Compelling valuation

Sustained earnings growth in FY17. After achieving a record profit in FY16, MKH is poised to deliver an even stronger performance in FY17, premised on the stellar performance from both its Plantation and Property divisions. These two key divisions are expected to drive the group forward, allowing it to have clear earnings visibility in FY17 against the backdrop of a challenging economic environment. MKH is currently trading at a bargain valuation of 7x FY17 EPS which is unjustified. We reiterate our BUY call with a higher SOP-derived TP of RM3.70.

Resilient property sales. MKH achieved FY16 property sales of RM776m (-7% y-o-y), broadly on par with its record sales of RM835m in FY15. Management has set an all-time high sales target of RM900m in FY17, which attests to the strong confidence in its product offerings (majority

Plantation to recover in FY17. MKH’s fresh fruit bunches (FFB) volume dropped 3% in FY16 due to the El-Nino impact on 2HFY16 production, but this is set to reverse in FY17 with the recovery in FFB production. Also, a strong rebound in crude palm oil (CPO) price supports our 117% growth projection in FY17 plantation EBIT (33% of group’s FY17 EBIT). The plantation business is already self-sustaining with strong cash flows to pare down its US$ borrowings.

Valuation

MKH is a rare gem that offers both deep value and strong earnings growth. Its current bargain valuation of 7x PE is unjustified, in our view. Solid earnings delivery will be a strong re-rating catalyst as investors appreciate the value in the stock.

Key Risks to Our View

Margin compression. Rising construction cost could erode profit margins for property projects. Exposure to fluctuations in CPO prices can increase earnings volatility.

Source: Alliance Research - 28 Feb 2017