Mulpha's embedded values

An aerial view of Sanctuary Cove, a resort-styled property development by Mulpha.

PROPERTY developer and investment firm Mulpha International Bhd (MIB) has come to be better known in Australia than in Malaysia, says its executive chairman Lee Seng Huang.

"Due to the quality of our assets Down Under, we are better known in the financial and property circles there," he says in a recent interview with StarBiz.

"In Malaysia, MIB suffers from legacy issues and is still perceived by some as being a trading company. But we have moved on to be a regional player. MIB is the largest Malaysian property player in Australia today," he says.

MIB's Aussie property portfolio (owned by its wholly owned subsidiary Mulpha Australia Ltd) is today worth around A$1bil (RM3.1bil), says Lee. The prized assets include a few five-star hotels such as the InterContinental Sydney, a resort-styled property development called Sanctuary Cove in northern Gold Coast that has a gross development value of around A$2bil (RM6.2bil) and Hayman, a five-star private island destination in Australia's Great Barrier Reef.

Topping all that is MIB's 25% stake – making it the single largest shareholder – in FKP Property Group, Australia's leading property investment company. The Australian-listed FKP is also the largest private sector owner-operator of retirement villages in Australia and New Zealand.

All these assets were acquired by Mulpha Australia between 2002 and 2004. FKP and MIB were recently in the news in Australia over rumours that FKP's second-largest shareholder, Stockland, itself a leading Australian property developer, could be seeking to take over FKP.

Lee says MIB is not keen on selling its shares in FKP as there is still a lot of upside potential in the latter. Talk of the takeover is said to have led to the slight increase in FKP's share price in recent weeks, pushing it up to around 90 Australian cent a piece.

Interestingly, MIB's 25% stake in FKP alone has a market value of A$275mil (RM855mil). MIB's other significant strategic stake in a listed company is its 22% holding in Mudajaya Group Bhd. MIB's Mudajaya stake has a market value of some RM350mil.

Combined, these stakes are worth around RM1.2bil, which is close to the market capitalisation of MIB of RM1.27bil at today's prices.

"There is a lot of embedded value in MIB," says Lee.

UBS Malaysia, in a recent note to clients, commenting on the potential bid for FKP by Stockland, highlighted the fact the MIB seems to be undervalued. "MIB looks undervalued currently. Its market capitalisation is around RM1.27bil, which is almost equivalent to its stake within FKP and Mudajaya, hence everything else comes free," UBS said.

However, it should be noted that MIB has slightly over RM1bil in debt. Still, that debt level has not been a concern for MIB because of its huge asset base. In any case, those assets that are seemingly "free" to MIB investors, are looking rosier by the day. In Australia, MIB is poised to pocket over A$100mil (RM309mil) if the sale of its Hilton Airport Melbourne hotel goes through.

Lee has confirmed that the hotel had been put up for sale and that the compay is in advanced talks with potential buyers but he declined to comment on pricing. News reports in Australia had put the figure at about A$100mil.

MIB's Hayman resort is also enjoying a new income stream from the sale of a few plots of land on the island as exclusive holiday homes.

Lloyd Donaldson, head of hotel investment for Mulpha Australia, said the company had secured the necessary approvals to build 42 homes on Hayman Island. So far three have been sold at prices from A$15mil (RM46.4mil) to A$20mil (RM61.4mil), depending on the size of the house. These prices are believed to be a record high for holiday homes in Australia.

Then there's the Sanctuary Cove, which was acquired by Mulpha Australia in 2002 for A$208mil (RM644mil). According to Sanctuary Cove executive general manager, Alison Quinn, more than A$60mil (RM186mil) of property sales were achieved in the first half of 2010.

MIB also has Leisure Farm Resort, it's prized Malaysian asset, a vast award-winning resort-styled residential development in Johor. Leisure Farm is strategically located within Iskandar Malaysia and is only a 15-minute drive from Tuas in Singapore via the second link.

Leisure Farm reported a rise in profits in the first half of 2010 to reach RM8.6mil from RM2.2mil in the previous corresponding period.

According to MIB, sales of its Bayou Water Village (one of its seven themed residential precincts) increased after its completion in the last quarter of 2009, with 18 of such units having been sold in the first half of this year.

Analysts also say that Leisure Farm is likely to benefit from the fact that since early this year, Malaysia and Singapore have agreed to cooperate on the development of Johor.

MIB has another 600 acres of land in Leisure Farm to develop.

Back to Australia. To be noted is the fact that MIB has had to equity account for losses stemming from writedowns of its Australian assets, mainly FKP. This is because under all assets are required to be marked to market under Australian accounting rules. Hence when the global financial crisis hit, the values of MIB's and FKP's assets had to be written down.

"FKP has a huge retirement asset portfolio. During the better years, these assets were written up but when the crash came, they had to write it down. These are accounting losses stemming from FKP and does not mean that FKP is not doing well," Lee explains.

When asked if there was going to be any more writedowns of FKP's assets that would impact Mulpha's profits, Lee says that is unlikely. "We have indicated such to the market. The cycle has turned and all the asset values are slowly increasing. What we went through was a period of extreme conservatism by the valuers in Australia as a whole."

When asked about dividends, Lee says MIB's board is reviewing its policy regarding dividends. MIB has not been paying dividends but Lee says that by the year-end, the company should have a clear strategy on dividends.

"Previously, when we had no dividends, we were conducting massive share buybacks. As we are not doing share buybacks at the current price of MIB shares, we should be looking at using that money for dividends."

Dividends would tie in nicely if MIB is able to unlock the values of its assets and use the proceeds for rewarding shareholders.

However, MIB is also inclined to reinvest its profits. "MIB's investment philosophy is to maximise the value of its assets and recycle that money into other assets that can generate more value," says Lee.

By The Star