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

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RM 1.1 billion of revenue to be recognised.

Astaka’s reported zero revenue and gross profit in FY16 as its accounting policy then only allowed for revenue recognition on the completion of the project.

The company has since started implementing FRS 115 and will be restating its financials retrospectively to account for revenue mainly using the percentage of completion method.

Sales from Phase 1 of One Bukit Senyum and from the Johor Bahru City Council Headquarters building (also part of One Bukit Senyum) total about RM1.1 billion or approximately 20% of the entire project GDV.

We expect the company to show both positive and growing revenue and profits following the change of accounting policy.

One Bukit Senyum to be iconic development.

Phase 1 has already topped off in June 2017 and is now undergoing works such as interior décor and mechanical and engineering.

The two towers are touted to be Southeast Asia’s tallest residential towers and will offer breath-taking views of Johor Bahru.

Phase 1 is about 70% sold and we expect sales to pick up with the development of Phase 2. We estimate that the entire project has a GDV of RM5.65m and net development value of RM1.76 billion.

Expanding into other projects.

However, Astaka is not just a “single-project” company. It has over the last 12 months or less acquired, launched and partially sold a 3,884 housing unit project located right at the mouth of Petronas’ integrated petroleum complex which has attracted investors such as Saudi Aramco.

The petroleum complex is expected to provide jobs for 70,000 workers and is expected to start operations in 2019. Hence, we can expect Astaka’s Bukit Pelali project to be well taken up.

Key risks.

The risk is that One Bukit Senyum is pitting its iconic status as the next CBD against competition from other developments in Johor.

While we forecast Astaka to make revenue of RM263.7m in FY17 and RM411m in FY18, the company has to take further steps to fund the development of One Bukit Senyum Phase 2.

Otherwise, construction progress risks lagging schedule in late FY18 or in FY19. That said, the company’s net gearing remains low at 20.4%.

Finally, the controlling shareholder has other real estate interests in Malaysia. Hence, interested party transactions may recur, such as in the acquisition of the Bukit Pelali project.

Fair value of S$0.130.

Our model values Astaka at S$0.130 or at a 56% discount from the estimated RNAV of S$0.296. A potential catalyst could be the proposed MRT rail link between Singapore and Johor.

The increased traffic flow will benefit One Bukit Senyum which is located within walking distance from the current CIQ complex in Johor.

On balance, we appreciate the business progress that Astaka has achieved since its listing in Nov 2015; albeit offset by broader market risks. Hence, we rate Astaka Overweight with a high-average return and high-risk qualification.

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