• Yoma Strategic's FY19 net profit boosted by US$96m of fair value gains.
• Core EBITDA growth mainly from real estate and Yoma Fleet, offset by losses from Yoma F&B and Yoma Motors.
• 5-year targets for Yoma F&B and Yoma Fleet.
• Maintain BUY; Target Price of S$0.40.

BUY, Target Price of S$0.40

• We maintain our BUY rating on YOMA STRATEGIC HOLDINGS LTD (SGX:Z59) and Target Price of S$0.40, based on a 60% discount to RNAV. This implies a 1x forward P/NAV. The stock currently trades at an attractive 0.8x P/BV as it rides through the gestation period of its businesses.

Where We Differ: Best Proxy to the Potential Economic Turnaround in Myanmar

• Despite some disappointment on Myanmar’s economic growth, we believe Yoma Strategic remains the best proxy to ride on the country’s potential economic turnaround with a new government in place. With its diversified portfolio in property, consumer and automotive sectors, Yoma Strategic is well placed to tap into the growth.

Potential Catalysts

• Recovery in Myanmar’s property market,
• Non-real estate businesses turning profitable.

1H19 Net Profit Supported by Fair Value Gains

• Yoma Strategic's FY19 net profit of US$34m vs US$12m in FY18 was boosted by US$96m of fair value gains. Core EBITDA (ex-fair value gains) is estimated to have increased 14% y-o-y mainly from real estate and Yoma Fleet, offset by losses from Yoma F&B and Yoma Motors.
• Key highlights:
  1. plans to launch more affordable housing,
  2. targets 125 F&B stores by FY23,
  3. new capital to grow Yoma Fleet’s fleet size by 5x.

Key Risks to Our View

• Political and economic risk. Myanmar is still a developing country and its real estate and infrastructure sectors are in the nascent stage of the cycle. As such, continued supportive government policies on foreign investments are key to improving sentiment within the real estate space.

What's New - Investing for the Future

FY19 net profit supported by fair value gains; real estate and Yoma Fleet are the key contributors.

• Yoma Strategic’s FY19 net profit of US$34m vs US$12m in FY18 was boosted by US$96m of fair value gains vs US$20m of fair value gains and US$21m of divestment gains in FY18. The fair value gains are in relation to the
  1. fair value gains of S$58.6m from conversion of 200 residential units at Galaxy Towers 2 & 4 into investment properties,
  2. reclassification of Pun Hlaing Golf and Country Club (PHGCC) as an investment property as the operations have been outsourced which was recorded in Real Estate Services revenue,
  3. completion of Golf Apartment B at Pun Hlaing Estate for leasing purposes under fair value gains, and
  4. fair value gains from edotco investment of S$11m.
• Excluding fair value gains, FY19 revenue increased 14% y-o-y, mainly led by Yoma Land (+89% y-o-y), Yoma F&B (+39% y-o-y) and Yoma Fleet (+25% y-o-y).
• Yoma Land’s FY19 revenue almost doubled to US$32m, mainly from the progressive recognition from a higher number of units sold at StarCity Zone C, and previous sales from Pun Hlaing Estate and Yoma Central. The successful launch and sales (90% of 357 units launched) of City Loft@StarCity in 3Q19 has yet to be recognised as construction works only started in April 2019. Progressive revenue recognition should begin from April 2019 onwards.
• Yoma F&B is the second largest contributor to revenue growth from higher sales at KFC and the additional revenue from the newly acquired YKKO in March 2019. Revenue from its KFC business grew 42% y-o-y following the expansion of new stores across Myanmar (+11 stores in FY19).
• Automotive & heavy equipment segment revenue fell 30% y-o-y, mainly due to tractor sales which almost halved y-o-y, affected by the monsoon season in FY19.

Core EBITDA growth mainly from real estate segment.

• Yoma Strategic's core EBITDA (ex-fair value gains) is estimated to have increased 14% y-o-y. Yoma Land and Real Estate Services remain the largest contributors to the group’s core EBITDA, at 96%.
• While Yoma Fleet remains profitable (core EBITDA +40% y-o-y), it was offset by losses recorded by Yoma F&B and Yoma Motors.

4Q19 results supported by fair value gains from investment properties at Pun Hlaing Estate.

• A net profit of US$25.7m was recorded in 4Q19 vs US$0.4m in 4Q18, largely boosted by fair value gains from PHGCC and golf apartments.

No dividend declared to fund ongoing and future investments.

• The Board has decided not to declare any dividends in view of the cash requirements for ongoing operations and investment plans for the future.

Real estate business remains key core EBITDA contributor despite revenue growth from non-real estate business.

• The real estate business (including real estate rental services) contributes 49% of its total revenue but 96% of its core EBITDA (ex-fair value gains).

Business Updates

Plans to launch more affordable housing following the success of City Loft; leasing activities at Yoma Central to start from 1H20.

• Following the successful launch of City Loft@StarCity, which has achieved 90% sales take-up, management is planning the launch of the next phase. City Loft in StarCity is a new division of modern affordable housing that targets the underserved middle-income market in Yangon. We understand that Yoma via City Loft is the first to offer mortgage loans of up to 25 years at LTV of 70-80%.
• As at 31 March 2019, Yoma Central had sold 15 out of 30 residential units launched with three units reserved since its launch in early 2018. It engaged Christie’s International Real Estate in April 2019 to market the properties internationally, especially in Japan, China and HK. Management expects to start its leasing activities for its retail and office at Yoma Central in 1H20 and 1H21 respectively, one year before the completion of the buildings.
• At Pun Hlaing Estate, management plans to build additional Golf Apartments for leasing purposes for more stable recurring income.

Yoma F&B:

• Opened first unit for Little Sheep and Auntie Anne’s; targets to grow to 90 stores in FY20 and 125 stores in FY2023. As at March 2019, Yoma had 33 KFC stores throughout Myanmar vs 22 stores as at March 2018. It had recorded encouraging same-store sales growth of 1% in FY19 and 6% in 4Q19. While it has yet to break even, management remains confident to achieve this in FY20, with more than 30 stores now.
• In March 2019, Yoma opened its first retail units for Little Sheep and Auntie Anne’s in Golden Valley and Junction City respectively. Second kiosk for Auntie Anne’s at Myanmar Plaza opened in April 2019. Yoma F&B’s core EBITDA losses were mainly from start-up losses from its two new F&B franchises.
• Yoma F&B targets to grow total stores to 90 stores in FY20 under four brands and 125 stores (including 70 KFC stores) in FY23 under six brands from 72 stores (four brands) currently.

Yoma Motors:

• Impacted by monsoon season; opened first Volkswagen showrooms in Yangon and Mandalay. Yoma Motors’s tractor sales almost halved to 594 units from 911 units in FY18, affected more severely by the monsoon season in FY19. The business has since stabilised, and management is realigning its focus on profitability vs revenue growth and targets smaller-sized government tenders. Yoma Motors’s first
• Volkswagen showrooms in Yangon and Mandalay became fully operational in May 2019. Interest has been positive, especially for Polo and Vento models. Its first batch of cars has arrived and deliveries of pre-sold vehicles are ongoing.

Yoma Fleet:

• New capital injection to grow fleet size by 5x in FY23. Yoma Fleet received capital injection from Tokyo Century (which acquired a 20% stake) for US$27m. With the new capital injection and potential to gear up the business, Yoma Fleet targets to grow its fleet size by 5x to US$200m (currently US$37m) by FY23.

New ventures:

• WaveMoney continues to record strong growth and has turned profitable in terms of EBITDA since September 2018. WaveMoney now looks to build scale from its mobile wallet service.

Source: DBS Research - 3 Jun 2019