THE EVOLUTION OF PARAMOUNT CORPORATION BERHAD (part 2)

Initiated Price : RM1.80        Target Price : RM3.00

CATALYSTS FOR FUTURE GROWTH

Paramount has set a target to achieve yearly Return On Equity of 15% (ROE) from FY2015 to 2019. For Paramount to grow further in the next few years, the management of Paramount has already outlined various strategies to improve the revenues and profits of the company. These strategies will increase the earnings per share of Paramount and hence its share price.

EDUCATION

1)   From the company announcements, Paramount has the intention to spin off and list its education arm. The education arm consists of KDU University College, KDU College, Sri KDU Schools, and REAL Schools.

The few education groups listed in Bursa Malaysia are trading at valuations of about 20 times of their after-tax profits (PE 20 times). Therefore, we can estimate the valuations of Paramount Education from the aggregate of its last 4 quarters after-tax profits and 20 times PE ratio. The education arm should be valued at RM760mil or RM1.78 every current Paramount share.

2)   In the recent quarterly report press conference, the CEO has announced that there is a possibility that Paramount may divest its university college. I fully support this move. The CEO said that it is in discussion with a few prospective buyers. I am hopeful that the university college is sold to a prestigious British university. This will be even bigger plus point to Paramount as the student population will be two or three times the current size. The demand for the student apartments and the commercial shops will increase tremendously.

In 2014, Selangor Properties Berhad (SPB) sold its education arm, HELP International (HELP University) to Southern Capital at RM2.53 per share. The face value of HELP International was RM0.50 per share.

The net book value and earnings per share of HELP International as at its financial year end on 31/10/2013 were

NBV=RM1.03, EPS = 8.5sen

These would translate into

Purchase Price : RM2.53

Price / Book Value = 2.65 times     

Price / Earnings = 29.8 times

The CEO said that KDU University Colleges has a book value of about RM400mi. If it is sold at the same valuation of HELP Universities, the price tag could be about RM1,060mil. The profits on disposal could be RM660mil or RM1.54 per share.

PROPERTY DEVELOPMENT

Paramount will continue to explore the opportunities to form joint ventures with the prospective land owners for its future developments. The first of this collaboration is the joint venture with Kumpulan Hartanah Selangor Berhad (KHSB) to develop the piece of 9.66 acre land in Section 14, Petaling Jaya. Paramount will own 84% of the Gross Development Values of this project and KHSB will own the remaining 16%. The first phase of this project is expected to be launched in FY 2019 and it is expected to do well as it sits in a matured area.

The 5 Year Plan with 15% Return On Equity (ROE) remains achievable for the final two years.

Property Sales 

2016  RM420mil 
2017  RM842mil 
2018  RM1,000mil (by the 1H/18, RM598mil sales concluded) 
2019  Approximately RM1,300mil 

Paramount is expected to obtain higher sales in 2019 (approximately  RM1.3bil). A few projects have already been lined up for launchings including the first phase of Berkeley Uptown in Klang, a commercial building in Atwater, Section 13, PJ and more phases in Utropolis Batu Kawan.

Paramount will continue to look for opportunities to sell and lease back some of its education assets including the REAL schools. It is also looking to further unlock the values of some of its landbanks. After the monetisation, a portion of the sales proceeds will be used to be distributed as special dividends. A bigger portion will be used to pare down the company’s borrowings. The reduced borrowings will translate into savings in interest payments and this will further enhance the profits of the company.

CONCLUSION

It is fortunate to have a responsible and dedicated professional CEO who knows what the market (especially the chairman and shareholders) wants. The CEO is pushing himself to achieve the targets so that the share price will rise in line with the performance of the results. Everybody is benefitted including the major shareholders, minority shareholders and the CEO himself.