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BUY,new SOP-derived TP of MYR0.67 from MYR0.75, 22% upside with c.2% FY22F yield. MGB’s 1H22 results missed our and Street estimates, due to a higher effective tax rate. Nevertheless, it should continue to benefit from steady construction orders from LBS Bina (LBS MK, BUY, TP: MYR0.64), combined with the current pipeline of Idaman projects by the Selangor State Government, which may support earnings until FY24.
Missed expectations. MGB recorded a 1H22 core net profit of MYR7.1m (-50.2% YoY) mainly due to an usually higher-than-usual tax rate of 93% in 2Q22 (1Q22: 39%) as certain expenses were disallowed for tax deductions. This constituted only 22% of our and Street full-year forecasts – falling short of expectations.Post 2Q22, management guided that the effective tax rate should normalise.
Performance review. The construction segment reported a 1H22 revenue of MYR303.9m (+8.6% YoY), backed by sales for projects at Bukit Jalil, Alam Perdana and Kita Ria. However, the segmental PBT margin contracted by 2.7ppts YoY to 4.5% in 1H22, amid the rise in building material costs combined with the labour shortage. Meanwhile, the property segment recorded a lower 1H22 PBT, which dropped 54% YoY to MYR0.7m as only 48% of units from Laman Bayu 3 and 4 have been sold.
MGB’s outstanding construction orderbook as of August stands at MYR2.1bn, which should provide earnings visibility for the next three years. A major catalyst would be the Kerteh Biopolymer Park in Terengganu (estimated GDV: MYR680m), where it is the turnkey contractor to undertake the entire design, financing, construction and completion, sales and marketing, and credit administration of the heavy industrial park. Work permits for main infrastructure are pending approval from the authorities, and construction is expected to commence in FY23. Following that, land sales could take place in late FY23/early FY24, as interest from overseas companies (from China) could pick up next year, assuming its economy will fully reopen by 2023. All in, its PBT margin is estimated to be c.15%. Meanwhile, we gathered that there are some delays of c.2-3 months for the launch of some Idaman projects, ie Melur, Cahaya and Sari.
We slash earnings for FY22-24F by 43%, 27% and 19% after: i) Imputing a higher average effective tax rate in FY22; and ii) revising the revenue recognition timeline to be more conservative after the delay in some Idaman project launches. As a result, our SOP-derived TP drops to MYR0.67, after factoring in a 0% ESG premium based on our in-house proprietary ESG methodology. Valuations are undemanding, as the stock is trading at 7.2x FY23F P/E, or -1SD from the 5-year mean. This is unjustified, in our view – given the multiple catalysts that could bring upside to earnings, namely Kerteh Bio-Polymer Park. Key downside risks include a prolonged period of escalated building material costs, and further delays in Idaman project launches.
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....