In this article, we will be deep diving into Tropicana's latest Q1 2021 quarterly results to determine the key metrics that measure the company's profitability, cashflow, liquidity and capital structure.
1. Profitability: Improvements in Q1 2021, however new lockdowns could affect Q2 and Q3 2021
For the first quarter of 2021, Tropicana recorded higher revenue and profit compared to the previous quarter and corresponding quarter in the preceding year, see Table 1. The improved result is chiefly attributed to the higher sales and progress billings across the key projects amid the relaxation of the movement control order (MCO).
We should note that the strong results in Q2 and Q4 2020 were due to one-off gains from disposals of the freehold development lands in Johor Bahru, for a total consideration of RM 241.8 million and RM157.4 million in Q2 2020 and Q4 2020 respectively.
After adjusting for one-off gains, adjusted revenue and profit were less spectacular, see Table 2. Nevertheless, the group has shown that it can produce consistent revenue and operating profit as seen in Q3 2020 to Q1 2021, when operations were close to normalcy. Operating profit margins ranged from 10.33% to 15.05%.
Table 1: Tropicana’s Group Performance (2020 - Q1 2021)
| RM'000 | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | Q1 2021 |
| Revenue | 142,728 | 335,667 | 223,973 | 356,687 | 240,532 |
| Operating Profit | 26,903 | 128,058 | 31,189 | 194,243 | 36,200 |
| Operating Profit Margin % | 18.85% | 38.15% | 13.93% | 54.46% | 15.05% |
| Net Profit | 5,359 | 47,949 | 8,546 | 85,430 | 8,375 |
| Net Profit Margin % | 3.75% | 14.28% | 3.82% | 23.95% | 3.48% |
| Sources: Tropicana's Annual Report, iFAST compilations, Data as of 3 September 2021 | |||||
Table 2: Tropicana’s Group Adjusted Revenue and Profits (2020- Q1 2021)
| RM'000 | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | Q1 2021 |
| Revenue | 142,728 | 335,667 | 223,973 | 356,687 | 240,532 |
| (-) Disposal of Land (One-off gain) | - | 241,800 | - | 157,400 | - |
| Adjusted Revenue | 142,728 | 93,867 | 223,973 | 199,287 | 240,532 |
| Operating Profit | 26,903 | 128,058 | 31,189 | 194,243 | 36,200 |
| Adjusted Operating Profit/(Loss) | 26,903 | -113,742 | 31,189 | 36,843 | 36,200 |
| Adjusted Operating Profit Margin % | 18.85% | -33.89% | 13.93% | 10.33% | 15.05% |
| Net Profit | 5,359 | 47,949 | 8,546 | 85,430 | 8,375 |
| (-) Net Gain on Disposal of Land | - | 108,700 | - | 98,100 | - |
| Adjusted Net Profit / Loss | 5,359 | -60,751 | 8,546 | -12,670 | 8,375 |
| Adjusted Net Profit Margin % | 3.75% | - | 3.82% | - | 3.48% |
| Sources: Tropicana's Annual Report, iFAST compilations, Data as of 3 September 2021 | |||||
Notwithstanding, in the upcoming Q2 and Q3 2021, we expect to see underwhelming financial results due to the nationwide Enhanced Movement Control Order (EMCO) affecting sales activities, halting construction progress and decelerating progress billings.
However, we believe that the dip will be short term and the group should recover beyond Q3 2021 once the pandemic situation improves and lockdown measures are relaxed, similar to the situation in Q3 2020 to Q1 2021 after MCO 1.0 was relaxed.
Going forward, Tropicana’s sizable unbilled sales of about RM1.1 billion provides some earning visibility through 2023. In the mean time, it can also sell its assets (such as investment properties or land) to generate much needed revenue or cash, such as in Q2 and Q4 2021.
2. Cash Flow Coverage: Improvement in Q1 2021 but more needs to be done
Thanks to improved CFO and FCF, cash flow coverage ratios have improved in Q1 2021 after being on a downward trend since 2018 to 2020. Nonetheless, much still needs to be done to further improve the cash flow coverage ratios back to positive territory.
Cash flows could be affected in the upcoming Q2 and Q3 2021 due to the nationwide Enhanced Movement Control Order (EMCO) which would affect construction progress and progress billings. However, we believe that the dip will be short term and the group should recover beyond Q3 2021 once the pandemic situation improves and lockdown measures are relaxed, similar to the situation in Q3 2020 to Q1 2021 after MCO 1.0 was relaxed.
The group should have enough cash to complete its ongoing developments estimated to be up to RM500 million. Further launches may require additional borrowings to fund preliminary expenses. Otherwise, the group could also tap into its unutilized credit lines of RM585 million.
Table 3: Tropicana’s Cash Flows (2020- Q1 2021)
| 2016 | 2017 | 2018 | 2019 | 2020 | Q1 2021 | |
| CFO | 46.3 | 316.1 | 162.8 | 67.9 | -552.7 | -47.1 |
| CFO Interest Coverage (x) | 0.41 | 2.46 | 1.34 | 0.39 | - | - |
| CFO Debt Coverage (x) | - | 0.1 | 0.02 | - | - | - |
| CFO Short-Term Debt Coverage (x) | - | 0.27 | 0.07 | - | - | - |
| CFO Net Debt Coverage (x) | - | 0.21 | 0.04 | - | - | - |
| Free Cash Flow (RM'000) | -142.7 | 171.1 | 54.6 | -377.3 | -657.2 | -55.1 |
| Sources: Tropicana's Annual Report, MARC, iFAST Compilation, Data as of 3 September 2021 | ||||||
3. Liquidity:
Slight deterioration in Q1 2021, but still much improved compared to 2019
Liquidity ratios are used to assess a debtor's capacity to pay off current debt without having to raise additional funds. We can see a "slight" slip in the group's liquidity ratios recorded in Q1 2021 compared to 2020 Having said that, the ratios are marked improvements from 2019, see Table 4.
That said, we opine that Tropicana still in a decent liquidity position with unrestricted cash balances of RM382.8 million. The group can also tap into unutilized credit lines of RM585 million or use its unencumbered landbank worth RM1.3 billion as collateral to raise funds if needed.
Furthermore, the group is in the preliminary stage of disposing some of its investment properties in Kota Damansara to shore up liquidity. Successful divestment can help the group raise much needed cash, reduce debt and improve its liquidity position.
Table 4: Tropicana’s Group Liquidity (2016 - Q1 2021)
| 2016 | 2017 | 2018 | 2019 | 2020 | Q1 2021 | |
| Cash Ratio | 0.44 | 0.34 | 0.38 | 0.21 | 0.25 | 0.23 |
| Current Ratio | 2.45 | 2.1 | 1.89 | 0.86 | 1.27 | 1.24 |
| Quick Asset Ratio | 1.00 | 0.85 | 0.71 | 0.4 | 0.59 | 0.59 |
| Cash Conversion Cycle (days) | 29.19 | 45.36 | -2.87 | -94.65 | -50.55 | 64.04 |
| Sources: Tropicana's Annual Report, MARC, iFAST Compilation, Data as of 3 September 2021 | ||||||
4. Capital Structure: Slightly higher gearing in Q1 2021 due to increased borrowings
Tropicana’s capital structure deteriorated slightly in Q1 2021 from 2020 which could impact its debt capacity, see Table 5. Debt to equity increased to 0.71, which makes Tropicana one of the highest geared among peers, only lower than SP Setia and IGB but slightly higher than EcoWorld and UEM Sunrise, see Table 6.
In addition, Debt to OPBITDA, which suggests the amount of time required by the company to clear all debt, spiked alarmingly, continuing the downward trend seen since 2018. The spike is mainly due to a combination of higher debt and lower OPBITDA.
Obviously, we can see the Tropicana increasingly geared up its leverage by making additional borrowing, especially in 2020. Nonetheless, additional borrowing seems justifiable as it is used for landbank expansion and ongoing property development funding, which could spur up the group’s performance by bringing in more sales numbers in the future.
Table 5: Tropicana's Capital Structure (2016 - Q1 2021)
| 2016 | 2017 | 2018 | 2019 | 2020 | Q1 2021 | |
| Debt to Equity (x) | 0.53 | 0.52 | 0.51 | 0.51 | 0.7 | 0.71 |
| Debt to Equity (exclude non-distributable reserves) (x) | 0.53 | 0.52 | 0.52 | 0.63 | 0.85 | 0.87 |
| Debt to Total Capitalization (x) | 0.35 | 0.34 | 0.34 | 0.34 | 0.41 | 0.42 |
| Debt to OPBITDA (x) | 10.6 | 5.87 | 5.11 | 6.16 | 9.28 | 15.65 |
| Long-Term Debt to Shareholders' Funds and Minority Interest (x) | 0.37 | 0.33 | 0.35 | 0.34 | 0.6 | 0.6 |
| Short -Term Debt to Shareholders' Funds and Minority Interest (x) | 0.16 | 0.19 | 0.16 | 0.17 | 0.09 | 0.11 |
| Total Liabilities to Total Assets (x) | 0.53 | 0.52 | 0.53 | 0.52 | 0.53 | 0.54 |
| Sources: Tropicana's Annual Report, MARC, iFAST Compilation, Data as of 3 September 2021 | ||||||
Table 6: Adjusted Debt to Equity compared to Peers
| Company | Adjusted Debt to Equity |
| IOI Properties | 0.56 |
| SP Setia | 0.78 |
| Sime Darby Property | 0.36 |
| Mah Sing | 0.54 |
| Eco World Development | 0.69 |
| UEM Sunries | 0.61 |
| IGB | 1.09 |
| OSK | 0.46 |
| Matrix Concepts | 0.17 |
| Tropicana | 0.71 |
| Sources: Annual Reports of respective companies, iFAST compilations, Data as of 3 September 2021 | |
Our thoughts: Tropicana to weather through the pandemic induced slowdown
Like many others in the industry, the pandemic and lockdowns have affected the sales and operations of Tropicana. Low take up rate of recent projects and inventory build up even with the government initiatives such as Home Ownership Campaign (HOC) are concerning.
Although there were some improvements, we also note the deterioration of some of the credit metrics for Tropicana but understand that this is not company specific and is prevalent across the industry which was aggravated by the Covid-19 pandemic.
That being said, we still believe that the company would be able to weather through the pandemic induced slowdown due to the following reasons:
1. RM 1.1 billion of unbilled sales to provide some earnings visibility through 2023
At end-March 2021, the group has an ongoing gross development value (GDV) of RM3.9 billion and an overall take-up rate of 58.1% for its ongoing projects. At this juncture, the current unbilled sales of about RM1.1 billion provides some earnings visibility through 2023. However, much more still needs to be done to reduce the RM 1.6 billion of unsold GDV and turn them into revenue and cashflow.
2. Debt Maturity Profile well spread out over the next 7 years
We think Tropicana’s debt maturity profile is manageable as RM4.15 billion of debt is spread out over 7 years.
As at end-March 2021, the group’s maturing short-term portion of a term loan stood at RM309.6 million up to Mar-2022. The group’s financial flexibility stems from its unutilised credit lines of about RM585 million and cash balance of RM383 million as at end-March 2021, which should be sufficient to cover short term debts and fund working capital.
After that, the next substantial debt due would be in 2023 where close to RM1.08 billion of debt is due.
Table 7: Debt Maturity Profile
| RM Million | 2021-2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 |
| Sukuk | 0 | 645 | 110 | 363 | 133 | 200 | 50 |
| Term loan (estimated) | 737 | 428 | 428 | 428 | 208 | 208 | 208 |
| Total | 737 | 1,073 | 538 | 791 | 341 | 408 | 258 |
| Sources: Tropicana's Annual Report, MARC, iFAST Compilation, Data as of 3 September 2021 | |||||||
3. Decent financial flexibility due to unencumbered assets
Over the years, Tropicana has accumulated assets such as investment properties and land. Going forward, we opine that these assets could continue to provide financial flexibility to the group.
For example, to shore up liquidity, the group is in the preliminary stages of disposing some of its RM 1.6 billion worth of investment properties including its schools and new office tower in Kota Damansara. Its RM1.3 billion worth of unencumbered landbank offers a source for liquidity in the future should it be needed. Another option is to sell down on the RM300 million inventory as of 31-Mar-2021 and unsold GDV of RM 1.6 billion.
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