MKH Bhd (March 9, RM2.95)
Reiterate buy call with a target price of RM3.70: After achieving a record profit in financial year 2016 (FY16), MKH is poised to deliver an even stronger performance in FY17, premised on the stellar performance from both its plantation and property divisions.
These two key divisions are expected to drive the group forward, allowing it to have clear earnings visibility in FY17 against the backdrop of a challenging economic environment. MKH is currently trading at a bargain valuation of seven times FY17 earnings per share, which is unjustified.
MKH achieved FY16 property sales of RM776 million (down 7% year-on-year [y-o-y]), broadly on par with its record sales of RM835 million in FY15. Management has set an all-time high sales target of RM900 million in FY17, which attests to the strong confidence in its product offerings (majority costing less than RM700,000 per unit).
MKH’s fresh fruit bunch (FFB) volume dropped 3% in FY16 due to the El Nino impact on second half of financial year for 2016 (2HFY16) production, but this is set to reverse in FY17 with the recovery in FFB production.
Also, a strong rebound in crude palm oil (CPO) price supports our 117% growth projection in FY17 plantation earnings before interest and tax (Ebit) (33% of group’s FY17 Ebit). The plantation business is already self-sustaining with strong cash flows to pare down its US-dollar borrowings.
We expect MKH to do well in property development, given its entrenched brand name in the Kajang–Semenyih growth corridor and stronghold in the affordable housing segment. This has placed the company in an enviable position with property sales and unbilled sales continuing to chalk new highs. Strong unbilled sales of RM705 million imply clear earnings visibility in the near term.
MKH’s projects continue to be well-received in this challenging market because of its focus on affordable housing.
MKH’s FY16 property sales came in at RM776 million, which is a commendable performance. The completion of mass rapid transit Line 1 by 2017 that will link the Kajang/Semenyih growth corridor will be a strong catalyst for MKH, given its 490-acre (198ha) property land bank in that area.
Scarcity of land in Kajang also offers an advantage for MKH for its future launches — they are expected to fetch premium pricing supported by strong demand.
MKH’s 16,000ha of fully planted oil palm estate in East Kalimantan continue to register strong FFB production because of the young age profile, though it was slightly affected by the dry weather in early 2016. FY16 FFB volume dropped 3% after surging by 36% in FY15. We project FFB production will recover in FY17 (up 16%) with an expected yield of 29 tonnes per hectare, which is impressive given that the average age of the oil palms at its estate is seven years.
Plantation Ebit contribution made up about 16% of MKH’s FY16 Ebit, and this is likely to continue to increase in tandem with rising FFB production. Also, as the plantation estates mature, MKH will benefit significantly from a CPO price recovery.
The plantation business will underpin the strong recurring earnings base for MKH going forward, thus complementing its property business, which is project-based. — AllianceDBS Research, March 9
This article first appeared in The Edge Financial Daily, on March 10, 2017.