News  Yesterday, Benalec announced that it has entered into a SPA with Jadex Land Sdn Bhd (JLSB) and JLSB’s wholly-owned subsidiary, Quality Paradise Sdn Bhd to dispose nine pieces of land amounting to 58.63 acres in Pekan Klebang, Malacca for cash consideration of RM107.3m (RM42 psf).

 The sale consideration will be satisfied entirely in cash and it is conditional upon Benalec procuring the issuance of land title. Prior to and/or upon the signing of the SPA, 10% of the selling price shall be paid by the purchaser while the remaining 90% shall be paid within 6-12 months of the SPA. The land disposal is expected to be completed by end of 4QCY15.

Comments  We are Positive on the news. The land sale will provide earnings visibility to Benalec for at least the next two years. We gather that almost all the reclamation works on the land have already been completed. Only about 10 acres are still on-going which the group expects to complete early next year.

 The disposal price tag of RM42 psf is slightly higher than our assumption of RM40 psf. Nonetheless, the cost to reclaim the land (i.e. NBV) is RM27.3 psf, also slightly higher than our land reclamation cost assumption of RM25 psf. Hence, in total, the group expects to book RM28.1m of net profit, implying net margin of 26% (in line with our FY16 net margin forecasts). All in, we expect this land sale to be recognised by end-FY15 to end-FY16.

 Also, with the land sales, the group’s balance sheet is expected to improve from a net gearing 0.38x (post Convertible Bond’s issuance completed) to 0.36x.

Outlook  So far, in FY15, we gather that the group has sold 73.6 acres of land, all in Malacca. This constitutes about half of our FY15 land sales assumption of 150 acres. Hence, as of now, including this land sales, Benalec has about outstanding land sales of RM398.0m (i.e. RM291m from last FY) which is yet to be completed pending land title issuances. Benalec will pocket a net gain of around RM78m throughout FY15-FY16.

 We also estimate, by now, Benalec has about approximately 341 acres of land in Malacca (281 acres) and Pulau Indah (60 acres) which is “held for sale”. Based on RM40psf (already imputed in our estimates), these lands could be worth about RM595m.

 Above all, further key re-rating catalysts for Benalec are its Johor project and the signing of the SPA with 1MY Strategic Terminal Oil for 1,000 acres of land in Tanjung Piai.

Forecast  No changes to earnings.

Rating Maintain OUTPERFORM While waiting for the ultimate catalyst to materialize (Tg Piai), which appears to be a longer-term earnings driver, we believe Benalec’s near-term catalyst will be driven by land sales in Malacca and Pulau Indah as it still has about 341 acres of ready land held for sale.

Valuation  We are maintaining our SoP-based Target Price of RM1.25, implying PER on 12.2x FY15 EPS, in line with mid-cap construction industry PER average of 12-15x.

Risks to Our Call Higher-than-expected input costs

 Failure of obtaining land title

 Failure to get approvals for the DEIA and hydraulic study and final survey for its Johor project

 Slower-than-expected land sales

Source: Kenanga