Damansara Perdana developer. Based on the latest Annual Report of 2013, MK Land owned 5,574 acres of undeveloped lands of which 88% are in Perak while the remaining 12% located in the Klang Valley. Of the 5,574 acres, we gather that it owns more than 220 acres of undeveloped prime land in the Damansara Perdana area with remaining GDV estimated at about RM4.0b-RM5.0b. This would provide earnings visibility for at least the next 5-7 years. It is worth noting that almost the whole of Damansara Perdana was developed by MK Land.

To launch about RM500-RM700m GDV in FY15. We understand that the group is looking to launch about RM600m new launches this year. Most of the projects are in Damansara Perdana and Damansara Damai, which comprises semi-detached houses and high-rise residential units. Given that MK Land’s projects in Damansara are strategically located in matured area with great accessibility to various highways and upcoming MRT stations, we believe the group could enjoy strong take-ups despite the property market slowing down following the cooling measures to curb speculation.

Double-digit earnings growth forecasts. In 9M14, the group’s net profit grew 35% to RM35m. MK Land will be announcing its full-year FY14 results soon. We estimate with strong sales recorded in FY14 of about RM400m, the group’s net profit will grow by 30% in FY14 to RM52.8m. As for FY15, we forecast its net profit to continue growing by 13% to RM59.5m on the back of: (i) current unbilled sales of RM300m, and (ii) assumption of new property sales in FY15 of RM450m.

Land sale gain… To recap, on 25th April 2013, MK Land announced that it was selling a piece of land (9.6 acres) located in Damansara at a price tag of RM83m (RM200/psf). Based on the announcement, the land sale transaction is expected to complete within 12 months. Hence, we do not rule out the possibility that MK Land will book the gain (estimated at around RM24m) in 4Q14 results, if not, in FY15. However, we have not built this into our estimates.

…could imply better dividends this year. Recall, MK Land paid 2 sen/share for its last financial year. They have also declared 2 sen so far in FY14, translating into a decent 4.2% yield. We do not rule out the possibility of them paying out another round of dividends for FY14 given: (i) the group’s strong earnings growth, (ii) the group’s strong balance sheet with net cash position, and (iii) potential cash proceeds received from last year’s land disposal gain. If the group distributes 50% of the land sale gain, this translates to another 1.3 sen dividends, which brings FY14 full year DPS to 3.3 sen.

Strong balance sheet. As at 3Q14, the group is in net cash position. This is very comfortable as most developers tend to have net gearing levels of 0.2-0.4x. Hence, MK Land should not have any funding issue in executing their existing projects. In fact, it can gear up further to replenish its landbanks in the foreseeable future.

Steep discount to RNAV. We believe MK LAND is another deep value stock in the mid-cap developers’ space. In spite of: (i) MK Land’s healthy earnings growth (4-year CAGR of 22% from 2009-2013), (ii) decent dividend yield of 4.1%, (iii) strong balance sheet (net cash position), (iv) its more than 220 acres of lands is located in matured area in Klang Valley, MK LAND is still trading at a huge 63% discount to its RNAV of RM1.28, compared to the current average of 40% for other property players under our coverage.

TRADING BUY with FV of RM0.64, laggard play in mid cap developers’ space. Recall, mid-cap developers (>RM500m mid cap) has gained an average 79% YTD versus MK Land’s 48% YTD. This stock could be a laggard play amongst its peers given the market’s prevailing appetite for deep RNAV plays. We value MK Land at RM0.64, which is at a 50% discount to its RNAV of RM1.28. The 50% discount is in line with its mid-cap peers’ RNAV discount of 30%-50%. At the current price, the stock offers ample potential upside of 33% (excluding dividend yield of 4.1%). TRADING BUY.

Source: Kenanga