• Maintain BUY, new TP of MYR2.75 from MYR2.66, 19% upside with 6% yield. We are positive on Matrix Concepts’ latest land deal, which should further bolster its presence in Negeri Sembilan’s Sendayan area. The new land will also boost its remaining landbank by 62% to 3,617 acres, and lift its portfolio GDV to almost MYR17bn. Given the company’s balance sheet, the acquisition will be funded by internal resources and borrowings.

• Details of the transaction. MCH’s JV company, N9 Matrix Development (85%-owned by MCH and 15%-owned by NS Corp), has entered into a sale and purchase agreement with Sime Darby (SIME MK, BUY, TP: MYR2.75) to acquire 1,382 acres of freehold agriculture land in Labu for MYR460m. The land forms part of Malaysia Vision Valley 2.0 (MVV 2.0), while NS Corp is a state body that promotes and coordinates investments with economic sectors in Negeri Sembilan. It also owns the master blueprint of MVV 2.0. 10% of the consideration has already been paid, while the remaining 90% is to be paid in late 2023 or early 2024.

• Reasonable land cost. Based on the price, the cost of MYR7.64 psf is very much in line with the rate that Sime Darby Property (SDPR MK, NEUTRAL, TP: MYR0.53) paid (MYR8.46 psf), when it exercised the option to buy 760 acres of land in Labu in Oct 2021. NS Corp is also entitled to receive MYR14m as facilitation fees, as well as an allocation of 350 units of Rumah Mampu Milik, seven units of double-storey shops to be developed by the JV, and an additional entitlement of MYR16.76m payable in five equal yearly instalments (MYR3.35m pa). All these amount to c.MYR60m.

• Expect similar profit margins. GDV of this new land is estimated at MYR7bn. After accounting for the estimated conversion premium and infrastructure cost of about MYR1psf and MYR10 psf, we believe MCH would still be able to generate development margins comparable to that of its existing developments in Sendayan, ie 40-50% at the gross level. We also understand that these upfront costs will only be incurred on a staggered basis according to launching phases – so this should be manageable for MCH to handle its cash flow for this greenfield development.

• Forecasts. The maiden launch of new projects on this land will be in 3-4 years. We maintain our earnings forecasts, since the interest expense associated with the new borrowings to be undertaken to fund the acquisition will be capitalised. The new borrowings will likely lift MCH’s net gearing to around 27-28% in FY24-25, based on our estimate. Nevertheless, management remains committed to its 50% dividend payout ratio.

• New TP. Our TP is based on an unchanged 30% discount to our revised RNAV and 4% ESG premium, given our ESG score of 3.20 for the company.

Source: RHB Research - 26 Aug 2022