Paramount remains resilient in a challenging market

It has been a tough couple of years for the property market, with developers seeing declines in revenue and sales.

But the gloomy environment has not deterred Paramount Corp Bhd, which is looking to repeat the record RM1bil sales it hit in 2018. Interestingly, among the property development companies, Paramount’s share price has done quite well, increasing more than 50% over the last three years.

Over that same period, property developers such as SP Setia Bhd fell 14%, Mah Sing Group Bhd declined by 26.3%, UEM Sunrise Bhd fell 25%, Eastern and Oriental Bhd plunged 42%, while Eco World Development Group Bhd and MCT Bhd fell 34% and 48%, respectively. In a nutshell, property developers are facing a supply glut of residential properties. According to the Valuation and Property Services Department’s (JPPH) unsold completed residential units rose to 30,115 units as at Sept 30, 2018, an increase of 48.35% from the 20,304 units a year ago. JPPH’s latest figures show that the total value of unsold units was RM19.54bil, a 56.44% rise from RM12.49bil a year ago. Should serviced apartments and small offices home offices (SoHos) be included, the overhang value will rise to 40,916 units, valued at RM27.38bil.

As for Paramount, it should be noted that despite its 50% price appreciation, Paramount’s shares are trading at an undemanding price earnings ratio (PE) of 9.5 times. So is there any more upside considering that this value is lower than many other property developers today?

For one, Paramount’s property sales have been slowly increasing every year, despite the softening of the property market. RHB Research also notes that about 70% to 80% of most of Paramounts property launches are sold. For another, Paramount has been selling some of its assets including buildings and lands that had free up some cash and paying bumper dividends.

In 2017, the firm sold its Sri KDU Campus in Petaling Jaya for RM165mil to unlisted Alpha REIT (real estate investment trust), which led to Paramount dishing out a bumper dividend of 16 sen per share which at that time gave shareholders a 9% yield.

It is worth noting that excluding bumper dividend payment in 2017, Paramount has has been giving dividends yielding between 4%-6% annually, on a payout policy of 40% to 50%.

In 2018, Paramount announced an 8.5sen dividend per share translating into a total dividend payout ratio of 38%. The dividend yield was about 4.2%.

Its chief executive officer Jeffrey Chew said the lower payout ration in FY18 was because the firm needed to conserve cash due to challenging economic environment.

“But this does not mean that we are going to do terribly. We just want to be careful and it’s better to increase our liquidity,” he told reporters at a briefing Thursday.

Chew was a high-profile banker who carved his niche in commercial banking. He left his position as CEO and director of OCBC Bank (M) Bhd to head Paramount back in 2014. Aside from the consistent dividend payment, this year, Paramount has proposed a bonus issue of new shares with warrants.

The proposed bonus issue would involve two bonus shares and two warrants for every five existing shares.

Aside from property sales target of RM1bil, Paramount has been churning recurring income from its education arm, which is under the KDU brand. In 2018, its education arm contributed 30% of revenue.

Notably, its education arm may provide a catalyst for earnings as Paramount has plan to monetise the assets in this business.

The firm is currently in the midst of selling a controlling stake in its loss-making tertiary education business.

At the end of last year, Paramount announced that Australia’s University of Wollongong (UOW) – via UOW’s wholly-owned subsidiary UPW Global Enterprises – had inked an agreement with the group to buy stakes in three of its KDU colleges, for a total of RM38.5mil. Paramount says the sale would give them a profit of RM20mil. The deal is expected to be completed in the second half of this year.

UOW has agreed to buy more stakes in Paramount’s colleges and if things go according to plan, Paramount may divest all of it to UOW within seven years.

Paramount had also announced that the university campus properties worth RM420mil would be injected into a special-purpose vehicle (SPV) to streamline its campus assets.