Paramount takes unconventional road for overseas ambition
This article first appeared in The Edge Malaysia Weekly on June 10, 2024 - June 16, 2024
PARAMOUNT Corp Bhd (KL:PARAMON) is known as a steady and predictable counter, so much so that some would even call it “boring”. As such, the announcement last month that the property developer was buying 517 million shares, equivalent to a 21.5% strategic stake, in Ecoworld International Bhd (KL:EWINT) took the market by surprise and made investors sit up.
The stake acquired by Paramount’s wholly-owned subsidiary Flexsis Sdn Bhd was done through a direct business transaction with GLL EWI (HK) Ltd — a unit of GuocoLand Ltd that is controlled by Tan Sri Quek Leng Chan — at 33 sen a share, amounting to RM170.6 million. GuocoLand, in a separate announcement on the Singapore Stock Exchange, said it has disposed of its entire 27% stake in EWI. The buyer of the remaining 5.46% equity interest remains unknown.
Paramount group CEO Jeffrey Chew recounts that the group decided very quickly to snap up the 21.5% stake in EWI after getting wind that GuocoLand’s block was up for sale.
“The whole process took about four to six weeks, including the time to get financing in place … It is quite unprecedented in the history of Paramount and it sounds shocking and very spontaneous. It was actually a fast decision, but it’s something that has been brewing for probably the last six to seven years,” says Chew in a recent interview with The Edge.
Chew, who led OCBC Bank in Malaysia for six years before joining Paramount, says more than the deal being a fantastic investment opportunity for the group, it fits into what it wants to do — which is to diversify into property development overseas, and at the same time fulfilling the wishes of its late chairman Datuk Teo Chiang Quan.
Chew highlights that since the divestment of its controlling stake in the tertiary education business in 2019, the group has sold over RM1 billion in assets over the last five years, and a large chunk had been reinvested into the property development division locally. This is evident from the increase in the group’s revenue, rising from RM517.27 million in FY2017 (before the sale of the education assets) to RM1 billion in FY2023.
He says the board is cognisant of the fact that the exponential growth of the property development business — averaging some 16% per annum over the last seven years — is not sustainable. Hence, it is making a conscious effort to slow down the growth of property development locally and seek diversification into other areas.
“We are preparing for what we are going to do beyond the 7% to 8% of growth in Malaysia for property development. We have two choices, which is to grow in property development outside of Malaysia, or we can grow outside of property development, going into other businesses, in Malaysia.
“This opportunity [investment in EWI shares] came very timely to our approach of diversification and also redeploying our capital that is coming back from property development in Malaysia as we slow down the growth in property development locally,” explains Chew.
He also told the media in a briefing last week that Paramount is targeting 30% of its annual profit from overseas property projects by 2030, supported by its strategic investment in EWI.
Taking a back seat in ‘EWI bus’
The strategic stake in EWI would mean that Paramount is taking the unconventional path of diversifying into property development overseas through EWI. It is worth noting that EWI’s development projects are predominantly located in the UK. According to its 2023 annual report, EWI’s gross development value amounts to £4.6 billion in the UK and A$700 million in Australia.
Chew stresses that while Paramount will seek board representation so as to have a better insight as a shareholder into EWI’s operations and decision-making, it has no intention of taking over the wheel. Using the analogy of a bus, he enthusiastically describes how Paramount will be taking a “back seat” while allowing EWI to drive it in the direction and speed it intends to go.
“They [EWI management] still know how to drive the bus despite having some minor accidents along the way, but they are experienced. I am not going to go there and ask them if I can take over the steering wheel or hold onto the brakes,” he says, adding that Paramount’s role will be as a partner to support EWI and also to provide more equity financing when needed.
“We’re not going to take over the bus because we have no experience in the UK. Let’s be real,” Chew says, adding that by entering the UK property market through its shareholding in EWI, Paramount will have a chance to better understand the UK market, which could potentially open a pathway for it to venture directly into development in developed markets in the future.
“Operating in a foreign land is challenging. We know it’s going to be challenging in the UK, but we will learn. We will try to get involved slightly at the operational level of the joint venture (JV) to learn and also identify the risks and then to measure the risks as well as provide feedback.
“So that will be the learning process in strengthening our organisation to be able to manage projects like that in developed markets,” says Chew.
Asked if Paramount would consider collaboration with EWI and in what form it would take, Chew emphasised that it is something both companies will have to be careful about so as to not cause brand confusion among the public.
“There are some potential collaborations, but we are trying to understand and see the potential impact on both parties. We don’t want people to confuse Paramount and EWI properties. Our property has different positioning and location from theirs,” he adds.
From the interview, it is clear the former banker has crunched the numbers and calculated the risks before bringing the deal to the Paramount board.
In fact, Chew confesses that he has been paying close attention to EWI for the past seven years, since its listing on Bursa Malaysia. While the odds have not been in EWI’s favour since its listing, Chew believes that the external factors that dragged EWI down in the past should not continue to weigh it down in the future.
Critics say Paramount may be making a costly mistake with its investment in EWI, given the company’s past performance, which has failed to excite.
EWI suffered nine consecutive quarters of losses, resulting in net losses for the financial year ended Oct 31, 2023 (FY2023) and FY2022, amounting to RM85.37 million and RM234.42 million respectively. However, it turned the corner in 1QFY2024, reporting a net profit of RM182,000 compared to a net loss of RM30.82 million a year ago.
Responding to the criticism, Chew says Paramount is essentially forking out some RM62 million for the stake, if the potential RM108 million return in dividends from EWI were taken into account.
EWI has committed to clear its inventories worth RM850 million and to distribute its excess cash as dividends for FY2024.
However, for Chew it is more than the cash value that he sees in EWI, he believes in the prospects of the property developer going forward. He believes that EWI was largely impacted by Brexit, Covid-19 and subsequently high interest rates, rather than poor management.
“I believe the UK government would know how to deal with the implications from Brexit by now, they cannot do worse. So that’s a positive for EWI. As for Covid, if there’s no Covid, it’s another positive for the group.
“In terms of interest rates, it is hovering at 5% to 6% in the UK, making mortgages very expensive. But if it stays at the same level for the next five years, it’s neutral for EWI but if it goes down, then it’s another positive factor for the group,” he says.
Would Paramount invest further in EWI in the future if the latter needs funds?
“We have capital coming in and with us slowing down our growth rate locally, I will be very eager to pump the capital into EWI. We really believe that with the right strategy, right leadership and right direction, a company can go forward,” says Chew, who believes that EWI might need some capital somewhere in 2027 or 2028 for landbanking.
JV for overseas development for now
Since the disposal of its controlling stake in the tertiary education business back in 2019, Paramount has been looking for other avenues to diversify its income stream to make up for the gap from the education business. It has ventured into co-working spaces, dipped its hand in digital enterprises such as peer-to-peer financing and online learning platforms while steadily building its property development portfolio locally.
Nevertheless, diversifying into property development overseas has continued to challenge the group. It has tried unsuccessfully to break into the Australian property development market.
Outside of Malaysia, it currently has only one ongoing 49%-equity venture development in Bangkok, Thailand, in which it invested RM24.6 million.
But the group is not letting go of its ambition and it is still on the lookout for opportunities overseas.
“We are not buying land overseas directly but we will probably look at joint ventures. I don’t think we are ready to go into the market overseas and buy land on our own for now. Over time, we might. But I think at this point, we’re not ready,” shares Chew.
Paramount’s philosophy is not to hoard land, but rather to focus on churning its projects quickly in order to keep its return on equity high.
Its projects are concentrated in the northern and central Peninsular Malaysia, with 10 ongoing developments currently.
Asked about the outlook for the group in 2024, Chew says he is “cautiously optimistic”, adding that he is hopeful for a pickup in activity in the second half of 2024.
“I believe that 2024 is also part of the continuous recovery and also the new government, new so-called plan for energy transition, economy transformation and all that will take place. It has been a little bit slower than what I expected. But I hope the second half will improve,” he says.
For 1QFY2024, Paramount recorded a net profit of RM7.7 million, down 33.4% from a year ago. Revenue was down 11.2% at RM172.61 million from the previous year.
In the past one year, Paramount’s counter has gained 38.2%, closing at RM1.12 per share last Thursday, giving it a market capitalisation of RM697 million.
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