Investment Highlights

• We initiate coverage on MGB Berhad (MGB) with a BUY call and target price of RM1.15. MGB is a comprehensive and established construction cum property development solution provider across various disciplines in the industry. The Group specialises in several scopes of business activities - design and build, project management, construction, Industrialised Building System (IBS) precast manufacturing and property development.

• Reaping the fruits of hard work. We think it is a timely call to bring investors’ attention to this stock after the Group’s successful transformation. For the past 2-3 years, the Group has reinvigorated and repositioned itself as a niche contractor cum developer mainly targeting at construction works in affordable residential market segment in the Greater Klang Valley, and lesser extent of public amenity works, in lieu of competing for government’s mega infrastructure projects which are scarce and render razor thin margins. Moreover, the Group has participated in affordable housing projects named ‘Rumah Selangorku Idaman’ (RSI), which was mooted by the Selangor state government. In tandem with its strategic move into mass housing market segment, we have also witnessed the Group’s maiden venture into the IBS and its subsequent expansion.

• We opine that this under-researched and under-the radar company deserves to be re-rated mainly driven by a few catalysts: 1) Benefiting from the affordable residential market segment which is relatively unfazed by the prevailing property market downturn and political uncertainty, hence maintaining a sustainable business model; 2) Serving a niche market with high entry barrier as the Group commands cost advantage in constructing affordable housings, mainly leveraging on its expertise in IBS; 3) Sizeable construction outstanding order book of RM2.2b (3.9x 2020 revenue) as well as a whopping RM1.1b RSI worth of property launches targeted for 2021-2022; 4) Earnings are back to growth trajectory as the Group is expected to attain 2021F and 2022F bottom line growths of 117.0% and 118.0% yoy on the back of its top line growths of 74.1% and 43.2% yoy respectively. Besides, the Group commands a strong balance sheet with 0.2x net gearing as of 2020; and 5) Backed by an established major shareholder, LBS Bina Group Berhad (LBS) with expected continuous orderbook replenishment as well as chances of tapping into LBS’ strength and resources.

• Affordable housing is in vogue. We believe MGB is in a sweet spot to benefit from the booming of this housing sub segment with its offerings under RSI despite overall property market outlook remains challenging. We deem this market segment as resilient under current trying times and sales are backed by first-time home buyers. Also, the affordable housing segment is less subject to rental pressure and mainly driven by genuine buyers with purpose of own staying. We are not overly concerned on more property developers jumping on the bandwagon of selling affordable housings, as MGB’s primary focus is on product offerings which are below RM300k (two types of apartments with pricing of RM250k/unit for bare unit and RM288k/unit with furnishing and parking bays) with decent built-up areas of 1,000sf/1022sf or equivalent to RM250psf/RM283psf where the projects are strategically located in Klang Valley, well within matured townships. The attractiveness of the product propositions which make the Group stand out in a crowd of competitors in respect of absolute pricing (compared with other developers who sell at mostly below RM500k/unit) as well as on psf basis (mostly above RM300-350psf) as RSI is initiated by the Selangor government to promote house ownership in the state.

• Sizeable GDV and launches for RSI to propel growth. The Group is teaming up with the Selangor state government and other JV partners to co-develop the RSI, which is part of the initiative by the state government to provide affordable houses. MGB will be working on 6 RSI projects - Idaman Perdana, Idaman BSP, Idaman Kita, Idaman Cahaya, Idaman Sari and Idaman Melur, to construct a total of 7210 apartment units starting from RM250k/unit. MGB acts as a contractor in the former three projects which are under LBS’ developments, whilst playing a role as a developer for the latter three projects in which the land is originally belonged to third-party developers. MGB envisages to launch the RSI projects, i.e. Idaman Cahaya, Sari and Melur (worth RM1.1b GDV) in 2021-2022 after receiving all the necessary approvals and meeting all the conditions precedent. We envisage good take-up rates from these projects which will lift the Group’s earnings for the next 2-3 years. We also understand that the original plan of the RSI is to launch 10,000 units of affordable units of which the abovementioned 7210 units have been approved. Hence, we shall expect the balance of 2790 units to be rolled out once approval being obtained with potential GDV of RM697.5m, further contributing positively to the Group’s earnings for 2022-2023F.

• Competitive advantage by leveraging on IBS in constructing affordable housing projects. We reckon that one of the competitive advantages of MGB in constructing affordable housing units is its ability to maintain profitability in which other developers are quite reluctant to work on this segment as profit margin is rather thin or even incur losses as compared to the mid- to high-end segments. By using IBS, MGB is able to save costs through faster delivery, less labour and less wastage, and hence delivering better margin. We understand that the Group has managed to rake in 8-10% GP margin for the RSI projects. Furthermore, the pre-condition for adopting IBS is that there must be economies of scale. By having a chance to participate in LBS’ RSI and private projects, this will significantly help the Group to achieve the objective. Currently, the Group owns two IBS plants in Alam Perdana (mobile) and Nilai (permanent factory) with total capacity of 4,000 units (pre-cast) and are semi-automated. Should the demand for pre-cast exceed its capacity, the Group can always put up mobile plant at the construction site by spending RM5-6m of capex with a capacity of 2,000 units/plant to be fully completed in 2-3 months’ time.
   
• Healthy orderbook underpins future earnings. MGB boasts a sizeable construction’s outstanding order book of RM2.2b (3.9x 2020 revenue) mainly stemming from internal works, i.e. LBS’ property projects, and this will render earnings visibility for the next 2-3 years. Moving forward, the Group aims to secure RM1b construction works (bagged RM443m works for LBS’ RSI ytd) for 2021. We opine that the Group could easily achieve its target orderbook for this year judging by its track record as it successfully clinched RM1b construction jobs in 2020. Near-term order book replenishment could be further strengthened by its RM1b tender book for government projects (mainly few projects such as highways, buildings and public amenities with each project size ranging from RM200-300m) as well as LBS’ planned launches worth RM2.7b and sales target of RM1.2b for this year.
   
• Stellar earnings growth and sturdy balance sheet. We are projecting commendable 2021F and 2022F bottom line growths of 117.0% and 118.0% yoy for MGB on the back of its top line growths of 74.1% and 43.2% yoy respectively, rebounding strongly from its dismal showings during 2019- 2020. In view of anticipated rising net profits and stable cash flow to be generated in the upcoming financial years, the Group has proposed a minimum dividend payout of 20% on PAT to reward investors. This translates into dividend per share of 1.2 sen and 2.6 sen for 2021F and 2022F or equivalent to dividend yield of 1.2% and 2.6% respectively. Furthermore, MGB possesses a strong balance sheet with 0.2x net gearing as of 2020, thus providing the Group with ample room to gear up for landbanking exercise and to undertake other mega infrastructure projects if deemed necessary.

Valuation/Recommendation

• BUY with a target price (TP) of RM1.15. Our TP is derived by ascribing a 10x PER to the Group’s 2022F diluted EPS (after conversion of 90m ICPS). This is in line with current valuations of other mid and small-cap construction companies which are currently trading at 7-10x forward PE.

Source: JF Apex Securities Research - 16 Mar 2021