What’s new

• Seeing is believing. We have visited AME Elite Consortium Berhad (AME)’s industrial parks and foreign worker dormitories in Johor recently and came back feeling positive on its product offerings and business strategies. We are amazed by the Group’s well equipped and well managed foreign worker dormitories and industrial parks. We notice that AME’s resort-like industrial parks stand out from its neighbouring industrial factories and business parks. Also, we are astonished by the living conditions and facilities enjoying by the foreign labour in AME’s apartment-style dormitories.

Comment

• Back to the pre-COVID-19 level. We understand that the Group’s operation has regained its momentum back to the pre-COVID-19 level and to a certain extent running ahead of the level. The Group has received many inquiries for its industrial park from Domestic Direct Investment (DDI) rather than Foreign Direct Investment (FDI) in recent months. Meanwhile, we understand that AME has accelerated construction progress to catch up backlog orders which were being accumulated during MCO & RMCO periods.

• Concluding land acquisition soon. We believe AME will conclude an industrial land deal (at least 150 acres) soon within Johor to replenish its existing landbank for further investment plan amid the current landbank is sustainable for 3-4 years. Further industrial park development planning will replicate its renowned i-Park@Senai Airport City which builds on more comprehensive settings such as Radio Frequency (RF) detection, well-established dormitories, pleasant environments, and proper management. A new land deal will serve as a catalyst for future growth after the Group getting well-known for its flagship and iconic ”i-Park” industrial park in Johor. Meanwhile, we are seeing more MNCs are setting up their manufacturing bases in Malaysia on the back of the country’s well-established infrastructure, comprehensive banking system, common law jurisdiction, and business friendly environment.

• More foreign workers dormitories in the pipeline. The Group has allocated RM25m CAPEX to build more dormitories to fulfill the high demand from MNCs. MNCs which account for major client base of AME’s industrial park are very concerned about labour’s living conditions, benefits and well-being. Thus, it creates huge opportunities for AME to generate recurring income from its dormitory business segment. Besides, we were told that foreign workers who are staying in AME’s dormitories are more productive and facing less sickness compared with labour who stay out of the dorms. Moving forward, there will be extra 2,700 beds to be added in FY22. Hence, totaling 8400 beds will be available to accommodate a huge amount of labour which renders more recurring income to the Group in the future.
   
• Potential REIT listing. The Group plans a total of c.RM800m worth of leasing industrial properties and dormitories to be listed as Real Estate and Investment Trust (REIT) on the local bourse in two years’ time to unlock its asset value and gain more funding to expand its core business. We are positive to the move as there is scarcity of industrial REIT in local stock exchange aside Axis REIT and prevailing sought-after industrial properties cum warehouses pursuant to booming of E-commerce and supple chain diversification of MNCs to ASEAN. Notably, industrial REIT is far more attractive than commercial REIT post COVID-19 mainly because of Work-From-Home (WFH) culture and stable network connectivity (5G & Fiber) implanted deeply into our working environments where people would demand lesser office space and shopping malls in the future.
   
• High retention rate of tenancy. We are surprised by the track record of close to 100% retention rate of its leasing of industrial properties for AME’s clients over the years. This has proven the top-notch quality services provided by the Group. Other than that, some MNCs are still expanding their manufacturing bases in its flagship industrial park after staying in for a long time. Moreover, the escalation of the trade-war and “cold-war” between China and the US bodes well for AME as more MNCs could move out from China, and AME’s industrial park will be the top destination in ASEAN for their relocation due to its excellent track records and established branding. Lastly, the pivotal factor behind the high retention rate also due to its comprehensive industrial solutions, i.e. AME could cater and customize all the needs and solutions of MNCs to set up their manufacturing plants for instance plant customization, utilities, dormitories, short construction period (6-12 months), and proper management. However, the cost of moving into AME’s industrial park is higher than its competitors or peers but there is a clear distinctive advantage of AME’s “i-Park” against the ‘usual’ industrial parks.

• Hindrance to suitable landbank. We understand that the Group may face some difficulties in searching of suitable landbank in certain strategic locations. A minimum 150 acres of land with a reasonable cost is hard to come by in Klang Valley nowadays. This hinders the Group’s plan to replicate its flagship product “i-Park” in Klang Valley. Even AME successfully does so, it could come at the expense of project margins.

Valuation & Recommendation

• Maintain BUY with a higher target price of RM2.21 (from RM2.02 previously) following higher PE multiple applied. Our revised target price is now pegged at PE multiple of 14.8x CY21F (from 14x PE) which is in line with -1SD of 5-year Bursa Malaysia Construction Index mean PER. We peg our valuation to CY21 instead of FY21 considering the impact of MCO & CMCO in 1st half of CY2020 which caused an exceptional profit drop as well as factoring in the quicker than expected economic recovery post CMCO.

Source: JF Apex Securities Research - 15 Sept 2020