We initiate coverage of MKH with a SoP-derived TP of RM2.15. MKH is a prominent property player in Kajang, focusing mainly on affordable houses with strong emphasis on transit-oriented development (TOD) which we believe is highly popular. Meanwhile, its plantation segment appears to be a top performer amongst large cap palm oil planters, and it is likely to see a portfolio expansion in the near term. The group also operates in a low gearing environment which could be key in the group’s long-term growth objectives.

Its property offerings could stay in demand. MKH’s property development segment is mostly located within the Kajang-Semenyih region. We had gathered that approximately 50% of its product offerings are priced below RM500k, a level seen as widely affordable. Helping the bankability of its pipeline, the group also possesses strategic land banks which are of close proximity (400m radius) to a KTM or LRT line, enabling its TOD emphasis.

Modest land bank to sustain in the long-term. The group’s remaining land bank of 627.5 acres translates to a total GDV of RM9.51b. This would be fueled by the group’s pipeline for integrated developments which will include highrises, terraces and semi-D homes as well as attached commercial retail lots. Historically, MKH sets an annual launch target of RM800m GDV but may move towards a target closer to RM1b in sales per year. This roughly translates to a product pipeline of 9 years, which indicates that the group would not be seeking land bank acquisitions in the near term.

Plantation segment a top-class performer. MKH’s Kalimantan-based palm oil plantation operations is highly efficient, with a segment ROE of 14% which is above large cap planter’s 3-year average of 13% and sector average of 10%. We attribute its significantly stronger performance to its fully mature estate, which is thought to be sitting on higher quality soil, hence bolstering yields. Future acquisitions of its palm oil estate land bank (+c.30%) could further drive its contributions. We gathered that its oil extraction rates are slightly below industry levels at 21% (vs. 23%), but this may be aligned in the near-term as the group is in the midst of upgrading its capabilities.

Initiate coverage with an OUTPERFORM call and SoP-derived TP of RM2.15. Our SoP components are driven by: (i) a 50% discount to RNAV on the group’s property segment, which is lower than our sector average of 60%, supported by its higher exposure to affordable products, (ii) 13x FY24F PER to its plantation sector earnings, at a 20% discount from its large cap peers owing to its smaller scale operations, and (iii) 12x FY24F PER on its hotel & property investment segment, also at a 20% discount from larger property investors.

We like MKH as they offer several unique propositions in the property development space, and potential in its plantation footprint. Additionally, the group’s low gearing (FY22 at 0.01x) provides strong flexibility should the group decide to ramp up either key business segment. On a side note, we do not discount further interest in the stock could develop from the pending spin-off listing of its plantation division, albeit this is yet to be factored into our assumptions.

Risk to our call include: (i) overhang in the high-rise, affordable home segment, (ii) unfavourable CPO price fluctuations, (iii) higher-than-expected input and production costs, and (iv) regulatory changes, namely concerning the palm oil industry in Indonesia.

Source: Kenanga Research - 22 Nov 2023