What’s New

• Foray into Melaka waterfront development. LBS Bina Group Berhad (LBS) has announced that the Group had signed a reclamation and development agreement with the Melaka state government for the reclamation and development of the reclaimed land into an industry hub with port facilities (including logistic and warehouse, manufacturing, LNG, port related business and other commercial development) approximately 1,200 acres located at Tanjung Bruas, Bandar XLV, Daerah Melaka Tengah.
   
• Salient terms and plans. LBS owns 70% stake of the development and is required to pay RM94.9m to the state government for the reclamation and development rights. The Group is given 18 months to complete the feasibility studies, getting necessary approvals and fulfilling conditions precedent. Upon successful completion of reclamation works, LBS shall be entitled to 4/5 portion of the reclaimed land whereas the state government shall be entitled to the remaining 1/5 of the area. Meanwhile, development plans are sketchy as it is still at preliminary stage pending further talks with other stakeholders.  

Comment

• Capitalising on growth prospects of Melaka Waterfront Economic Zone (M-WEZ). M-WEZ, which was initiated by the state government, would be built on a 15,000-acre (6,070-hectare) sea reclamation area running a 22 km stretch from Umbai to Tanjung Bruas.The approved reclamation area is part of the M-WEZ blueprint which provides an effective platform for sustainable business generation and economic transformation for the state. This project would present as a thriving commercial hub between Melaka and great cities of the world, connected by the port, sea access for tourists, business and industry.

• Short-term neutral, longer-term positive. Over the short-term period, we do not see any immediate earnings impact to the Group as the reclamation and development of Melaka project involves long gestation period, 5 years of land reclamation and 15 years of full development. Having said that, we are positive over the longer run as this renders a golden opportunity for the Group to procure sizeable tracts of lands at the coastal area of the Straits of Melaka, one of the busiest shipping lanes in the world. Also, this will enable the Group to establish a dominant presence in this growth area with access to a new market catchment particularly the industrial and commercial segment. Moreover, this would indirectly benefit its listed subsidiary, MGB for future construction works which are related to the project in respect of infrastructure and property development. We understand that 60% of the 1,200 acres of reclaimed land would be used for mixed development whilst 40% are catered for port-related facilities and businesses.
   
• Potential synergy to Zhuhai International Circuit (ZIC) in China. With LBS’ strong presence and foothold in the Guangdong province in China, the Group could also further leverage on the "Friendly State and Province" relationships between Melaka and Guangdong to explore bilateral investment corporations and establishments. The Group is confident that the industrial and commercial development will be well received in view of its strategic location, growing economic activities in the vicinity and the supports from the state government.
   
• Roping in foreign partner to mitigate risk of reclamation works. We learnt that the Group is keen to partner with a Chinese counterparty to work on reclamation works as it fits into the role of financial strength, construction and port management expertise, as well as G- 2-G role in fast tracking the project. Hence, we are not overly concerned on the project funding of this sizeable and long gestation development. 

Earnings Outlook/Revision

• No change to our earnings estimates.

Valuation & Recommendation

• Maintain BUY on LBS with a higher target price of RM0.62 (RM0.53 previously). Our revised target price is now pegged at higher PE multiple of 14.5x 2022F PE, which is in line with current valuations of large-cap property counters which are trading at 12-15x forward PE. 
   
• We favour the stock for its: a) Commendable sales amid prevailing soft property market, b) Sound business strategy of concentrating in selling affordable landed housing especially in Klang Valley; c) Strong earnings visibility underpinned by its healthy unbilled sales; and d) Unlocking potential landbank values in Zhuhai International Circuit (ZIC), China in the immediate future.

Source: JF Apex Securities Research - 9 Apr 2021