Initiating Coverage on Matrix Concepts with an OUTPERFORM recommendation and TP of RM4.80 based on 20% discount to its FD RNAV of RM6.00. We like the stock on account of the following factors:

(i) its flagship Bandar Sri Sendayan (BSS) and Sendayan TechValley (STV) at Seremban and Taman Sri Impian@Kluang, Johor enjoys growing demand driven by sustainable factors such as rising affordable housing demand and attractive industrial land prices, (ii) it is reaping higher margins due to low land costs, and (iii) balance sheet is in net cash position, which paves the way for aggressive GDV replenishments in Seremban. We are estimating FY13E and 14E earnings of RM146m (+41% YoY) and RM167m (+15% YoY) based on sales assumptions of RM708m-RM760m where industrial lot land sales from STV constitute 28% and 21% of our assumptions. Valuations are attractive with dividend yields of 9.4%-7.8% and PER of 6.6x-5.8x vs. mid-cap peer averages of 4.3%-4.9% and 8.3x-7.1x for FY13 and FY14.

An affordable housing and industrial developer. Matrix has two major township landbanks; Bandar Sri Sendayan (BSS; 5,233 ac) located in Seremban, Negeri Sembilan and Taman Seri Impian (TSI) located in Kluang, Johor (900 ac). Identifiable remaining GDV of RM8.3b provides visibility up to 2022, which is far longer compared to many developers. Its main drivers are its township developments and Sendayan TechValley (STV) in BSS, which are targeted at the owner-occupiers market. Seremban is part of the Greater Klang Valley-KL Conurbation and thus, BSS has indirectly benefited from the spill-over effects due to the significant property price increase in the Klang Valley. STV has also attracted FDIs (e.g. Hino-Motor, Messier-Buggati-Dowty) which will further spur more economic activities in the area. Matrix Concepts’ demand profiles leave them relatively unscathed from the recent tightening measures.

Low land cost = high margins. Matrix Concept’s landbanks are largely locked at favourably low prices, at around 5% to 6% of Land Cost/GDV ratio as compared to the industry average of 10%-20%. Hence, the lower holding cost for the group means they reap higher gross margins of 40%-45% as compared to the average gross development margins of 20%-30%. It also provides them more pricing flexibility against the competitors which helps combat the recent property cooling measures.

Deeply net cash with more gearing headroom. As at 9M13, the company is in a net cash position of 0.36x post IPO. After netting-off their newly announced landbank commitments, and estimated dividend obligations for FY14E, we estimate that the group has RM124m (combination of cash and debt) to use for further landbanking in Seremban. Assuming that land cost is 10%-15% of GDV and a comfortable net gearing limit of 0.3x, the group can replenish up to RM0.8b-RM1.2b worth of GDV from FY14E onwards. However, the group is looking at landbank of between RM300m-RM700m next year and is likely to stick within the vicinity of BSS.

Attractive valuations and dividend yields. Matrix has a minimum 40% dividend payout policy and is the only developer to pay out quarterly dividends so far, which reiterates their strong cashflow position. Additionally, valuations are attractive with dividend yields of 9.4% and 7.8% and PER of 6.6x and 5.8x for FY13E and FY14E, respectively. This compares favourable to the mid-cap peers’ averages of 4.3% and 4.9% and 6.6x and 5.8x for Even at our TP, the group’s implied FY13E and FY14E dividend yields are 6.3% and 5.2%, which are still attractive compared to its peers. At our TP, corresponding Fwd PERs will be pegged at 9.9x and 8.6x, which is slightly higher than its mid-cap peers' averages of 8.3x-7.1x. However, this is justifiable as its market cap will increase from current RM969m to RM1.44b. Our TP provides a total return of 55%.

BRIEF INTRODUCTION

Township players in Negeri Sembilan and Johor. Since our IPO note on Matrix Concepts back on 10-May-2013, the group’s IPO was a success, being 11.3x oversubscribed and it was listed on 28-May-13 on Bursa’s Main Board. It managed to raise RM137.5m proceeds based on an IPO price of RM2.20/share. The group has two major township landbanks; Bandar Sri Sendayan (BSS; 5,233 ac) located in Seremban, Negeri Sembilan and Taman Seri Impian (TSI; 900ac)) located in Kluang, Johor. Its main driver is its projects in Negeri Sembilan, which accounted for 75.0% of FY12 revenue with 17.8% from its Johor projects, and the remaining 7.2% from the Johor land sale.

Longer than average visibility. Currently, it has a remaining landbank of 2732 ac and has identified GDV of RM8.3b (including on-going launches which span 954ac land with GDV of RM1.8b) while there are some landbanks with no guidance yet (e.g. Sendayan Icon Park and some vacant land in TSI). Its Seremban landbank makes up 63% of the total landbank, while its Kluang landbank constitutes 31% while the remaining comprises its Port Dickson and KL land. Their remaining GDV provides visibility up to 2022, assuming c.12% growth p.a. The nine years visibility is on par with the small developers such as CRESCENDO (OP; TP:RM4.00) and SCIENTEX (OP; TP:RM6.28) while it has longer visibility than the bigger developers and HUAYANG (OP; TP:RM2.91) with average visibility of five to seven years only.

INVESTMENT CASE

1. Growing demand driven by sustainable factors such as rising affordable housing demand and attractive industrial land prices

SEREMBAN

Affordability issues in Selangor and KL… Over the past few years, property prices in the matured areas of Klang Valley has risen significantly with landed double-storey terraces average prices touching RM700k/unit and above in Selangor (i.e Bandar Rimbayu, Puchong and even Cyberjaya). We also noticed that in the last three years, developers are landbanking further and further away from Kuala Lumpur’s city center as sizeable landbanks suitable for township developments are harder to come by; while land for affordable housing requires cheaper costs with key areas such as Bangi, Semenyih, Rawang, Cyberjaya and Putrajaya becoming popular areas.

At the moment, the hottest projects in town are landed residentials and affordable housing projects like those in Semenyih e.g. Setia EcoHill Semenyih (e.g. SP Setia (MP; TP: RM3.60). The area is located about 50km North of Bandar Sri Sendayan. We understand that SP Setia is going to launch its EcoHill link homes (1500sf) with a starting price of RM400,000/unit or RM267psf vs. BSS link homes (2720sf) which are being sold at c.RM470,000/unit or RM170psf onwards.

We also understand that Mah Sing is looking forward to launch 2.5-storey link homes (22’ x 75’) at c.RM800k/unit while 2-storey link house (24’ x 80’) in Cyberjaya are selling above RM1.0m/unit. We also understand that areas like Bandar Rimbayu started off with double-storey terraces at RM580,000/unit onwards and is now aiming to launch cluster homes of above RM800,000/unit onwards. The high prices in the Klang Valley have pushed many young families to the outer ring of Klang Valley and thus, Seremban has been growing in popularity amongst home buyers.

…has made Seremban popular. Seremban is part of the Greater Klang Valley-Kuala Lumpur Conurbation. Matrix’s Bandar Sri Sendayan in Seremban is also strategically located due to its accessibility via main highways, namely the Seremban-Port Dickson Expressway, the North-South Expressway, the proposed Senawang-KLIA Expressway and the proposed West Coast Expressway. It is 30 minutes away from KLIA and LCCT. The strategic investment in infrastructure by the Negeri Sembilan’s state government for projects such as the Paroi-Senawang-KLIA highway, Seremban Middle Ring Road (worth RM2.4b) and other road upgrading works facilitate the rising number of commuters, (estimated at over 100,000 people daily), between Negeri Sembilan to Kuala Lumpur. In Seremban, many young families or even retirees can still afford a decent size landed double-storey terrace home which is ideal for young children or those who want to enjoy larger garden spaces.

Bandar Sri Sendayan enjoys spill-over effects from matured areas of Klang Valley. In 2008, the company began its 1,263 ac (remaining: 941ac) integrated township in Seremban, Negeri Sembilan, known as Bandar Sri Sendayan with total GDV of RM4.3b (remaining RM3.7b). The township enjoys all the features of a bread-and-butter earnings driver given the strong population and economic drivers. It is near KLIA/LCCT (30-minute drive) and other townships and industrial areas like Seremban 2, S2 Heights, Bandar Enstek, Oakland Commercial Centre and Industrial Park, Tuanku Jaafar Industrial Park, Senawang Industrial Park and Nilai Industrial Estate. BSS will also be home to the new academic and training centre of the Royal Malaysia Air Force (RMAF). Matrix Concepts has delivered RM620m worth of projects in BSS since 2008. The completed projects in the area include single storey terrace, single storey semi-d, double storey terrace, double storey semi-D, single storey shop office, single storey stall, triple storey shop office and commercial lots.

A good mix of buyers to sustain demand. We also notice rising interest in the area because the buyers’ profile has changed from purely 90% Bumiputra to a fairly good mix of of 40% Bumiputra and 40% Chinese. This is another point worth noting; as the bulk of its house buyers are Bumiputeras, Matrix Concepts has no issues meeting the Bumiputera requirements unlike their counterparts in Klang Valley. Moreover, it has also attracted buyers from Klang Valley which makes up c. 40% of take-ups as compared to zero during the initial phase. We believe the rising interest could be driven by the spaciousness and facilities in the township, which provides ample comfort for the residents.

Industrial land at Sendayan TechValley (STV). It spans 685 ac within BSS, serving as a FDI melting pot, which drives economic activity and housing demand around the region. Besides being within the Greater Klang Valley with quick access to KLIA (22km), Sendayan TechValley also offers competitive advantages given that: (i) it is the first developer in Malaysia to initiate collaboration with Gas Malaysia to provide gas pipeline in the area; and (ii) it offers attractive business incentives where the company offers flexible payment arrangements such as short-term leases and staggered payments (12-15 months) to tax exemptions and business grants. As long as Malaysia continues to attract FDIs, particularly in the manufacturing space, we believe STV will be one of the key locations. Currently, the group has c.244 ac landbank remaining which will last them another two years. STV industrial lot land has recently been transacted at between RM35-40psf which is comparable to Johor such as: (i) UEMLAND (OP; TP: RM3.05) SiLC’s latest transaction was back in 2011 at RM36psf and we reckon prices should be closer to RM50psf given the run-up of prices over the last two years; (ii) Crescendo (OP; TP:RM4.00) Nusa Cemerlang Industrial Park is now fetching a market value of RM35-40psf.

1MDB’s land will be the new RMAF site. 1MDB acquired 750ac of landbank from the company back in 2011 to relocate the new academic and training centre of the Royal Malaysia Air Force (RMAF) to BSS which will also be home to the new academic and training centre of the Royal Malaysia Air Force (RMAF, previously located in Sungai Besi, KL). We believe the area will also enjoy strong population growth eventually which will invigorate property buying and renting activities in the area. While it may take 3-5 years before this impact is felt, we remain confident of the medium to longer-term demand prospects of this area which we think is akin to Manjung, Perak where the naval base there provided resilient demand for developers like YNH Properties (NOT RATED).

JOHOR

Taman Seri Impian @ Kluang, Johor... Spanning over 636.6ac of freehold land, Matrix’s second township development – Taman Seri Impian (TSI) @ Kluang, Johor has a total GDV of RM1.3b (with a remaining GDV of RM679.2m). Taman Seri Impian is located about 60 minutes drive from the JB City center, reachable from the south via Kota Tinggi. To the east of Seri Impian is Mersing town, the gateway to world renowned Pulau Tioman diving sites. The township is easily accessible via the existing Jalan Kluang – Bandar Tenggara and well connected to the proposed Kluang – Pasir Gudang Expressway strategic interchange/ exit point.

…an affordable township. TSI commenced in 2005 and is well planned with a host of residential and commercial properties of various ranges, shopping complexes, transportation hub, government and private institutions, mosque, religious school, healthcare centres and etc. As a township in Kluang, Seri Impian provides relatively safe neighbourhood with 24-hours gated and guarded residency in each individual neighbourhood. Its project is largely affordable landed residentials, being priced at RM280k/unit on average and targets the local market. On the upcoming launches, Matrix planned to launch Impiana Villa 2 (est GDV= RM85.6m) in 3Q14, which consists of 54 units of 2-storey bungalows and 74 units of semi-d houses. We are still bullish on affordable housings in Johor, particularly landed residentials, given the recent price increases. (Refer to Appendix for Project Details and Maps)

2. Low land cost and expanding margins

Banking on low land costs. Matrix Concept’s landbanks are largely locked at favourably low prices. Its BSS and TSI were both transacted at an extremely low cost of RM3psf many years ago before the recent property boom, which implies 5%-6% of Land Cost/GDV ratio as compared to the industry average of 10%-20%. Currently, the asking price for nearby land in BSS ranges between RM5.60 and RM8.00 while land price around TSI has also doubled to around RM6psf. Moreover, the recent acquisition of two parcel of lands in Labu and Rasah Kemayan, Seremban was also transacted at a relatively cheaper average cost of RM6psf or 6%-7% of guided GDV. Hence, the lower holding costs for the group means they reap higher gross margins of 40%-45% versus the average gross development margins of 20%-30%. It also provides them more pricing flexibility against the competitors which helps combat the recent property cooling measures put in place.

3. BSS prices still have ample upsides

Adding value to BSS…. The group has expressed confidence in their property prices as they believe that they are offering values for all their property buyers. An example includes adding further amenities i.e. Sendayan Metropark, Matrix Global Schools and Clubhouse to BSS which further attracts more buyers. These amenities are under construction at the moment and will likely be delivered in the next two years and will further enhance the value of BSS while keeping demand strong.

…with economic drivers to drive population growth. To date, Sendayan TechValley has already secured committed FDI of RM2.7b from renowned companies from France, Japan, United Kingdom and Germany, amongst others. Several of the light-to-medium industries include Hino Motor, Messier-Bugatti-Dowty, Daihatsu Motor, Nippon Kayaku, Linatex (Wier Group), Schmidt + Clemens, Meditop Corporation, Daihatsu; and so far 60%-65% has been taken up. Full operations of these industrial players are likely in the next 6-12 months time as they are either in the midst of construction or at trial runs.

Additionally, local SMEs from areas such as Shah Alam and Puchong are moving to STV for expansion reasons while monetizing the higher land prices of their old sites. All these industrial activities are enough to keep BSS’s land active for the upcoming years, providing job opportunities to their residents.

Property prices in BSS to go up further! BSS has been developed successfully over time while the terrace houses’ prices have been on the rise from RM110k/unit during the initial phase to about RM400k/unit now. Going forward, they will be pricing their double-storey terrace homes at RM450-480k/unit and the group believes that prices for double-storey terrace house prices could breach RM500k/unit in less than two years. It is also worth noting that neighbouring townships are fetching >RM200psf ASPs for new launches and recently delivered double-storey terraces compared to BSS’s average of RM170psf.

STV industrial lot prices are moving up! Since Klang Valley’s capital values have increased significantly over the years, we do notice that industrial developments have been moving further out and it appears that Nilai and Seremban do offer competitive land costs while still being accessible (airports, highways, proximity to Klang Valley). The implied that the cost for the industrial land was extremely low at RM3psf or RM9psf including the infrastructure cost. Industrial lots sold at RM11psf at least 5 years ago have now gone up to RM36-40psf. We understand that the ready-to-develop industrial land in Sendayan TechValley is being sold at RM36-45psf. Industrial lots will likely be priced at between RM45-50psf next year. To further enhance the industry activities and facilitate the tenants there, Matrix Concepts plans to reserve 30ac land in STV to build Semi-D industrial properties for light industrial, which will be targeted at small industrial players or supporting industries to the existing medium to heavy industry players in the area. The project would likely kick-off in FY15 onwards or after most of the existing industry players commenced full productions. We expect that the group will be able to see further profit and margin expansion with more higher-priced product launches and industrial lot sales, going forward.

4. Beefing up branding with their maiden foray into KL

Maiden foray into KL. The company announced acquisition of 1.1ac freehold land in Aug-13 along Jalan Ipoh Kecil via Jalan Putra (which is behind Jalan Raja Laut) and nearby PWTC and Sunway Putra Place. The land acquisition should be completed next year. It is also within walking distance to the PWTC LRT and Chow Kit Monorail station. The land will be funded by 60:40 debt-equity ratio, which should not be an issue since the company has minimal borrowings and is net cash post IPO. The land cost of RM43.6m (RM950psf) is fair considering it makes up 17% of its estimated GDV of RM250m and we believe the group could reap 20%-25% gross margins. Although the margins are lower than its BSS’ gross margins of 40%-50%, the development is meant to promote the company’s branding in the Klang Valley and improve its visibility to promote its BSS products.

KL Project GDV estimated at RM250m. The project enjoys a high plot ratio of 8x and will mainly feature service apartments, SOHOs and retail components. We understand that the service apartments/SOHO will be mainly small units (studios and 1-2 bedrooms) and will likely be priced between RM700-800psf to target the young working adults market. If so, most units should be priced between RM350k-RM700k/unit which we deem as digestible by the market. Currently the group is in the midst of planning and submission and hopes to get approvals by mid-2015. They intend to kick-off substructure works prior to launching, meaning that the project would commence sales in 2016.

Expanding BSS via two land acquisitions. Given the increasing interest of BSS, Matrix Concept has replenished its landbank there through the acquisition of two parcels of freehold agriculture land in Labu and Rasah Kemayan in July 2013, which is nearby BSS. The acquisitions should be completed next year. The two parcel of land will add 431ac and RM1.6b worth of GDV to the remaining land size and GDV of 805.6ac and RM3.0b in BSS. We reckon the GDV is being estimated conservatively at RM142psf (assuming utilisation rate of 60%) while some secondary landed houses in Rasah Kemayan are already asking for c.RM280psf. In addition to that, the land cost only takes up 6.7% of the GDV which imply high gross margins of more than 40%. Hence, we believe the two developments will be lucrative for the company. Matrix Concept is planning for a mixed development of residential and commercial properties and would likely to commence the 1st phase in 2015-16. We believe this would not be the end of the development in BSS because we reckon that there is still ample vacant land surrounding BSS, which could potentially be up for sale and Matrix Concept may continue to further expand in the area.

Deeply net cash with more gearing headroom. As at 9M13, the company is in a net cash position of 0.36x post IPO. The group has announced three landbank deals so far amounting to RM150.4m, which should be completed by FY14. Also, the group has utilized 55% of its IPO proceeds, meaning another RM61.8m remains to be used over the next 1-1.5 years. After netting-off the mentioned and estimated dividend obligations for FY14E, we estimate that the group has c.RM110m (combination of cash and debt) for further landbanking in Seremban. Assuming that land cost is 10%-15% of GDV and a comfortable net gearing limit of 0.3x, the group can replenish up to RM0.8b-RM1.1b worth of GDV from FY14E onwards.

Landbanking plans. The company is unlikely to do any landbanking in KL until its current KL Project is proven successful. For the past two years, Klang Valley developers have been aggressively acquiring landbank in Semenyih and Bangi in Selangor but they have yet to move further south to Nilai and Seremban in Negeri Sembilan. This gives Matrix an advantage to aggressively landbank in these areas given their traction in the state and we believe it will continue dominating the Negeri Sembilan market for years to come. Matrix will continue its landbanking expansion in the BSS and Sendayan Techvalley area in the future. We understand there is c.1000ac of landbanks surrounding BSS which are undeveloped and are largely agriculture in nature. They also do not discount landbanking in mass township areas of Johor. While the company has not given us guidance on GDV replenishment targets for the next two years, we believe they can comfortably replenish up to RM300-700m GDV in a year’s time, which is also supported by our analysis above.

Minimum 40% dividend payout policy... The group is very certain of its cash flow and has set an official dividend payout policy. For 9M13, the group surprised investors due to the following factors: (i) it is the only developer to pay out quarterly dividends, (ii) although the IPO took place in late May-13, the group rewarded post IPO shareholders with FY12 dividends, and (iii) declared a set of special dividends in 3Q13 amounting to 5.0 sen.

…and attractive dividend yields and valuations ! For FY13, we believe total dividend payout will be 60% (due to the exceptional dividends arising from FY12), which implies a net yield of 9.4%. We estimate FY14E dividend payout of 45% which implies a dividend yield of 7.8%. This is also extremely attractive against its mid-cap peers which are averaging FY13E and 14E yields of 4.3% and 4.9%. Valuations are also attractive since Matrix is trading at 6.6x and 5.8x FY13E and 14E PERs which is attractive vis-à-vis its mid-cap developer peers of 8.3x and7.1x.

Source: Kenanga