CASH-RICH Fiamma Holdings Bhd is ready for a slowdown this year. The distributor of electrical appliance and medical equipment, which has been enjoying mid to high-teen pre-tax margins, knows that it is unlikely to escape the expected weak consumer spending unscathed.
However, CEO Jimmy Lim Choo Hong is confident that the group will be able to cushion any adverse impact on its earnings as it is launching an affordable housing project and its kitchen-fitting distribution business is enjoying brisk sales.
In its property development segment, it is mulling a delay in launching its high-end development, which has a gross development value of RM600 million, near Jalan Yap Kwan Seng in view of the soft property market.
Lim acknowledges that Fiamma (fundamental: 3; valuation: 3) has turned cautious on the high-rise serviced apartment project, which was initially slated to start this year. He deems the development “high risk”.
“We have already got approval for the project, and [are] currently working on the costing. We actually targeted to launch it this year, but because of the change in market conditions, we will first ‘market’ it [overseas] for about six months to gauge the response,” Lim tells The Edge.
The selling price has yet to be fixed, but Lim says Fiamma will not market it at more than RM2,000 psf. It is also keen to have more overseas buyers than local ones, he adds.
The 61,422 sq ft prime land located behind Menara Public Bank — currently a car park — was acquired in 2007 at a net book value of RM38.8 million, or RM631 psf.
However, Fiamma is bullish on the redevelopment of the three acres its warehouse is located on in Bandar Menjalara near Sri Damansara, Kuala Lumpur. Lim says the group will definitely launch its high-rise affordable housing project — which is estimated to have a gross development value (GDV) of over RM300 million — this year. Fiamma bought the land in 1996 at only RM50 psf and it is carried in its books at RM238 psf based on its last revaluation in 2011.
“The response here [in Menjalara] is more positive. We are confident that it will sell because of the location (in a mature area), and due to its affordable pricing. We have been receiving a lot of enquiries,” says Lim, who is also a substantial shareholder with a direct 23.45% stake.
To make way for the redevelopment, Fiamma will be relocating its warehouse to Bukit Raja, Klang, by the middle of the year. The new site will have four times more storage capacity for its trading and services business. According to Lim, Fiamma intends to rent out part of the storage space to third party logistic firms.
Fiamma expects a decent increase in its rental income this year with the newly completed Menara Centara on Jalan Tuanku Abdul Rahman, Kuala Lumpur. It has kept 35% of the office and retail space, from which Lim expects an annual rental income of RM5 million.
Fiamma collected rental income of RM1.5 million for the financial year ended Dec 31, 2013 (FY2013).
For the nine months ended Sept 30, 2014, property development accounted for 18.4% of its revenue and 28.6% of profit.
Fiamma has not jumped on the property development bandwagon simply because of the boom of the last few years. Lim says the group is on the lookout for landbank for future developments.
In December last year, Fiamma bought a 2.6-acre freehold commercial land parcel near the Southgate Commercial Centre in Sungei Besi for RM49 million or RM430 psf. “We target to launch the project in two years’ time. We have yet to come up with the final plan, but most likely, it will be high-rise offices, suites, serviced apartments and maybe a hotel,” Lim says.
“Assuming a plot ratio of six and a sellable area of almost 500,000 sq ft, we can garner a GDV of over RM300 million, conservatively,” he notes.
He thinks there is still demand for industrial land, adding that the group is in talks to buy some such land down south.
In Johor Baru, the first phase of the RM110 million VIDA Residenz project — a joint development in which Fiamma has a 70% share — was launched in the middle of last year. Lim admits that the take-up rate has been rather slow.
Fiamma also has about 18 acres of undeveloped land remaining in Kota Tinggi, Johor. It will be developed over the next three years with an estimated GDV of RM35 million.
“[Separately], we also have 86 acres in Kota Tinggi that we are looking to sell at about RM9.50 psf. Our book value is RM4.50 psf,” Lim shares.
As at Sept 30 last year, Fiamma had net cash of RM45.8 million, or 33.5 sen per share (after deducting total borrowings of RM61.8 million), with retained earnings of RM182.5 million. In comparison, its market capitalisation stood at RM282 million based on its closing of RM2.06 last Thursday.
Lim says the group may consider giving a bonus issue or share split to increase its share base. Fiamma, he adds, has about seven million in treasury shares (about 5% of its share base) that it can sell off, if need be.
He foresees a drop in sales growth this year, on the back of weaker consumer sentiment caused by the impending Goods and Services Tax (GST) as well as pricier purchases owing to the strengthening of the US dollar.
As more than 90% of its products are purchased in US dollars, Lim says the group is contemplating changing the currency to the renminbi. Also, the group has not seen a surge in sales pre-GST, he notes.
The division saw double-digit sales growth from FY2010 to FY2012 but it dropped to about 4% in FY2013 and FY2014, in tandem with the industry.
Fiamma markets electrical home appliances, sanitaryware, as well as medical and healthcare devices under several brands, including Elba, Rubine, Faber, Tuscani, Haustern and MEC. It is also the sole distributor of Omron, Whirlpool and Braun products.
It is banking on its home and kitchen-fitting business under its trading and services segment to help buffer against any slowdown in the sale of electrical products. “We now also provide home and kitchen furniture and fittings to projects. The order book stands at RM25 million and we may recognise half or more of this amount in FY2015,” says Lim. He adds that the tender book stands at RM180 million.
While sales and margins might be affected for a few months, at least until after GST has been implemented, the group hopes to maintain its sales growth and 10% to 12% net margin.
Net profit grew at a compound annual growth rate of 24% in the last four years, from RM14.5 million in FY2009 to RM34.7 million in FY2013. Revenue grew at 13% from RM178.2 million to RM292.9 million.
This article first appeared in The Edge Malaysia Weekly, on January 26 - February 01 , 2015.