Investment Merits

• Prime beneficiary of MRT stations in Kajang/Cheras

• Increasing contributions from plantations due to plantations reaching prime age profile

• Low valuation even after dilution for upcoming rights and bonus issue

Company Profile

MKH is a property developer with a vast array of developments ranging from premium residential and commercial properties to affordable dwellings. Some of its on-going and future projects are located adjacent to the upcoming Mass Rapid Transit (MRT) and Light Rail Transit (LRT) stations. In 2008, MKH diversified its business into an oil palm plantation in East Kalimantan, Indonesia, with 18,388ha of landbank currently. MKH is also involved in trading of building materials and furniture manufacturing.

Highlights

Growth momentum driven by its plantations division. We expect the plantations division to lead MKH’s earnings growth momentum in the next few years, with EBIT contributions projected to rise to 34% of group EBIT by 2018 from 8.4% in FY16 (Sep). This is due to its age profile entering the prime age of above 7 years from FY17 onwards which could lead to an 11.6% YoY FFB growth in FY17 and reducing unit costs of a similar quantum. MKH’s FFB yields in an El Nino year (of FY16) were still very decent at 25.69tonnes per ha, owing to the flat geographical topography of its estates. For its estates at prime optimal age, its FFB yields have hit as high as 32 tonnes per ha previously. CPO unit costs are currently at MYR1,600 per tonne and this is expected to decrease to average industry levels as FFB yields improve.

Property development to provide stable earnings base. The bulk (86%) of MKH’s future property developments are in Kajang/Semenyih, where it is developing a range of products including affordable and premium dwellings, as well as commercial properties. These developments could be a prime beneficiary of the three MRT stations that are coming up in Kajang and Cheras, which should be completed by the end of 2017. As at end-1QFY17, MKH has unbilled sales of MYR705m. It has planned launches of MYR1.64bn for FY17. Its total remaining landbank GDV beyond 2017 is approximately MYR8.9bn. We expect property earnings to decline by 20-25% in FY17 given the weak market sentiment and tight lending conditions, but start to recover after FY18F.

Property investment provides recurring income. MKH’s property investment portfolio consists of two shopping complexes – Plaza Metro Kajang and Metro Point Complex, as well as several parcels of commercial land, offices, shops and an international school – Rafflesia International School. MKH should continue to earn a steady income of MYR30-40m and EBIT of MYR15-20m p.a. from this business.

Company Report Card

Latest results. MKH reported a core net profit of MYR45m (+39% YoY) in 1QFY17. The higher profit was driven mainly by improved contributions from the plantations division (to EBIT of MYR25.6m from MYR1m in 1QFY16) offset by lower contributions from the property division (-30.6% YoY). The plantations division saw a significant earnings improvement on the back of a 49% and 118% YoY jump in CPO and PK prices achieved, respectively. The property division saw a decline in profits due to lower profit recognition after the handing over of vacant possession of MKH Boulevard and completion of profit recognition on sales of Pelangi Semenyih in the preceding quarter.

Balance sheet/cash flow. At the end-FY16 (Sep), MKH had net gearing of 41%, which was reasonable, in our view; operating cashflow stood at MYR150-250m pa, while interest cover was 6.8x. Going forward, MKH expects capex to remain relatively flattish at close to MYR100m per year. We expect net gearing levels to start trending downwards from FY17, unless there are any new landbank acquisitions.

ROE. ROE has ranged between 8-16% over the last three years, with MKH reinvesting its cash on cultivating its plantation areas as well as managing its property landbank developments. We project MKH’s ROE to range between 12-13% over the next two years. .

Dividend. MKH does not have an official dividend policy. It has been paying a net DPS of 7-8sen over the last few years, which is a payout ratio of 18-28% p.a.; we project net DPS of 7.5-8sen for FY17-18, which implies a net payout of 16-18% and a net yield of 2.9-3% p.a..

Management. MKH is an owner-managed company with the Executive Chairman, Managing Director and Deputy Managing Director positions filled by the three brothers from the Chen family. In terms of succession planning, the Executive Chairman’s son, Tan Sri Dato’ Chen Kooi Chiew’s son, Dato’ Chen Way Kian, is currently working in the company, holding the position of Deputy Property Director.

Rights and bonus issue. In December 2016, MKH proposed a renounceable rights issue of up to 45.4m rights shares on a 1-for-10 basis at a price to be determined later and a bonus issue on the basis of two bonus shares for one rights share of up to 90.8m new shares. The maximum proceeds of MYR85.8m is to be utilized for infrastructure development for the property division. This rights and bonus issue are due to be completed by 2Q17 and would dilute MKH’s EPS by 30-38%. We have not imputed this exercise into our forecasts yet.

Recommendation

While MKH’s property development business may be facing some headwinds, we believe its prime landbank location in Kajang/Semenyih/Cheras will bode well for it in the medium term, given the increased connectivity near the three new MRT stations, as well as its increasing focus on the affordable housing market. In the next few years, its plantations division could rise in prominence, given the increasing FFB yields leading to lower unit costs. While MKH’s plantation landbank is still relatively small, it continues to expand with its latest acquisition in 2016 being 2,445ha of landbank in Kalimantan. We value the company with SOP, using RNAV for property and P/E targets for the plantation and other divisions; we attribute a 50% discount to RNAV to value the property division, a 2018 P/E target of 15x for the plantation division (in line with other small plantation companies) and 8x for the other divisions. We have diluted the share base for rights and bonus issue, giving us a fair value of MYR4.00.

Source: RHB Securities Research - 5 May 2017