Kimlun announced that its c.70% owned subsidiary has entered into an SPA to buy 11 acres of freehold commercial land nestled in Bandar Seri Alam, Johor for RM40.5m with completion by 3Q21. Company did not share development details as plans are still being hatched out. We consider its RM84 psf purchase price to be fairly attractive relative to surrounding plots for sale. Net gearing is expected to rise to a manageable 0.51x. Overall we see this as near term neutral given the long term nature of the development. Maintain forecasts. Maintain HOLD with unchanged TP of RM0.87. Our TP is derived based on FY21 earnings pegged to 7.0x target P/E multiple.

NEWSBREAK

Land acquisition. Kimlun announced that its indirect subsidiary, Kii Melodia Sdn. Bhd. (69.5% effective interest) has entered into a sales and purchase agreement (SPA) with Seri Alam Properties Sdn. Bhd (wholly owned subsidiary of United Malayan Land Bhd) in relation to the purchase of 2 plots of freehold commercial land in Mukim of Plentong, JB for a total consideration of RM40.5m measuring roughly 11.3 acres. Transaction is slated for completion by 3Q21.

Land details. The two adjoining plots of land measuring 11.3 acres have obtained necessary approvals from authorities for conversion into commercial title. Additionally, both plots will be combined to be held under a single block title. They are currently vacant and free from any squatters, occupiers and encumbrances. In terms of location, both plots are nestled within Bandar Seri Alam (20km from JB city) with university, schools and hypermarkets nearby. The township is also conveniently located within 10 mins from Pasir Gudang and 30 mins from Senai Airport.

Development plans. No detailed development plans were shared in the announcement other than plans to build commercial properties. As planning and development details are still being hatched out with surveyors and consultants, GDV/GDC as well as development timelines cannot be ascertained as yet.

HLIB’s VIEW

Near term neutral. Kimlun’s purchase price of RM40.5m seems to be on the lower side at RM84 psf which we believe to be an opportunistic purchase in a matured township. This is based on a comparison with a commercial land for sale nearby going at RM145 psf. Development of this land and its ensuing earnings stream should take place over the longer term. We see this acquisition as leveraging on weak property market sentiment to expand on future earnings stream. Balance sheet impact from the transaction is also rather manageable with estimated rise in net gearing from 0.47x to 0.51x (based on 3QFY20) assuming c.70% effective stake.

Forecast. Maintain Forecasts Due to the Long Term Nature of the Planned Development.

Maintain HOLD, TP: RM0.87. Maintain HOLD with unchanged TP of RM0.87. Our TP is derived based on FY21 earnings pegged to 7.0x target P/E multiple (near 5 year mean). Stock currently trades at a fair FY21-22 P/E multiple of 6.8x and 6.7x, considering the lack of any meaningful near term catalysts.

Source: Hong Leong Investment Bank Research - 6 Jan 2021