- We maintain our BUY call on Benalec Holdings with an unchanged fair value of RM1.25/share, pegged at a 45% discount to its sum-of-parts value.

- Benalec recorded a net profit of RM3mil in 2QFY15, taking 1H earnings to RM15mil. While this represented only 32% of our FY15F forecast of RM48mil, we deem it to be in line on expectations of a stronger 2H.

- The lower earnings at half time (-10% YoY) was mainly attributable to:- (i) lower revenue from land disposals (RM73mil vs RM88mil a year ago); (ii) forfeited deposit from a cancelled land sale of RM5mil in 2QFY14; and (iii) discount received from subcontractors in 2QFY14 (RM4mil).

- Similarly the lower sequential earnings (-60% QoQ) were largely due to the absence of any gains from land sales during the quarter vs. the RM40mil booked in in 1QFY15. This more than offset a 12% YoY increase in revenue arising from better recognition from the TNB freight contract.

- That said, we expect a pick-up in earnings in the 2H to make up for the shortfall in 1H. This is premised on expectations of more land sales to be crystallised.

- To this end, Benalec has c.RM394mil (217 acres) worth of land sales with SPAs that are to be progressively recognised between FY15F and FY17F.

- Out of this total, we expect the next land deal to be worth RM51mil to be recognised in the upcoming quarter.

- Furthermore, we understand that the group has recently commenced work on the RM203mil reclamation contract in Malacca that was secured on a cash basis.

- Benalec’s Detailed Environmental Impact Assessment (DEIA) for its Tg. Piai project was finally approved on 23 January – giving legitimacy to its aspirations to develop the area into a future oil hub.

- This comes after it submitted plans to raise RM200mil via convertible bonds. We expect initial works of between 100 acres to 200 acres at Tg. Piai to commence within the next one to two months.

- Benalec has its work cut out from now on. While the DEIA approval would certainly provide more assurance of the project’s viability, the real challenge is to secure maiden off-takers during a period of declining oil prices.

- This comes at a time when negotiations with 1MY Strategic Oil Terminal Sdn Bhd (~1,000 acres) have been extended for a further six months until 11 June 2015.

Source: AmeSecurities