What’s New

Prospects remain bright amid lowering our earnings expectation. We had a virtual meeting with the management last week and we are still positive on MGB Berhad’s (MGB) long term outlook. We were guided that the Group’s 2021-2022 earnings will not be as strong as what we initially expected mainly due to slower construction progress in this year as impacted by movement control order (MCO) imposed by the government earlier, limited workforce (80% allowed under current phase of national recovery plan from earlier 60%) and shortage of building materials supply. Management highlighted that it only expects to see a meaningful pick up in progress billings in 4Q21.

The wait for the Rumah Selangorku Idaman (RSI) projects may finally be over. Also, the Group has decided to launch its RSI in early Nov this year (soft launch is expected in Oct) following 1H’s delay no thanks to the MCO and weak consumer sentiment. Thereafter, MGB will launch each of its all six RSI projects in Klang Valley every 2-3 months apart. Hence, full impact could only be felt in 2022-2023.

Comment

Update on turnkey project in Kertih Biopolymer Park. To recap, MGB successfully secured a turnkey project to develop a 1,006.7 acres industrial park in Kertih, Terengganu last week. The Group will be mainly involved in earthworks, basic infrastructure and amenities development as well as selling of the industrial lots. We understand that this is a government project under ECER (East Coast Economic Region) development and the industrial park is the Asia’s largest second generation biorefinery complex. Currently, it houses the France's Arkema and South Korea's CJ CheilJedang (CJ) bio chemistry platform – the first world scale bio-methionine plant and a glove factory named Encompass Industries Sdn Bhd which manufactures medical gloves.

Contract value of RM500-550m with decent project margin of 10-15%. We understand that the GDV of this 780 aces of saleable lot is RM680m (RM20psf), spanning over 6-7 years of 5 phases of launches. Management envisages contract value of RM500-550m with a gross profit margin of 10-15% over 6-7 years. The project is expected to contribute to the Group starting 2023 (target launch in 2023 whilst securing necessary approval from relevant authorities in 2022).

Earnings Outlook/Revision

We slash our 2021F net earnings estimate by 22.2% to RM27.0m and 2022F net profit forecast by 17.7% to RM54.5m. Also, we introduce our 2023 net profit forecast of RM84.5m. Still, our bottom line yoy growths for 2021/2022/2023 represent strong growths of 92.8%/101.9%/55.1%.

Valuation & Recommendation

Maintain BUY with a lower target price of RM1.05 (RM1.15 previously) following our earnings cut. Our revised target price is derived by ascribing 11x PE multiple to the Group’s 2022F diluted EPS (after conversion of 90m ICPS) which is in line with its 2-year historical mean PE.

We favour the stock for: 1) Benefiting from the affordable residential market segment which is relatively unfazed by the prevailing supply-demand imbalance; 2) Serving a niche market with high entry barrier as the Group commands cost advantage in constructing affordable housings, mainly leveraging on its expertise and scale in IBS; 3) Sizeable construction outstanding order book of RM1.3b as of Aug 21 as well as a whopping RM1.1b Rumah Selangorku Idaman (RSI) worth of property launches targeted in 4Q21 onwards; 4) Earnings are back to growth trajectory as the Group is expected to attain 2021F/2022F/2023F bottom line yoy growths of 92.8%/101.9%/55.1%; and 5) Backed by an established major shareholder, LBS Bina Group Berhad with expected continuous orderbook replenishment as well as chances of tapping into its parent company’s strength and resources.

Source: JF Apex Securities Research - 27 Sept 2021