This is an excerpt from NRA Capital’s research report on Capital World Limited.

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9M17 results were encouraging

For the quarter ended 31 March 2017, Capital World Limited reported a net profit of RM38.4m on revenue of RM74.6m. Gross margin remained high at 73.8 percent, which was similar to reported historical margins. On a 9M basis, revenue and net profit grew by about 72/71 percent to RM120.3m and RM62.3m respectively.

Unique business model

Capital World insists that it has a unique business model that entails low initial capital outlay, fast project turnaround and higher profitability by entering into joint venture agreements with landowners whose assets are ready for development.

Under this business model, Capital World will fund the development of the land and repay the landowner progressively in the form of cash or on completion of units. From our perspective, the company’s CEO being a veteran architect is well qualified to propose highly differentiated projects such as large scale integrated developments.

Trading at close to Capital City’s land value

What we find attractive about Capital World right now is that it is trading at a market capitalisation of S$166.1m (RM513.4m), compared to a land cost of RM324m for its flagship Capital City project. Capital City is slated for completion in stages from 2018 to 2020.

Comprising of a thematic retail mall, serviced suites, serviced apartments and a hotel (to be operated under one of Hilton’s brands), this high-quality development has a total net floor area of about 1.9m sq ft Capital World’s current market capitalisation translates to only RM270.6 psf, whereas Capital City’s retail mall units fetch selling prices of as high as RM2,800 per square foot (psf) or more.

We estimate the present value of the net development profits of Capital City Project to be RM560.7m, against an earlier value of RM970m obtained from the 29 March 2017 Circular.

Legacy business presents key risk

In the listing of Capital World, the shell company Terratech did not dispose its marble mine at Kelantan. We have not incorporated any on-going losses and write-offs from the marble business in our forecasts and valuation which purely reflect that of the newly injected business.

Hence, there is the risk that reported group profits may vary significantly from our forecasts. As of end 2016, Terratech had a book value of RM9.8m, which can serve as a buffer against any related losses, before our valuation is impaired. That said, we reckon that value can be unlocked if a buyer can be secured for this legacy asset.

Conclusion: Overweight (high return/high risk)

The bottom line is that Capital World can deliver high returns if its projects proceed smoothly, for example, sustained sales at Capital City, etc. Some buffer of safety is also offered as Capital World now trades at close to the land value of Capital City. On the flip side, we also caution that risks are high and recognise Capital World as a high-risk prospect.

NRA Capital is the first independent equity research company licensed by the Monetary Authority of Singapore, offering independent institutional-quality equity research written for sophisticated investors.