Meda Inc. HOLD

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Meda Inc.

Recommendation:

Stock Code: 5040 Bloomberg: MEDA MK Price: MYR0.115 12-Month Target Price: MYR0.120 Date: October 12, 2005

HOLD

Recommendation

• We initiate coverage on Meda with a Hold recommendation and a 12-month target price of MYR 0.120 based on a combination of P/BV and PER valuation methodologies.

• Meda’s historical earnings pattern has been volatile. Besides the exceptional MYR34.1 mln profit reversal, which occurred in 2004, we believe the sub-prime locationsof its two ongoing non-Klang Valley based projects, that arguably enjoy less predictable demands, contributed to the earnings volatility.

• While no further profit reversals are expected, we are concerned about Meda’s high net gearing of 0.80x, incurring annual interest expenses of about MYR17 - 18 mln. Our forecasted net interest cover of 1.6x in 2005 leaves the company precariously close to not being able to service its debt obligations if future operating profits fail to improve.

• However, we believe downside is limited given that the share price has already corrected 58.2% year-to-date and is supported by a NTA per share of MYR0.85.

• We think there is a Real Estate Investment Trust (REIT) angle to Meda’s two integrated (retail, office, and hotel) properties as an option to pare down debts.

Board: Main Sector: Property

GICS: Financials / Real Estate Management & Development

Market Capitalization: MYR49.1 mln

Summary: Meda Inc. (Meda) is a holding company for subsidiaries involved in three key fields – property development, property investment, and hotel operations.

Analyst: Alexander Chia, ACA

0.00 0.10 0.20 0.30 0.40 0.50

Jan-03 Sep-03 M ay-04 Jan-05 Oct-05 0 50,000 100,000 150,000 200,000 Volume Price

30 Day M oving Average

Vol ('000) Price (M YR)

Key Stock Statistics

FY Dec. 2005 2006F

EPS (sen) -10.0 0.4

PER (x) NM 27.7

Dividend/Share (sen) 0.0 0.0

NTA/Share (MYR) 0.85 0.85

Book Value/Share (MYR) 0.85 0.86

Issued Capital (mln shares) 426.9

52-week Share Price Range (MYR) 0.075 - 0.312

Major Shareholders: %

Dato’ Teoh Seng Foo and family 46.0

Kumuplan Emas 6.1

Per Share Data

FY Dec. 2002 2003 2004 2005F

Book Value (MYR) 0.99 0.95 0.85 0.86

Cash Flow (sen) 7.2 2.3 -8.3 2.1

Earnings (sen) 5.6 0.5 -10.0 0.4 Dividend (sen) 1.0 0.0 0.0 0.0 Payout Ratio (%) 3.1 0.0 0.0 0.0 PER (x) 2.1 21.1 NM 27.7 P/Cash Flow (x) 1.6 5.0 NM 5.4 P/Book Value (x) 0.1 0.1 0.1 0.1 Dividend Yield (%) 8.7 0.0 0.0 0.0 ROE (%) 5.6 0.6 -11.7 0.5 Net Gearing (%) 67.3 70.1 79.8 80.4

Highlights

• Meda’s key ongoing property projects include Kota Malim Prima (Tanjung Malim, Perak), Semantan Avenue Suites (Damansara Heights, Kuala Lumpur), and Natural Heritage Orchard & Country Resort (Kuala Linggi, Melaka). Property development contributed 47.5% of 2004 revenues.

• Meda owns The Summit shopping-cum-office malls at Subang USJ and Bukit Mertajam. Rentals from these properties contributed some MYR20.0 mln in revenues, representing 23.6% of group’s total revenue in 2004.

• The company also owns and operates The Summit Hotels at Subang USJ and Bukit Mertajam. The two hotels recorded average occupancy rates of 75.0% and 56.0% in 2004 respectively. The hotel division accounted for 24.3% of 2004 total revenue.

Investment Risks

• Risks to our recommendation and target price include a rising interest rate environment and a sharper-than-expected downturn in property demand.

• Our analysis and forecasts carry a higher degree of uncertainty than normal, because attempts to meet with Meda’s management to obtain additional information prior to preparing this report were unsuccessful.

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Meda Inc.

Recommendation:

All required disclosures appear on the last page of this report. Additional information is available upon request.

HOLD

Background

Corporate Profile

Meda was listed on the Main Board of Bursa Malaysia on Mar. 2002. Dato’ (Dr.) Teoh Seng Foo and Teoh Seng Kian are both currently the Executive Directors of the company. Combined with Teoh Seng Aun, the three brothers own circa 46.0% of Meda. Ong Biok Siong, who has some 22 years of experience in the construction and property industries, serves as the Chief Executive Officer.

Corporate Structure Meda Property Development Property Investment Hotel

Source: Company data

Business

Meda has three core business divisions – property development, property investment, and hotel operations.

Segmental Breakdown

Source: Company data, S&P Equity Research Property Development

Property development has traditionally been the largest contributor to Meda’s turnover. Meda’s key projects include:

1. Kota Malim Prima - Tanjung Malim, Perak. This is a self-contained 424.2 acres mixed development project located close to the Proton City.

2. Natural Heritage Orchard & Country Resort - Kuala Linggi, Melaka. Located close to the Linggi River this resort-themed project occupies a land area of about 1,376.2 acres and offer bungalows and orchard lands for sale.

3. Semantan Avenue - Damansara Heights, Kuala Lumpur. Launched in 4Q03, we believe Semantan Avenue is Meda’s highest-profile property project yet. The project comprises 428 units of service apartments.

Property Investment

Meda derives rental incomes from two shopping malls – The Summit at Subang USJ and The Summit at Bukit Mertajam. In 2004, average occupancy rates of these two shopping complexes stood at 95.0%.

Meda also owns two office blocks – Menara Summit at Subang USJ and Wisma Summit at Bukit Mertajam. As at end-2004, Menara Summit and Wisma Summit reported occupancy rates of 97.0% (versus 85.0% in 2003) and 35.0% (versus 35.0%), respectively.

Hotel

Meda manages two hotels located next to the two Summit shopping malls, The Summit Hotels at Subang USJ and Bukit Mertajam. These two hotels mainly target local corporate clients. We understand that occupancy rates for the two hotels averaged 75.0% and 56.0% in 2004.

Car Park

Although Meda’s car park operations accounted for only 4.2% of 2004’s turnover, the business is highly profitable with operating margins hovering around 69.6%.

Others

Grouped under the category of the Others include Meda’s plantation business, which chipped in circa MYR1.5 mln in sales last year, relatively insignificant.

Earnings Outlook

In 2004, Meda group registered a YoY revenue growth of 12.8%. However, the company suffered a pretax loss of MYR41.1 mln due to an exceptional charge of MYR34.1 mln arising from a prior year adjustment. The adjustment resulted from purchasers of past property projects not being able to fully satisfy the purchase consideration after signing the Sales & Purchase Agreement.

Nonetheless, stripping off that exceptional charge, Meda would have incurred a smaller pretax loss of about MYR6.9 mln for 2004 because of the high interest expense.

Going forward, we believe Meda’s property development earnings will be underpinned by its Semantan Avenue Suites project. The project is located at Damansara Heights, off Jalan Semantan, on a 0.89 hectares piece of prime land. With a total of 428 fully furnished units for sale, we estimate that the project should carry a Gross Development Value (GDV) of circa MYR100 – MYR150 mln. Meda is also offering a buy-to-lease option with a guaranteed return of 8.0% per annum for 3+3 years. As of writing, we believe that over 90.0% of the project is already sold. However, due to Meda’s management inability to meet with us, we are unable to ascertain the rate of progress billings for its property projects. We forecast Meda to record net profits of MYR1.8 mln and MYR1.4 mln in 2005 and 2006, respectively. Our earnings forecast is based on the following major assumptions:

1. Flat top-line growth in 2005 for property development, buffered by progress billings from the Semantan Avenue project. 2. A 5.0% decline for property development revenue in 2006 to

cater to our expectations of slower property launches ahead. 3. Normalised operating margins of 17.0% for property

development. Others 2% Car Park Operation 4% Hotel Operation 24% Property Investment 23% Property Development 47%

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Meda Inc.

Recommendation:

HOLD

4. Revenue contributions from other segments such as rental incomes from property investments, hotels, and car parks are assumed to be relatively stable. Single-digit YoY growth rate is incorporated into our forecasts to provide for potential rent revisions.

5. Net gearing to remain at 0.80x. Meda’s gross borrowings of MYR296.5 mln as at Jun. 05 will result in annual interest expenses of MYR17 – 18 mln, dragging down its operating profits markedly.

6. Non-recurrence of exceptional losses.

All in, our forecast for an unexciting 0.3% growth in group revenues reflects our reservations for Meda’s property projects in Perak and Melaka. We believe aggressive launches are not likely due to uncertain demands in these areas.

In sum, we project an EPS of 0.42 sen and 0.33 sen in 2005 and 2006, respectively.

Our profit forecast does not include a potential fulfillment of profit guarantee by Kumpulan Emas (KE, KUE MK, Not Ranked), a substantial shareholder of Meda. In 2001, KE sold a 60.0% stake in Cemerlang Land to Meda with a net profit guarantee of MYR6.0 mln over three years. The shortfall of MYR4.5 mln, to be satisfied by way of property transfer by Mar. 2006, should increase Meda’s reserves.

Valuation

We are valuing Meda based on a combination of P/BV and PER methodologies.

Over the past three years, Meda traded at a P/BV range of 0.26 – 0.89x according to Bloomberg’s data. To account for Meda’s volatile earnings track record, fringe land banks that are subject to longer gestation periods, and a relatively high net gearing of 0.80x, we have accorded the company the lower end of its historical P/BV range at 0.26x.

A 4x multiple is ascribed to Meda’s projected 2006 EPS of 0.28 sen, lower than the multiple attached to other small-cap property companies under our coverage to capture Meda’s risks.

An equally weighted valuation of the two methods yields a fair value of MYR0.120, implying 4.4% upside from current share and hence our Hold recommendation. Valuation Method Ascribed Multiple (x) Fair Value (sen) Weights (x) Weighted Fair Value (sen) P/BK _0.26 _0.22 _0.5 _0.110 PER _4.0 _0.01 _0.5 _0.007

Final Fair Value (Rounded up) _NA _NA _NA _0.120 Source: S&P Equity Research

Comparative Valuation

MEDA MAH

SING* GLMC* KSL*

Share Price (MYR)@ Oct. 12, 05 0.115 1.62 1.31 1.72

Mkt. Cap (MYR mln) 49.1 235.1 284.1 457.1

Ave. Daily Vol. (’000) 4,096 147 222 29

PER FY03 (x) 21.1 9.8 8.9 6.3

PER FY04 (x) NM 8.4 7.0 6.4

P/NTA 0.1 1.1 0.9 1.2

Yield (%) 0.0 2.7 4.4 4.2

Source: Bloomberg, Company data

*MAH SING (MSGB MK, Not Ranked), Glomac (GLMC MK, Not Ranked), KSL (KSL MK, Not Ranked)

Relative Share Price Performance of Comparables

-70 -40 -10 20 50

Jul-04 Oct-04 Dec-04 Feb-05 May-05 Jul-05 Sep-05

MEDA MAH SING GLMC KSL %

Source: Bloomberg, S&P Equity Research

Recent Developments

Mar. 05: Announced that 60%-owned Cemerlang Land Sdn Bhd, failed to meet profit guarantee agreement (PGA) of MYR6 mln over three years. The PGA expired on Dec. 31, 2004. The profit shortfall of MYR4.5 mln will be satisfied by way of a transfer of property by the vendor, Kumpulan Emas, by Mar. 2006.

May 04: Announced that wholly-owned subsidiary, Sri Lingga Sendirian Berhad ("SLSB"), the developer of Nusa Dusun Orchard Resort in Kuala Linggi, Malacca ("the Resort") has entered into a Memorandum of Understanding ("MOU") with IZEE Consultants ("IZEE") to form a joint venture company ("JVC") to undertake the adventure challenge facilities at the Resort on the terms and conditions therein the MOU. The JVC will lease part of the Resort land measuring approximately ten acres from SLSB for the operation of the adventure challenge facilities.

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Meda Inc.

Recommendation:

All required disclosures appear on the last page of this report. Additional information is available upon request.

HOLD

Profit & Loss

FY Dec / MYR mln 2003 2004 2005F 2006F

Revenue 75.0 84.6 84.2 82.0

Operating Profit (EBIT) 18.4 -24.4 19.2 20.1

Depreciation -6.8 -7.4 -7.1 -7.3

Net Interest Income / (Expense) -18.1 -16.8 -17.7 -18.4

Pretax Profit 0.4 -41.1 1.6 1.7

Effective Tax Rate (%) 418.2 3.5 28.0 28.0

Net Profit 2.3 -42.6 1.2 1.3

Operating Margin (%) 24.5 -28.8 22.8 24.5

Pretax Margin (%) 0.5 -48.6 1.9 2.1

Net Margin (%) 3.1 -50.3 1.4 1.5

Source: Company data, S&P Equity Research

Balance Sheet

FY Dec / MYR mln 2002 2003 2004 Total Assets 834.5 843.8 811.6 Fixed Assets 534.5 548.4 536.6 Current Assets 299.0 291.8 271.0 Other LT Assets 0.9 3.6 4.0 Current Liabilities 176.4 213.2 186.9 LT Liabilities 240.0 224.4 261.1 Share Capital 213.4 213.5 213.5 Shareholders’ Funds 412.0 406.1 363.6

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Glossary

Strong Buy: Total return is expected to outperform the total return of the KLCI or KL Emas Index respectively, by a wide margin over the coming 12 months, with shares rising in price on an absolute basis.

Buy: Total return is expected to outperform the total return of the KLCI or KL Emas Index respectively, over the coming 12 months, with shares rising in price on an absolute basis.

Hold: Total return is expected to closely approximate the total return of the KLCI or KL Emas Index respectively, over the coming 12 months with shares generally rising in price on an absolute basis.

Sell: Total return is expected to underperform the total return of the KLCI or KL Emas Index respectively, over the coming 12 months and share price is not anticipated to show a gain.

Strong Sell: Total return is expected to underperform the total return of the KLCI or KL Emas Index respectively, over the coming 12 months by a wide margin, with shares falling in price on an absolute basis.

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