Monday, December 13, 2010

Gallant Ventures or Gallant Bubble

Recently theres a renewed hype over Gallant ventures and the stock flew 41.5% + 13+% over 2 weeks, from S$0.255 to S$0.415 now. I was thinking, wow thats a pretty good return and I started to wonder why I did not buy that counter. Then I went to view the reason - a research report done on it and started to see if it indeed justifies the run up.

To cut the long story short, Gallant ventures basically is a firm co-owned by Sembcorp Industries, Salim Group (Indonesia) and JTC of Singapore. The firm owns about 18,400 Ha of land in Bintan and Batam (mainly Bintan). The story goes that now the firm started to sell land at prices of S$90-300 psm, average of S$110 psm, also backed by a couple of recent transactions. The prime is Lagoi Bay and neigbouring land surrounding the Northwest Jetty. Gallant is currently building out the Lagoi area and so has residential and other investors flocking in to buy a piece of the land around the area.

So key businesses are:
  1. 18,400 Ha of Bintan land - "to sell, develop etc" (1 Ha = 10,000 sm)
  2. Provides utilities (electricity,water and communications), resorts and ferry services to the island
  3. Bought a 29% stake in a South Kalimantan Iron ore producer (Silo) for S$ 14 million - "miner"
  4. Bought a 49% stake in a Shanghai land for S$288 million (81,326 sm) - "building condos"
I went to do a fast calculation and this is what I got:

The "target price" was around $0.70 per share if I remembered correctly.
No disputes on utilities, mining businesses since the assumptions were fairly reasonable.

Then I noted the following :
  1. Cash and debt were not accounted for entirely
  2. I played around the Shanghai property figures and the above is the maximum I got and it represents almost a 71.6% return on investment for Gallant (cost was S$288mn + S$114mn in development cost). (Note: I was really optimistic on the figures). It has the potential to be much lower.
  3. Resorts and Industrial parks should be accounted as a loss, but I took it as 0. I dont understand how can one assume an entity loss making now, to be making good profits in future when there are more future visitors. The businesses are not related (industrial parks vs tourists) and secondly the resorts are loss making now when you have 400,000 visitors a year. How is it going to change in future with expected a million visitors in 2015 with even MORE resorts?
  4. The calculation above also supposes that empty land (be it industrial or for residential/hotels/resorts) are taken at S$ 1 psm. This is really wild land little or no roads, no pipes, no infrastructure no nothing. A bulk of them are on the other side (East, North eastern) of the island without ferry access. 
    • Assuming Lagoi Bay is worth S$30 psm, it comes up to about S$ 451.3 million. S$110 psm transaction price is for undeveloped land near beach front
    • Landbank 1 is the area around Lagoi Bay and I put it as S$3 psm with expanding roads and infrastructure
  5. Note that I did not use NPVs and discounted figures will yield lower figures
Conclusion of the story: 
The numbers of the $0.70 per share value seems a tad too high, price wise at the former S$0.250-0.270 range is reasonably attractive. My assumptions are optimistic (in my opinion very!), I did not use NPVs, no efficiency discount for Lagoi Bay land, assuming 100% take up of the shanghai property (which is quite a bubble now) and of cos the 100% smooth running of the Indonesia mines. There are many further things not accounted for including development costs. Capital expenditure for the utilities part amounted to S$300+ million alone. While developing resorts and tourists area may not need that much, it sure needs at least 20-30% of that amount or (S$60 - 90million) to build extension roads, expand telco towers and reach, building pipes for portable water etc for a similar area (Development costs is around S$ 1000-1700 psm) . The story does not hold up well and is too good to be true. And oh, did I also mention that the firm has quite a bit of debt on their books?

PS: I welcome any discussion on this, this post just reflects my thoughts and may or may not be right/accurate. Currently Gallant Venture is trading at S$0.415. The only thing for sure is I spent 3 hours on this.

Disclaimer: The author does not have a position in the above counter be it long or short. This is neither a recommendation to buy or sell the stock.


George said...

good research work Mervyn, did you buy the share?

Mervyn Teo (MT&Co) said...

Hi George,

I did not buy the counter, price wise still not favorable. This note is a negative note, not an investment note. Just like Olam.


Excellent suff could not be better.

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