A meeting with Management revealed more clarity on its recently inked joint venture agreement (JVA) between its subsidiary, MGB International For Industry (MGBI) and SANY Alameriah Industrial (SA) to supply and install a combined total of 270,000m3 precast concrete products in phases, over a period of 3 years. While historically, dealing with the Middle East countries are deemed notorious, we came away comforted with MGB’s venture in Saudi Arabia as i) the shifting political landscape has resulted demand for housing, especially affordable segment and ii) payment risk is low as the Group will only target for government housing projects which involve minimum design variation. Hence, we raise our earnings forecast by 18% on average per annum for FY24-25F based on the potential orderbook increment from this JVA assuming high single digit margin as well as a base corporate tax rate in Saudi Arabia of 20%. We reiterate our Outperform call with a revised SOTP derived TP of RM1.12 (previously RM1.03) pegged at 8x PER, below 15x PER sector average, given MGB’s smaller size.

• Expects precast concrete orderbook of 400,000m3 for 3 years, translating to RM435.6m in value (45% of contract value net to MGB, 1m3 of precast concrete = SAR2,000 and SAR1 = RM1.2). Recall, the Sakani housing program will build up to 10,000 units of properties and to be completed in 5 years. We assume project size of building about 2,000 units or 160,000m3 precast concrete products annually (considering 80m3 of precast concrete products per unit) to be supplied and installed by MGB over a span of 5 years. To recap, the utilisation rate of SA’s precast concrete factory amounts to only ~60% (our assumption of 160,000m3 output per annum) considering its annual maximum output of 270,000m3 per annum.
• Salient details recap. We understand that SA is expected to secure supply and installation contracts for a total aggregate minimum amount of 270,0000m3 of precast concrete products within 3 years from the commencement date. The commencement date refers to the 90 working days transition period starting from July 27, 2023. During the first year from the commencement date, SA is required to secure a minimum order of 90,0000m3 of precast concrete products.
  It is also imperative that MGBI would operate SA’s precast concrete factory located in Jeddah for the production of precast concrete products and works to be carried out by MGBI pursuant to the purchase orders issued by SA to MGBI to cater for the supply and installation contract within Saudi Arabia. In return, MGBI will inject approximately SAR10-20m or equivalent to RM12- 24m (assuming SAR1=RM1.2) as working capital to operate the said factory.

Source: PublicInvest Research - 1 Aug 2023