Kenanga Research & Investment

MKH Berhad - Soft Patch in Property, Plantation Profits

Publish date: Thu, 30 Nov 2023, 10:35 AM

MKH’s FY23 results disappointed on weak property and plantation profits. It will continue to focus on transit-oriented development (TOD) while its plantation business will see sustainable earnings from its Kalimantan portfolio. We cut our FY24F net profit forecast by 11%, lower our TP by 2% to RM2.11 (from RM2.15) but maintain our OUTPERFORM call.

Below expectations. MKH’s FY23 core net profit of RM74.6m missed our forecast by 8%. Consensus estimate is unavailable as we are the only research house covering the stock currently. The variance against our forecast came largely from cost pressure at both its property and plantation segments. It declared a 4.0 sen dividend which was in-line with our expectation.

YoY, MKH's FY23 revenue saw a 10% increase, mainly attributed to its higher contributions from core property development and construction segment (+9%) backed by supportive sales and recognition from higher completed progress. Its trading segment (+30%) performed well driven by higher product mix of high profit margin building materials. However, operating margin decreased to 12.5% (-7.4ppts) due to rising costs which hurt both its property and plantation divisions’ profits. We noted that the absence of land sale (RM2.5m as in FY22) did undermine property margins as well. As a result, FY23 core net profit decreased to RM74.6m (-34%).

QoQ, its 4QFY23 revenue saw an increase in revenue of 14% but with lower pretax profit by 20% mainly due to a drag in plantation profits, likely owing to higher fertilizer costs. Its 4QFY23 net profit of RM18.7m was 13% weaker.

Outlook. The group’s property development and construction segment’s planned launches in FY24 comprising of high-rise service apartments and retail commercial shops development with a total estimated GDV of RM640m will be phased based on prevailing market sentiments. With unbilled sales amounting to RM841.2m, this division is set for sustainability over the next two years. While the market is expected to remain soft but stable, the segment's growth is likely to proceed at a moderate pace, influenced by the unchanged Overnight Policy Rate (OPR) at 3.0% since May 2023 but its TOD developments are likely to remain attractive to potential buyers.

In the plantation segment, despite its underwhelming performance this year, we anticipate a more robust financial outcome in the upcoming year. This optimism is rooted in the anticipated increase in both CPO prices, and production volume. Its hotel and property segment are likely to remain stable due to increased business activities from the support of domestic business travelers and agencies. For its trading division, 73% of building materials sales come from the group’s development projects, and it will continue to provide building materials for both current and future development projects.

Forecast. We cut our FY24F earnings by 11% to reflect elevated construction cost for its property projects. We introduce our FY25F numbers.

We trim our SoP-derived TP by 2% to RM2.11 (from RM2.15), having updated our property RNAV. Our valuation bases are: (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) a 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) a 12x FY24F PER on its hotel & property investment segment, also at a 20% discount from larger property investors.

We continue to 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 (FY23 at 0.00x) provides strong flexibility should the group decide to ramp up key business segment. The pending spin-off listing of its plantation division may attract buying interest. Maintain OUTPERFORM.

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 - 30 Nov 2023

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