Mitra is acquiring 60% of Premier Discovery S/B (PDSB) for RM15.9m. PDSB owns 264ac of land in Bentong of which 58ac have been planted with Musang King durian trees. While the durian business is potentially lucrative, we are slightly negative as we find the acquisition rather hasty with (i) lack of a proper plan for the remainder 205ac land and (ii) long commercialization period of the durian trees. With a rather frail cash position, this purchase would erode Mitra’s financial resources and incur high opportunity cost for the group as the planted durian lands would only see income trickling in 3-4 years down the road. No change to earnings and downgrade to UP with unchanged TP of RM0.215.

Injecting private assets. Mr Tan Eng Piow, the major shareholder of Mitra (at 45%) will be injecting his 60% stake in PDSB into Mitra for RM15.9m cash. PDSB is involved in sand extraction and durian plantation in which it owns 264.4ac of leasehold lands in Bentong of which 58.6 acres (or 22%) is planted with Musang King durian trees. Profitability-wise, PDSB is a barely breaking even, straddling between slight profits and losses for the past two years as profits from the sand extraction business is channelled towards the cultivation of the young durian trees.

Durian economics. Currently, PDSB’s durian plantation is only two years old which require another 3-4 years to start bearing fruits. Based on a yield assumption of 4 tonnes/acre/year with Musang king prices at RM50/kg, this could translate to revenue of RM11.7m/annum based on PDSB’s 58.6 acreage plot. Also, assuming operational cost (irrigation, fertiliser, pest control and labour) of RM100k/acre, it would derive a tentative pre-tax profit of RM5.9m/annum (RM3.5m for Mitra’s 60% stake or 4.5x PE). That said, we note that these assumptions only apply to matured trees of typically c.10 years old. Young durian trees (of 6 – 10 years) will only produce a fraction of this yield.

Planted durian land prices. Based on data available on brickz, the average transaction prices for planted durian lands in Bentong from 2015 – 2019 averages at RM7.70psf, translating to RM337.5k per acre (refer back for data). Juxtaposing against Mitra’s purchase price of RM2.30psf or RM100.2k/acre for the lands which are partially planted with durian trees (at 22%), we would deem the purchase price fair. We note that Mr Tan Eng Piow’s original cost of investment in PDSB was RM12.6m back in 2017 (or RM79k/acre) when the lands were not yet planted with Musang King durian trees.

Purpose of remainder 205 acres unsure. Mitra remains unsure if the remainder 205ac land (which are currently part banana trees/jungle) would be earmarked for durian plantation or eco-tourism. We find the lack of clear plans a cause of concern as the acquisition price tag of RM15.9m cash for an unproductive asset is rather substantial against their existing cash reserves of RM33m. Net gearing to rise to 0.2x (from 0.18x) post acquisition.

No change to our earnings assumptions as profits from the planted durians will only stream in 3-4 years down the road.

Downgrade to UP (from MP) on unchanged TP of RM0.215 (based on 0.25x FY21E PBV) given the sharp rise in share price recently. We remain cautious over Mitra’s prospect as it still faces replenishment risk on the back of a dwindling order-book.

Upside risks are: (i) higher-than-expected margins from construction, and (ii) stronger than expected sales for Wangsa 9

Source: Kenanga Research - 23 Dec 2020