Its wholly-owned subsidiary, Hicom Glen SB (HGSB), entered into a sale and purchase agreement with Eksklusif Pesona SB (EPSB), which is under Tradewinds Plantation Bhd (TPB), to acquire 10 parcels of land measuring c.287.73 acres (or 116.44 hectares) for RM240m funded by 65% in borrowings (c.RM156m) and the balance (c.RM84m) via cash. We are neutral on this proposed acquisition as the expected development of the lands will only start in 2022 with minimal earnings impact to the group for the near term. Pending further details, we made no changes to our SoP-derived TP of RM2.10. Maintain MP.

Buying agricultural land for RM240m for industrial development in 2022. Its wholly-owned subsidiary, Hicom Glen SB (HGSB) which is under Glenmarie Properties SB, had entered into a sale and purchase agreement with Eksklusif Pesona SB (EPSB), which is under Tradewinds Plantation Bhd (TPB), to acquire 9 parcels of freehold land and 1 parcel of leasehold land measuring c.287.73 acres (or 116.44 hectares) located at Pulau Sebang, Alor Gajah, Melaka for RM240m funded by a mix of 65% in borrowings (c.RM156m), and balance (c.RM84m) via cash. The purchase consideration represents 0.23% discount to the appraised market value of related mixed development lands ranging between RM16.91 psf and RM24.84 psf to arrive at the market value of RM20.00 psf for the freehold land and RM10.00 psf for the leasehold land. The proposed acquisition is expected to be completed in 1QCY2021 with industrial development to commence in 2022. In the meantime, the group intends to obtain some recurring income by entering into an arrangement with TPB for the rental of the lands until 2022. Note that, the entire 10 parcels of lands are contiguous agricultural lands which have been approved for industrial use. The proposed acquisition is deemed a related party transaction due to the common major shareholder, Tan Sri Dato’ Seri Syed Mokhtar Shah bin Syed Nor.

Impact to financials. We are neutral on this proposed acquisition as the expected development of the lands will only start in 2022 (GDV estimated at c.RM600m). We believe the proposed acquisition will have minimal earnings impacts for the next two years with the expected rental income to be received (undisclosed) to be offset by the interest costs to fund the acquisition. The proposed acquisition is expected to increase the group net gearing to 0.76x, from 0.73x as at 31 June 2020.

Rationale of the acquisition. The proposed acquisition is in line with the group’s strategic direction where the property division will focus on the development and sale of industrial properties. The proposed acquisition will enable the group to replenish its industrial landbanks in Melaka and enable the group to pursue the development of new industrial parks in Melaka. Note that, the closest industry area would be HICOM Pegoh Industrials Park (6km east of the lands) which has two Honda production lines plant. Currently, the group only have c.600 acres of industrial land banks and will further expand to c.2,700 acres (estimated GDV of RM9.0bn) once the other proposed land swap disposal is completed in December 2020.

Outlook. During the sales tax exemption period, the group’s auto marques are expected to boost their sales performance in 2HCY20 by featuring new or revised models. Proton has launched the Proton X50 in October 2020 while Honda has launched the face-lifted BR-V in July 2020 and all-new Honda City in October 2020. Its services segment’s on-going transformation efforts will be augmented by improved tariff rates and growing demand for e-commerce. Its other businesses will continue to adapt to the “new normal” environment to ensure financial sustainability, against the backdrop of changes in consumer behaviour.

Pending further details, we made no changes to our SoP-derived TP of RM2.10. Maintain MP. Our TP implies a PER of 16x on FY21E EPS.

Key risks to our call are: (i) lower-than-expected car sales volume, and (ii) lower-than-expected associates’ contribution

Source: Kenanga Research - 2 Nov 2020