Rebound lag

Benalec’s 1QFY17 result was below our expectation. We were surprised by the high tax rate (48% in 1QFY17). Net profit increased RM4.4m yoy to RM5.6m in 1QFY17, driven by higher revenue from the sale of reclaimed land. Delays in obtaining land titles for its Melaka project remain a concern. We cut our earnings forecasts by 22-25% for FY17-18E to reflect higher operating cost and tax rate. Maintain HOLD call with lower target price of RM0.40, based on a lower target FY17E Price/book of 0.5x due to delays in monetisation of its land.

Disappointing result

Benalec’s net profit of RM5.4m in 1QFY17 was only 19% of our previous full-year forecast of RM28.8m. Revenue increased 126% yoy and 3% qoq to RM100m in 1QFY17, driven by higher reclaimed land sales recognised. Core increased 33% yoy to RM6.9m in 1QFY17 in tandem with the higher revenue. But was down 54% qoq due to EBITDA margin contracting 8.4ppt qoq. Forex loss of RM1.6m was recognised in 1QFY16.

Potential land sale gains

Benalec has unrecognized revenue of RM103m for its RM204m contract to reclaim 415 acres of land for Boon Siew. Furthermore, 115.8-acre reclaimed land sales in Melaka worth RM212m is yet to be recognized as revenue. Total revenue of RM315m will be recognized in FY17-18. Delays in obtaining land titles from the Melaka authorities remain a key concern.

New project will only contribute in 2018

We understand that Benalec has reclaimed about 120 acres of land in Tanjung Piai to date and is proceeding with the oil storage terminal project while finalising a deal with a strategic partner. The Tanjung Piai Maritime Industrial Park and Pengerang Maritime Industrial Park projects in Johor will only start contributing to earnings in FY18 at the earliest. It is financing the reclamation works with the proceeds from the RM150m redeemable convertible bonds issued last year.

High execution risk

Execution risk remains high for its reclamation projects given the current weak property and oil and gas markets. We maintain our HOLD call on Benalec. We reduce our target FY17E Price/book to 0.7x from 0.5x, given the earnings forecast risk. We cut our target price to RM0.40 from RM0.53.

Source: Affin Hwang Research - 30 Nov 2016