Benalec Holdings Bhd
(Dec 3, 68.5 sen)
Maintain “outperform” with a target price (TP) of RM 1.25. Benalec announced that it had entered into a sale and purchase agreement (SPA) with Jadex Land Sdn Bhd (JLSB) and JLSB’s wholly-owned subsidiary Quality Paradise Sdn Bhd to dispose of nine pieces of land amounting to 58.63 acres (24ha) in Pekan Klebang, Malacca for a cash consideration of RM107.3 milliom (RM42 per sq ft [psf]).

The sale consideration will be satisfied entirely by cash and it is conditional upon Benalec procuring the issuance of land title. Prior to and/or upon the signing of the SPA, 10% of the selling price shall be paid by the purchaser while the remaining 90% within six to 12 months of the SPA. The land disposal is expected to be completed by the end of the fourth quarter of calender year 2015.

The land sale will provide earnings visibility to Benalec for at least the next two years. We gather that almost all the reclamation works on the land has already been completed. Only about 10 acres are still ongoing which the group expects to complete early next year. The disposal price tag of RM42 psf is slightly higher than our assumption of RM40 psf. Nonetheless, the cost to reclaim the land (that is the net book value) is RM27.3 psf, also slightly higher than our land reclamation cost assumption of RM25 psf. Hence, in total, the group expects to book RM28.1 million of net profit, implying a net margin of 26% (in line with our financial year 2016 [FY16] net margin forecasts). All in, we expect this land sale to be recognised by end-FY15 to end-FY16. Also, with the land sales, the group’s balance sheet is expected to improve from a net gearing of 0.38 times (post convertible bond’s issuance completed) to 0.36 times.

So far, in FY15, we gather that the group has sold 73.6 acres of land, all in Malacca. This constitutes about half of our FY15 land sales assumption of 150 acres. Hence, as of now, including this land sale, Benalec has outstanding land sales of about RM398 million (that is RM291 million from the last FY) which has yet to be completed pending land title issuances. Benalec will pocket a net gain of around RM78 million throughout FY15 and FY16.

We also estimate Benalec has about 341 acres of land in Malacca (281 acres) and Pulau Indah (60 acres) which are “held for sale”. Based on RM40 psf (already imputed in our estimates), these lands could be worth about RM595 million. Above all, further key rerating catalysts for Benalec are its Johor project and the signing of the SPA with 1MY Strategic Terminal Oil Sdn Bhd for 1,000 acres of land in Tanjung Piai. We are maintaining our sum-of-parts TP of RM1.25, implying price-earnings ratio (PER) of 12.2 times FY15 earnings per share, in line with mid-cap construction industry PER average of 12 to 15 times. — Kenanga Research, Dec 3

This article first appeared in The Edge Financial Daily, on December 4, 2014.