We value MCH at MYR3.35 at a 40% discount to RNAV. Based on our FY14 EPS estimate, current valuations are undemanding at 4.7x P/E. Bandar Sri Sendayan (BSS)’s profile will be raised as industrial activities pick up at Sendayan Techvalley (STV). Low land costs and pent-up demand are key drivers for earnings and margin growth. Its strong net cash underpins an attractive gross dividend yield of at least 7%.

- STV and TUDM creating spillover. We recently visited MCH’s flagship project – BSS in Seremban. Although the project is not widely appreciated by the market due to the distance from KL and vast landbank in the surrounding area, we believe this perception will change very soon. The spillover from the growing industrial activities at STV and the relocation of Tentera Udara Diraja Malaysia (TUDM) will generate pent-up demand for properties at BSS.

- New landbank filling up the gaps. Since IPO in May, MCH has added three parcels of land into its portfolio. These include 237 acres in Labu, and 194 acres in Rasah Kemayan, which are not far from BSS and STV, as well as 1.1 acres of land in KL, near PWTC and  Sunway Putra Mall. As a result, total GDV is boosted by MYR1.81bn to MYR8.2bn.

- Lofty margin will be sustainable. MCH’s gross margin is expected to hover around 40%, above the sector’s average. Low land cost of MYR3 psf (gross) for BSS and MYR9 psf (including infrastructure) for STV as well as pent-up demand are key drivers for earnings growth and margin expansion. New sales in 1H13 already totalled MYR483.7m, compared with MYR687m in FY12. This brought unbilled sales to MYR521.9m.

- Strong net cash underpinning attractive dividend payout. Post-IPO, MCH is currently sitting on net cash/share of 62 sen (or MYR186m). Taking into account the upcoming outflow of MYR145m for the second interim dividend and land acquisitions over the next six months, the remaining cash and consistent operating cash inflow will ensure the sustainability of a 40% dividend payout. In addition, the “missing” dividend payout in 2012 as a result of the IPO exercise will translate into a higher dividend payout of 60-70% in FY13. 1H13 interim dividend already amounted to 20.5 sen.     

- Fair value at MYR3.35. We value MCH at MYR3.35, at a 40% discount to RNAV. This is in line with our valuations for small cap developers.

Source: RHB