- 1Q14 earnings met expectations. MKH Berhad (MKH)’s 1Q14 Core Net Profit* (CNP) of RM37.8m came in at 29% of consensus forecast (RM131.5m) and 30% of our forecast (RM127.7m). We deem the result as within expectations as the first quarter is seasonally strongest for its plantation division due to higher FFB production in Oct-Dec season. Note that we have excluded unrealized forex loss of RM19.9m in our CNP calculation.

- YoY, CNP increased 12% to RM37.8m as plantation division core EBIT (excluding unrealized forex loss) jumped 194% to RM16.2m. We believe that this is likely attributted to MKH’s healthy FFB growth in 1Q14 which we estimate to be above 20% YoY due to its young trees profile. Despite the strong earnings growth in its plantation division, overall earnings growth for the Group in 1Q14 is relatively subdued at 12% as the property division core EBIT declined 4% to RM26.3m. Note that the property division commands a higher earnings weighting (estimated to be 90% of total group EBIT in FY14).

- Good prospect for FY14. We maintain our FY14E CNP of RM127.7m or steady 8% earnings growth YoY for MKH. The Group’s major earnings driver is seen to be its plantation division with trees currently at the excellent age profile of about four years old. Typically, palm tree starts to produce fruits at the age of three years old with production continue growing until the tenth year. Meanwhile, its property division earnings should be supported by its unbilled sales of RM513.9m as of end-1Q14 and planned launching worth RM893m in FY14.

- Share price has done well with 82% gain. Since our initial Trading Buy recommendation when it was trading at RM2.60 on 26-Dec-2013, its share price has performed extremely well with 82% gains in less than four months. This is in contrast with the benchmark FBMKLCI’s return of merely 0.5% for the same period.

- New Target Price is RM4.85 based on 30% discount to its RNAV of RM6.93. The 30% discount to RNAV is in line with the average discount applied for mid cap developers. At our Target Price of RM4.85, it implies a FY15 Fwd. PER of 11.7x. Admittedly, our Target Price is slightly higher than the blended FY15 Fwd. PE of 10.7x (assuming earnings mix of 80% property @ peer average of 10x PER and 20% plantation @ peer average of 15x). Although our TP’s implied PER is higher compared to relative valuations using PER, we believe the premium is warranted as its plantation earnings will become more prominent in the next five years. In fact, the group is targeting for plantation to make up 50% of group earnings in the long term (from the expected 20% in FY15E). Note that plantation companies’ valuation is usually higher than property. Take profit for now as the short-term upside seems limited at on 1% to our Target Price of RM4.85. Accordingly, we have changed our recommendation to Take Profit (from Trading Buy previously).

- However, it is still an attractive long-term investment. Despite our Take Profit recommendation, MKH’s long-term growth prospect remains intact. Note that MKH’s property division stand to benefit in the long-term from the upcoming Kajang MRT station due to its large landbank exposure in Kajang. As for its plantation division, earnings is set to increase significantly over the long-term due to its young trees profile of about four years old.

Source: Kenanga