• Still BUY with a higher SOP-derived TP of MYR1.00 from MYR0.93, 44% upside and c.2% FY23F yield. MGB, via MGB International For Industry (MGBI) - its subsidiary in the Kingdom of Saudi Arabia (KSA), - entered into a JV agreement (JVA) with SANY Alameriah Industrial (SA). The JVA presents a platform for MGB to collaborate with SA on the supply and installation of precast concrete products and the operation of the precast manufacturing plant. Key risk is a slowdown in the property market.

• Further details. Under the JVA, SA plans to secure a minimum of 270k cu m of precast concrete products within three years from the commencement date - the date when MGBI and SA have fulfilled the obligations under the JV within the 90-working day period from 27 July. SA will also handover the precast manufacturing plant to MGBI and grant exclusive rights to MGBI to use and operate the plant. Other salient terms include SA having an obligation to secure a minimum order of 90k cu m of precast concrete products within a year from the commencement date. Separately, MGBI will inject MYR12-24m of working capital to operate the factory.

• Earnings impact. We opine that the total volume of precast concrete products supplied could reach 300k cu m (vs the minimum of 270k cu m) over the three year period underpinned by KSA’s robust demand for housing. As such, the potential value attributable to MGB is c.MYR324m (assuming 45% share of contract value to MGB, a price of SAR2k per cu m, and an exchange rate of SAR1 = MYR1.2). Bottom-line wise, we expect an earnings accretion of MYR22.7m over the three year period, with a 7% PAT margin assumed. Timeline wise, we expect contribution from the precast venture to come in after 1H24.

• Other developments. According to management - construction progress for Idaman Bandar Saujana Putra (BSP) reached c.51% completion (vs 33% as of end March) with a sales conversion rate of nearly 100% - roughly within our projections. Meanwhile, the Idaman Melur project reached a sales conversion rate of c.40% (vs 12% as of end March) – quicker than our initial estimates of 40% sales conversion rate by the end of FY23.

• We revise our FY23F-FY25F earnings by 12%, 7%, and 10% to take into account faster property sales conversion rates in addition to earnings accretion from the precast venture in KSA. We also add the precast component into our SOP valuation, pegging its FY24F earnings to a P/E of 8.5x – which is in the range of the 7x-14x P/E for precast players. As such, we derive a new TP of MYR1.00 (from MYR0.93) with a 0% ESG premium baked in. We keep BUY due to an undemanding valuation of 7.5x FY24F P/E (>-2SD below the KLCON index) which is unjustified premised on the group’s potential of scoring more affordable housing jobs (exceeding the current 7,210 units under the Rumah Selangorku Idaman project) as the Selangor Government targets to build 60k housing units by 2025. Impact from political risks is also low as affordable housing projects would be in the best interest of any administration.

Source: RHB Research - 1 Aug 2023