We are positive on Alam Flora acquiring land to build a port recovery facility in Port Klang to handle waste management, broadening its earnings base. Being part of the group since early 2020, Alam Flora has produced consistent earnings with net profit of RM64.6m in FY20, and additional new earnings base is a positive. BUY with TP of RM1.05 based on 20% holding company discount to its SoP valuation of RM1.31.

Yesterday, a wholly-owned indirect subsidiary, Alam Flora Environmental Solutions Sdn Bhd entered into a sale and purchase agreement with The New Straits Times Properties Sdn Bhd, a indirectly-owned unit of Media Prima Bhd (MPB) to acquire a leasehold industrial land in Bandar Sultan Sulaiman, Daerah Klang measuring c.5.77 acres together with two single-storey detached factory warehouses erected thereon. This is deemed a related party transaction as Tan Sri Syed Mokhtar who is the indirect major shareholder of MPB is also the shareholder of MALAKOF’s parent company MMCCORP.

The property, which is situated adjacent to Northport, Westports and the anticipated future development of Pulau Carey Port, will be converted to a recovery facility to handle various types of waste from the ports. The total development cost for the recovery facility is expected to be c.RM130m, spanning 42 months including Environment Impact Assessment (EIA) assessment and subject to any necessary approvals including the relevant authorities. The development will be funded via a combination of internally generated funds and bank borrowings.

While there is no nearterm earnings accretion as the facility will take 3.5 years to complete, we reckon that it should help to broaden Alam Flora’s earnings base as the busy port activities nearby would add more business volume. In its first year of earnings consolidation into the group, Alam Flora netted RM64.6m net profit in FY20 which helped to fill up group earnings gap and stabilised forward earnings. Although group’s net gearing was high at 1.85x in FY20, we are not overly concerned given its concession-backed assets. We have projected FY21E net gearing of 1.61x, and with this new project the group’s FY21E net gearing would rise slightly to 1.62x which we believe is not too stretched.

Source: Rakuten Research - 16 Jul 2021