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Matrix (5236) is a property stock listed in Malaysia Bursa main market with dividend yield of around 5.5 to 6%. Due to MCO 3.0 implemented in Q2 of 2021, Matrix has made much less profit compared the last few quarters. Let’s take a look into the details.

(Last update: 22nd Sep 2021 based on quarterly report issued on 25th Aug 2021. Updates are made in red. For readers that would like to read superseded version, please free to contact by email)

Background of Matrix

Matrix concept is a property development company found in Seremban Malaysia. Their business mainly covers four areas, namely

• Property development
• Construction
• Education
• Hospitality (Club and Hotel)

Having say that, no doubt that Matrix is a pure property development company. Looking at financial report of 2020, property development contributes more than 95% of revenue. The other three business segments serve to complement property development segment. Let’s talk about the role of the other three segments.

• Construction: Matrix only constructs own properties. From revenue breakdown by business segments available in financial report, all revenue from construction segment will be eliminated during consolidation as they are deemed as inter-company transaction. Matrix is not a construction company.

• Education: Matrix owns an international school in their flagship Sendayan township in Seremban. The international school is generating recurring revenue to Matrix, but its contribution to revenue is not significant and it is still losing money (again not significant in comparison with the total profit). However the international school can improve community living in general which should be good to Matrix in long term.

• Hospitality (Club and Hotel). Matrix owns a club and a hotel in their flagship Sendayan township in Seremban. Similarly, they are generating recurring revenue to Matrix, but contribution to revenue and profit is insignificant. Value of the hospitality properties is to complement the amenities of township.

Property development projects of Matrix

To understand business of Matrix, you must first learn about their two flagship townships below. These two projects are main source of income, and will still be their main profit contributor in coming years.

1. Sendayan development, Seremban (contributed 82% of revenue in FY2021)
2. Bandar Seri Impian, Kluang Johor

Other on-going developments include

1. High rise project in Cheras
2. High rise project in Puchong
3. Landed residential project in Melbourne, Australia
4. Islamic finance district development in Jakarta, Indonesia through joint venture with local companies. Matrix owns 30% of the joint venture company. According to AGM minutes in 2019, whole development of the joint venture project will take more than 10 years.

Except for the project in Jakarta, the other projects are one-off project in mature township that will not continuously contribute to profit over the long term. Joint venture to explore Indonesia market is the latest attempt by Matrix to go beyond Malaysia market, there is both risk and opportunity, it is too early to conclude now whether this will bear fruit in long term.

In Australia, Matrix has completed one project and second project is in progress now. To comply with Australia accounting standard, revenue of RM79millino from second Australian project will only be recognized upon full completion in FY2022. Next Matrix aims to launch a 12-storey mix development in Melbourne with estimated GDV of RM240 million.

Business strategy of Matrix

Matrix’s strategy is township property development. Matrix is still replenishing landbank near their developing township near Seremban and Kluang, so it is important that the township is continuing to evolve to bring value to the new property launches. This is where the education and hospitality divisions play a vital role. Furthermore in FY2019, Matrix has partnered with Pusat Hemodialisis Mawar (PHM) as its first step to eventually establishing a full-fledged medical center in Bandar Sri Sendayan. Under this 30-year management agreement with PHM, Matrix will manage non-clinical aspects of the medical center related to finance, administration and resources.

Financial Highlights (2021 Q2 / FY2022 Q1)

• MCO 1.0 was implemented in the 2020 Q2 while MCO 3.0 was implemented in 2021 Q2. The financial result of Matrix is this quarter is almost the same as last year, so we can conclude that extent of impact of MCO 1.0 and MCO 3.0 on Matrix is very similar.

• Management disclosed that unbilled sales stood at RM1.04 billion, and it would sustain earning for the next 12 months. With this level of unbilled sales, Matrix should sustain current level of revenue in coming quarters without any significant growth. Below is trend of unbilled sales for the past quarters.
  • FY2021 Q1 – RM1.2 billion
  • FY2021 Q2 – RM1.1. billion
  • FY2021 Q3 – RM0.96 billion
  • FY2021 Q4 – RM1.02 billion
  • FY2022 Q1 – RM1.04 billion

• Throughout the COVID pandemic, Matrix has done a very good job in optimizing their cost structure (selling & marketing, admin and general expense). However on the other hand, raw material pricing (steel etc.) has been increasing and this is not a good news for construction companies and property developers. Although we can see that gross margin is going downtrend for the past 4 quarters, Matrix mentioned in the financial report that it is due to less industrial properties sales. There is no mention about rising material price and I guess this is because Matrix is still using stock materials purchaser earlier. I think rising material cost will hit at some point of time and it may be difficult for Matrix to transfer the cost to customers.

My summary

1. Although gross margin was declining during past few years due to strategy to focus on affordable housing segment, I believe this is correct strategy to cater for what market needs. Margin from affordable housing is lower, so Matrix needs to put more efforts on sales to achieve the same level of profit. In coming future, Matrix will continue to focus on residential housing less than RM500,000. Matrix will also focus on greater cost efficiency, such as use of aluminum framework that is equally lasting than other materials.

2. Unbilled sales stay at almost same level compared to last quarter. Current level of unbilled sales is healthy but not something the can give significant growth in the near future.

3. Considering the lackluster property market in Malaysia in these few years, Matrix is still having a track record of making good profit comparing to its peers over the past years, with return of equity (ROE) at 14.5% at the time of writing.

4. As Matrix turns their lands into properties fast to make profit, they have to continuously replenish their landbank. This is not a concern for the years to come, but need to note that Matrix has to spend money from time to time to replenish landbank for sustainability of their business.

5. Most of property stocks in Bursa are now trading below their NTA (net tangible asset) value. However for Matrix, it is only traded almost to its NTA value because their share price is supported by track record of making profit and distributing dividend continuously.

6. Overall I do not expect to have very high capital gain from Matrix. In fact, its share price of RM2.10 at time of writing is beyond my expectation, because its share price has been lackluster for many years. From business perspective, property sector as a whole is still expected to be challenging. Supply and demand in properties sector are still in the process of balancing in Malaysia. In oversea market where countries are recovering from COVID pandemic, housing price has started to rise due to low interest rate environment and various initiatives from government to support economy. Same thing may happen to Malaysia once economy is opened up further when more population is vaccinated. It would be interested to see if more people will take this opportunity of lower interest rate and government incentive to enter property market. In this case, it would be good for Matrix. In contrast, material pricing is also increasing globally so this may limit how much Matrix can benefit from possibly booming property market.

7. Within property sector, Matrix is definitely a good performer with stable dividend distribution (around 5.5% at current price of RM2.1, pay quarterly). Personally, I’m actually impressed by how management adapt to changes in the midst of COVID-19 pandemic to still generate sales and drive their cost down through digital solutions.

8. Management mentioned in the latest quarter report that “With the increased vaccination rate of the Malaysian population, businesses look forward to further easing of restrictions as stipulated under the National Recovery Plan. In anticipation of this, the Group hopes to replicate last financial year’s swift return to normal operations as it expedited construction activities to catch up on its development schedule“. In AGM, Matrix mentioned that all of their staff are fully vaccinated, company anticipates return of full force b 10th Dec and completion of delayed construction work by end of Q1 2022.

9. Specific points I would continue to monitor include

• Trend of unbilled sales (i.e. sales that not yet recognized as revenue). This will give indicator of revenue in the coming quarters.
• The effect of rising raw material price on gross margin compression, something that I think may not be reflected in 2020 Q2 yet.
• Status of Indonesia project. This is where Matrix spend most of the capital expenditure in financial year 2020, so should keep an eye to see if it bears fruits. This project has reached 25% construction progress, soft launching has started and will be completed by financial year ending Mar 2023. However looking at quarterly report, contribution of revenue and profit from this project is unclear.

In case you want to know more about dividend investing, feel free to check out my article about ultimate guideline for dividend investing here.

Disclaimer: This article is purely my notes from studying this company. This is not a BUY or SELL call. I am not a registered investment advisor nor an investment guru, please be reminded to do your own homework and invest at your own risk.