide the group with significant headroom for future growth opportunities.

Kah Siong also points out that Radium’s operating cash flow has remained positive for the past three years (FY2019-FY2021) and for the cumulative 10 months ended Oct 31, 2022 (10MFY2022), ranging from RM41 million to RM155 million as stated in the company’s prospectus. “The combined statement of financial cash flows in the past few years demonstrated that Radium is capable of reducing its gearing ratio over the years through repayment of bank borrowings and increase of shareholders’ funds.”

After listing, Radium has also committed to a dividend policy of 30% payout ratio in each financial year from FY2022 onwards.

“When you put all these factors together — from the company’s high profit margin to its low gearing ratio, healthy cash flow, coupled with a clear dividend payout policy — that justifies why Radium commands a comparatively higher valuation than other industry peers,” he asserts.

Radium’s IPO entails a public issue of 868 million new shares, equivalent to 25% of the enlarged issued share capital. Post-IPO, the promoters and substantial shareholders are expected to own about 74.97% of Radium, leaving the remaining 25.03% as free float.

Kah Siong, 42, will emerge as the largest shareholder of Radium, with a 15.74% direct stake and a 37.49% indirect stake through Cengal 2020 Sdn Bhd. Other substantial shareholders include his brothers — Gan Tiong Kian, 49, and Gan Kok Peng, 54 — who are executive directors of the company. Post-IPO, Tiong Kian will have a 7.5% direct stake and 2.25% indirect stake via Java Citarasa Sdn Bhd, while Kok Peng will own a 7.5% direct stake and a 1.12% indirect stake via Tambun Team Sdn Bhd.

Meanwhile, Kah Siong says the subscription rate of its retail portion was lower than expected due to several IPOs taking place in recent months such as Cape EMS Bhd, Oppstar Bhd, DXN Holdings Bhd and Cloudpoint Technology Bhd.

“We do not deny that property IPO stocks are generally less attractive than technology IPO stocks, where Radium is competing for investors’ money in April and May. You can see that some of the technology IPO stocks are priced at a much higher PER, ranging from 13 to 24 times to their respective historical PER,” he adds.

In particular, he points to two large corporate exercises recently, namely DXN, whose offering raised RM112 million, and the first tranche of Pavilion Real Estate Investment Trust’s (Pavilion REIT) private placement exercise to raise RM720 million.

“Suddenly, investors are spoiled with too many choices within a short span of a month. Radium’s fundraising exercise unfortunately falls during the peak season of fundraising campaigns by DXN and Pavilion REIT in the same month. We hope our observation can provide some explanation as to why the oversubscription rate is relatively low for Radium for the public tranche,” says Kah Siong.

Despite the rich valuation, there are analysts who see upside in Radium’s stock post-listing.

TA Securities fairly values Radium at 51 sen per share based on FY2024 EPS of 3.5 sen and a target PER of 14.5 times. “Our target PER of 14.5 times is at a premium to the market-capitalised weighted average implied target PER of 13.2 times for developers with a market capitalisation above RM1 billion.”

The local research firm believes the premium is justifiable, given Radium’s encouraging profit growth as it is positioned to benefit from strong demand for affordable housing in Kuala Lumpur. On top of that, it also points to Radium’s experienced management team and superior margin and return on equity.

“This has been evident in the group’s financial performance, with a core net profit margin ranging from 15% to 18% during FY2019 to FY2021, demonstrating a relatively robust performance compared with industry peers,” says TA Securities.

The company’s prospectus shows that Radium’s net profit for FY2021 was RM101.6 million, a 16% increase from RM87.89 million in FY2020. In 10MFY2022, it recorded a net profit of RM89.59 million.

However, analysts like TA Securities and Apex Securities remain cautious in their forecasts of Radium’s performance in the near term.

TA Securities is projecting Radium’s core net profit to decline in FY2022 and FY2023, given the absence of new launches in the last two years and the completion of both Residensi Semarak Platinum and Residensi Vista Wirajaya in 2021 and PV9 @ Taman Melati in November 2022, as well as the scheduled completion of Residensi Vista Sentul in 2Q2023.

“We estimate a contraction of 22% and 9% respectively, with core net profit of RM79.2 million and RM72.3 million. Note that we have excluded extraordinary items such as one-off recoupment income of RM47 million, and fair value loss on investment of RM18.7 million, in our FY2022 core net profit computation,” it adds.

Nevertheless, the research firm anticipates a rebound in Radium’s financial performance in FY2024 and FY2025, with projected earnings growth of 70% and 36% to reach RM122.8 million and RM167.1 million respectively. “This growth will be driven by higher property sales and construction progress for projects launched in FY2023 and FY2024, reaching significant billing stages,” says TA Securities.

Apex Securities, meanwhile, arrives at a fair value of 55 sen based on Radium’s FY2024 EPS of 4.11 sen and its peers’ forward PER of 13.5 times.

“The target price represents a 10% potential upside from its IPO price of 50 sen. We also project another 2% return from dividends in FY2024 based on its dividend policy of 30% payout ratio,” it says in a May 12 report.

Likewise, Apex Securities sees Radium’s FY2023 revenue and net profit remaining soft as Vista Sentul Residences is near completion and Residensi Desa Timur will only be launched in 3Q2023.

“Going forward, FY2024 revenue and net profit are expected to grow 58% and 54% respectively as Radium launches two new projects in Mukim Batu with a GDV of RM500 million and Mukim Petaling with a GDV of RM1.4 billion,” it says.

Another key concern among market observers and analysts is Radium’s relations with Southern Score Builders Bhd and privately held property firm Platinum Victory Sdn Bhd, where the major shareholders of the three companies are from the Gan family. Southern Score is Radium’s sister company with common shareholders and a Bursa-listed entity.

To this, Kah Siong asures: “Moving forward, if there is any related-party transaction that takes place between Radium Development and Platinum Victory and/or Southern Score, it will be based on an arm’s-length transaction basis, same as when Radium deals with any independent third party.

“Similarly, if there is any purchase of land bank from related parties — be it from Platinum Victory or from any of the Gan family members — the said related-party transaction usually does need to be supported by the appropriate land valuation report and obtain Radium’s board of directors’ approval for a certain threshold value of the transaction.

“Radium’s board consists of five independent non-executive directors out of 10 board members who will play a check and balance role while approving any related-party transaction. We are always mindful that as a public-listed company, we do need to comply with all the listing requirements, especially pertaining to related-party transactions, which are sensitive by their nature.”

According to Kah Siong, the Gan family has taken a conscious decision to not list all the three interrelated entities under a single listed entity despite the fact that all three business enterprises — Southern Score, Platinum Victory and Radium — are majority-owned by the family.

He also says Radium will differentiate itself from Platinum Victory by focusing more on small pockets of land within Kuala Lumpur, ranging from two acres to six acres, to build high-rise buildings such as condominiums, serviced apartments, SOHO, affordable apartments, and mixed-use developments that will feature retail shops and a hotel.

“Platinum Victory, meanwhile, will focus more on township development on larger tracts of land. The majority of its projects are focused around Setapak and its surrounding areas,” he adds.

In a May 7 IPO report, Malacca Securities head of research Loui Low Ley Yee notes that although Radium has around RM3.36 billion GDV of projects in hand to develop, it is a continuous effort for the company to identify and acquire suitable land bank in strategic locations to sustain its business operations as a property developer. “Failure to do so could provide downside risks to the earnings visibility beyond 2028,” he says.

Kah Siong says the company is monitoring the property market dynamic closely and assessing the overall property market sentiment and development from quarter to quarter. “We are adopting a tactical strategy and will only buy new land that can give us a quick turnaround period of within two to three years whenever the right opportunity arises. We will only begin to replenish our land bank when we anticipate that our existing land bank inventory is going to be fully developed over the next 12 to 24 months.”

Radium’s unbilled sales stood at RM134.6 million as at Oct 31, 2022.

This Wednesday, substantial focus will be on Radium’s debut amid a lacklustre stock market. The benchmark FBM KLCI is down 4.8% year to date; it ended at 1,402.98 points last Friday. 

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