TILB remains our top pick for small cap property developers. Fair value is raised to MYR1.55. Industrial activities were robust when we visited the Batu Kawan industrial area. Re-rating on real estate values is in the process, with a few developers being expected to enter the mainland in a big way. TILB will benefit the most given its cheap land cost. Higher selling prices will drive GDV and margin expansion.

-  Burgeoning industrial activities on mainland. We were honoured to be hosted by Steve Neoh, the financial controller of Tambun Indah (TILB), to have a site visit around Pearl City and Batu Kawan industrial areas. Compared to our previous visit in Oct 2012, the new Honda plant is now up and running, with hundreds cars parking in front of the office. A few more plants have also been built. Meanwhile, construction works of the interchanges from the Penang Second Bridge (PSB) are still ongoing.

 - Competitors’ landbanking will set new benchmark for real estate on mainland. Based on our discussions with many developers, mainland Penang is now a key landbanking destination. This is beneficial to TILB, as the potential entrance of these competitors is likely to set new benchmark for land and property prices on the mainland. Essentially, this means an expansion of Pearl City’s GDV and margin. We are not concerned on the potential competition, as TILB’s average land cost for Pearl City is only at MYR11 psf. Other competitors will have to enter at higher prices given the current market value of MYR20-25 psf for land at Batu Kawan/Simpang Empat areas.

- Shareholder profile getting institutionalised. A few institutional funds have emerged in TILB’s shareholding list this year. Given the political landscape after the 13th GE, as more investors recognise the prospects on the mainland, we believe TILB’s stronger shareholder profile will lead to better liquidity and higher valuations going forward.

- Reiterate Buy; fair value raised to MYR1.55. In less than five months, TILB will be able to unlock the value of Pearl City. According to Jambatan Kedua Sdn Bhd, the PSB is on schedule to open in Sept. Given the immediate growth prospects, we further narrow our discount to RNAV to 15%. Our valuations have also built in some “scarcity premium”, given the limited number of pure mainland Penang plays available. Our fair value is revised up to MYR1.55 (from MYR1.28), suggesting an implied PE of 7.9x for FY14, still rather decent in our view.

Source: RHB