Valuation / Recommendation

We initiate coverage on MGB Berhad (MGB) with a BUY call and an SOP-derived TP of RM1.18, translating to 46% potential upside. Our TP implies 10.4x FY25F PE which is undemanding compared to similar peer average PE of 11.0x. We like MGB for its focus on affordable housing and healthy construction order book, complemented by its expertise in IBS solutions.

Investment Highlights

Beneficiary of government initiatives on affordable housing. As of August 2024, MGB has launched 5 affordable housing Idaman projects out of the 6 secured, with a total combined GDV of RM2.0bn. These projects have achieved a strong take-up rate of over 90%. Additionally, the group has also recently clinched another project in Puchong under the new Rumah Selangorku 3.0 scheme (RM399m GDV). We believe that affordable housing will be a key earnings driver for MGB going forward, supported by ongoing government initiatives to promote home ownership, especially among the B40 and M40 income groups. In our view, potential policy changes, such as REHDA's proposal to establish a national trust for building affordable housing, could be a game-changer for niche construction company such as MGB.

Healthy construction order book. MGB’s latest outstanding order book amounted to RM1.3bn, representing a healthy cover of 1.5x FY23 construction revenue. YTD 2024, the group has secured two new projects from LBS Bina totalling RM396m, on track to meet its annual order book replenishment target of between RM400-600m. Besides in-house and Idaman projects, MGB is also looking to beef up its order book by tendering externally for RM500-600m worth of jobs from government projects such as schools and housing quarters.

Contribution from IBS JV in Saudi and KTIP. MGB will invest c.RM20m capex to upgrade the JV IBS plant in Saudi, and in return, MGB will be entitled to a portion of the manufacturing and installation revenue. Based on a minimum order of 270k cu m3, we estimate MGB will recognise about RM200m in total revenue from this JV over the next 3 years. Meanwhile, we understand MGB is currently working with the Terengganu state government, MIDA, and Bank of China to secure potential buyers for its industrial park development in Kertih (RM680m GDV). After deducting the state government's 14% cut and assuming a 20% PBT margin, we estimate this venture could contribute up to RM100m to MGB's earnings when all 7 plots of land are fully sold.

Risk factors for MGB include (1) Failure to replenish order book; (2) Fluctuation in construction cost; and (3) Subdued property sales.
 

Source: Mercury Research - 15 Oct 2024