News

Recall that on 11th Aug, MSGB proposed to acquired 960 acres of freehold land in Seremban, Negeri Sembilan for RM359.6m (RM8.60 psf net), and planned to develop an RM7.5bn township there, which would make this its largest project to-date in terms of overall GDV (Figure #3).

On 26th Aug, MSGB announced that in the midst of its due diligence process, it has discovered a land caveat lodged on 8th Aug, which it did not discover in its land search before the 11th Aug announcement.

MSGB is now seeking clarification from the vendors and deliberating on its next course of action.

Financial impact

In the unlikely event that the deal is aborted, our RNAV estimate would be reduced from RM3.31 to RM3.05, while our TP would be reduced from RM2.65 to RM2.44, which would alter our call from BUY to HOLD.

No impact to our earnings forecast as MSGB has yet to firm up the GDV for the inaugural phase, which it targets to launch by mid-2015. Assuming some delay in the consummation of the land acquisition, we believe earnings contribution would commence by 2016 at the earliest.

Pros / cons

We opine that the caveat issue is a minor hiccup which does not pose a major threat to the land deal, as MSGB is highly experienced in dealing with such land matters, and has successfully resolved a similar caveat situation before in the course of its acquisition of 1,352 acres of freehold land in Pasir Gudang. Of note, MSGB still managed to complete the Pasir Gudang land acquisition within a year. We also spoke to management and understand that such hiccups are not uncommon for sizeable land deals, and that MSGB has a strong track record in resolving such matters.

This Seremban land parcel is a key part of MSGB’s growth plans, as it provides exposure to the growth corridor of Seremban, where Matrix Concepts has done well, and would serve to strengthen its earnings visibility over its 7-8 years development period.

Risks

Slower than expected sales; execution risks for projects; inability to replenish landbank.

Forecasts

Maintained.

Rating

BUY

The Seremban land acquisition is significant as it contributes 26 sen/share to our RNAV estimate, and we believe the risk of being aborted is unlikely at this juncture.

MSGB currently trades at 9.1x FY15E P/E vs its historical 5- year P/E average of 11.1x

Valuation

Maintain TP at RM2.65 (20% discount to RNAV), which values MSGB at 9.7x P/E vs. its historical 5-year P/E average of 11.1x

Source: Hong Leong Investment Bank Research - 28 Aug 2014