What’s New

• LBS Bina Group (LBS) has announced that the Group will buy a retail mall named M3 Mall in Gombak, Kuala Lumpur for RM105.0m.

• The mall is located along Jalan Madrasah, Taman Melati, Gombak, Kuala Lumpur with high & dense population in the surrounding housing area. It is near by the Tunku Abdul Rahman University College and Taman Melati LRT Station. Other neighbourhood amenities include Gombak Police Station, Pejabat Pertanian Daerah Gombak, Kuala Lumpur Library (Gombak Setia Branch), Zoo Negara Malaysia, Giant Panda Conservation Center and a few secondary schools.

• Constructed on 3.2 acres of leasehold land, M3 Mall is part of a larger mixed development project known as “Medan Mega Melati” which includes the M3 Residency, a 2 blocks of 16-storey service apartments build atop the mall.

Comment

• Venturing into property investment. The acquisition offers a low entry to the retail business with stable recurring incomes expected in the medium term and capital appreciation over the long run. More importantly, LBS could leverage on the experience in operating M3 Mall to work on another sizeable shopping mall which it intends to develop in its existing township project, Bandar Saujana Putra.

• Fair price for the mall. The Group is required to pay RM40.8m (in-kind payment by contra of properties) for the Shareholders’ Advances and RM5.2m (5 instalments within a period of 9 months) for the Directors’ Advances on top of the RM12.0m outright cash consideration. Furthermore, LBS needs to assume outstanding loan of c.RM47m owing by the mall to its financier with regards to the existing credit facility. In total, the Group shall assume liability of RM105.0m for the acquisition of the mall, which is in line with the current market value of RM107.0m as assessed by a property valuer on the M3 Mall.

• Challenging operating environment. We are neutral on the deal as the mall is still loss-making with a net loss after tax of RM5.7m in FY16. We only expect the mall to breakeven in 2-3 years’ time. For the time being, LBS would envisage a net loss of RM1-3m per annum for the mall. Furthermore, we opine that the overcrowded retail malls in Klang Valley and highly competitive retail landscape do not bode well for the Group.

Earnings Outlook/Revision

• No change to our earnings forecasts for 2017-18F pending fulfilment of the conditions precedent as the acquisition is expected to be completed in 4Q17. Hence, any earnings impact will be felt in 2018F.

Valuation & Recommendation

• Maintain BUY on LBS with an unchanged target price of RM2.27 based on 35% discount to its RNAV/share of RM3.49. Our valuation has yet to factor in the M3 mall as well as the recent land purchase in Seri Kembangan (8 acres with potential GDV of RM600m) and the earnings dilution of RCPS (which is not imminent in view of implied conversion price of RM2.20/share and attractive dividend rate of 6%).

• We favour LBS for its: a) resilient sales and clear earnings visibility amid current property headwinds; b) diversified product offerings and geographical exposures (mid to high end property across Klang Valley, Pahang, Johor, Perak, Sabah); c) focusing on affordable housing segment; d) decent annual dividend yield of over 5%; and e) unlocking potential landbank values in ZIC with current advocate of ‘One belt, One Road’ initiative amid stronger Malaysia-China ties.

Source: JF Apex Securities Research - 6 Sept 2017