We initiate coverage on Tambun Indah with a Buy rating and fair value of MYR1.28. The stock is our top small cap pick. Despite the 57% share price appreciation since our first report in Oct last year, we believe the growth prospect of its 600-acre anchor landbank at Simpang Empat has yet to be fully priced in. The upcoming opening of the Penang Second Bridge (PSB) will provide significant economic impact at Batu Kawan area and visibility on the mainland property market.

- Deep value embedded. Tambun Indah (TILB) has garnered significant investors’ interest since we first issued our non-rated note in Oct 2012. TILB’s value is underpinned by its strategic anchor landbank, capable management, quality products, solid balance sheet and attractive dividend yield. TILB’s Pearl City township is just 15-min away from the PSB. This is a growing township as it is just 50% developed, with remaining landbank of 600 acres. Being close to many industrial parks, the growing working population creates a natural demand for properties particularly in a proper township. Therefore, although share price has appreciated by 57%, value will continue to be realised particularly upon the opening of PSB in Sept this year. Its market cap has almost hit MYR300m mark, a good level to be included in small cap radar.

- Four re-rating catalysts. Key re-rating catalysts for the stock include: (i) The best Penang mainland play to capture the significant economic impact from the opening of PSB. Other players on the mainland are typically smaller cap companies and lacking earnings track record; (ii) Upside in product pricing suggests room for margin and RNAV expansion. We estimate that, a 10% increase in Pearl City’s GDV will translate into an additional 8-10 sen to RNAV/share; (iii) Landbanking activities to top up RNAV. Management may look to continue penetrate the mainland market and possibly venture into the Klang Valley; and (iv) Solid balance sheet and earnings growth enable sustainable dividend payout. Yield is attractive at about 6-7%.

- Earnings forecasts. We expect an earnings growth of at least 20% p.a. over the next two years. Sales at Pearl City will accelerate to meet our forecast of MYR450m for 2013 (vs. MYR400m achieved in 2012).

- Top small cap pick for the sector. We initiate coverage on TILB with a Buy rating and fair value of MYR1.28, at 25% discount to RNAV.

Source: RHB