Signature International Bhd (Dec 12, 73.5 sen)

Upgrade to buy with an unchanged target price of 92 sen: Signature International Bhd shares have reacted negatively to the government’s decision to freeze approvals for new luxury properties, which are sold at RM1 million and above. Note that in November, the government froze indefinitely approvals for luxury developments, effective Nov 1, to control the housing oversupply. However, Second Finance Minister Datuk Seri Johari Abdul Ghani was quoted as saying later that he will ask the prime minister to allow such projects in major cities. Management believes this uncertainty would likely delay future launches, in turn affecting Signature’s financial year 2018 (FY18) order book replenishment.

Besides that, the acceleration in progress billing, at a rate faster than job replenishment, would likely deplete its order book from RM181 million as at September to an estimated RM160 million. For the first quarter of FY18, the group reported a 22.1% year-on-year increase in revenue, underpinned by increased progress billing.

We believe Signature would be affected by the freeze, but the impact is expected to be temporary. Although it will deplete its FY18 order book, we believe the jobs would come back later after developers change their development plans. As such, we think the market is overacting to the news.

To mitigate the problem of order book depletion, the company will focus on growing its retail sales by increasing its showrooms from the current 22 to 33 over a five-year time span. The increase in the number of showroom would not involve a significant capital expenditure as it plans to engage dealers to carry and promote its products.

Signature would increase its product range to cover other home furniture, including the bedroom cabinet, study room and TV cabinet. These new products, which will be available next year, are all custom-made instead of ready-made. It caters mainly to those buyers who prefer unique home designs. Although this is a new market to Signature, we see synergy in product bundling as the new products would fit well with its kitchen and wardrobe systems.

Signature has engaged a number of property dealers for the disposal of its 38.86 acres (15.73ha) of land. We believe the disposal would yield positive results for its profit and help the group returning to net cash-positive if the proceeds are used for debt repayment. Note that the market value of the land is approximately RM50 per sq ft (psf), which is a lot higher than the purchase price of RM30psf. — TA Securities, Dec 12

This article first appeared in The Edge Financial Daily, on Dec 13, 2017.

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