Highlights

We attended MCH’s analyst briefing for its 2QFY13 results announcement, and came away feeling upbeat about its prospects. Salient highlights:

Updates on the new KL development, with selling price guided in the region of RM700-800 psf. The land cost of the one-acre site averaged at RM950 psf with circa 8x plot ratio, with planned GDV of RM250m.

Strong earnings visibility, with unbilled sales now standing at RM362m (0.8x FY12 revenue).

Margins highly sensitive to earnings mix. In line with our results review, MCH’s margins are highly sensitive to product mix, with 2Q only recording 36% gross margins vs. 48% for 1Q, as 1Q saw more highmargin industrial land disposals and sales of doublestorey terrace houses.

High margins from industrial land. Management guides for ~70% gross profit margin from industrial land sales. We reckon this is achievable given: (1) Low land cost of RM3psf vs. recent transacted price of RM34 psf; (2) All infra costs have been paid for at ~RM6 psf; and (3) Strong FDI momentum with reputable manufacturing MNCs such as Hino continuing to make Sendeyan Tech Valley (STV) their destination of choice.

More land sales to come. YTD, STV land sales have amounted to 50 acres and we gather that MCH intends to release a further 50 acres of land in 2H. Currently, it has 200 acres of industrial land plots in inventory.

Strong property prices in Seremban. The asset class outlook in Seremban conitues to be encouraging, with MCH’s double storey terrace houses now fetching RM380k vs. RM300k last year. We believe a large part of this comes from new buyers from Klang Valley, now estimated to make up 40% of MCH’s new sales.

Risks

Slowdown in sales; escalation in construction and raw material costs; downturn in Seremban and Johor.

Forecasts

Unchanged. Note that we upgraded our FY13-15 net profit forecast by 9-27% immediately after the results.

Rating

BUY

Positives: Offers great exposure to the thriving satellite town of Seremban and high dividend yield.

Negatives: Lack of landbank diversification means the company’s fate is closely tied to that of Seremban, although we note that the recent maiden land acquisition in Klang Valley will mitigate some concerns.

Valuation

Maintain TP at RM2.84 (25% discount to RNAV).

Source: Hong Leong Investment Bank Research - 28 Aug 2013