MKH’s focus on Kajang-Semenyih pays off

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MKH Bhd ended a stellar financial year (ended Sept 30, 2014) with record property sales despite weaker prices and fewer transactions in the market. The group’s strategy of concentrating its projects — 70% of them — in the Kajang-Semenyih area and diversifying its offerings seems to be paying off.  

In FY2014, MKH made RM820 million in property sales while unbilled sales stood at RM823 million, which was a 64% increase from a year ago.

In Kajang, both commercial and residential properties continue to enjoy price appreciation, group chairman Tan Sri Alex Chen tells The Edge. “For example, over the last three years, the prices of commercial properties in Kajang-Semenyih have increased threefold to about RM500 psf while the value of landed homes has nearly doubled.”

This bodes well for MKH, which has been building in Kajang for several decades now — way before other developers began to look at it as an important location. The majority of MKH’s commercial and residential properties that were launched earlier this year enjoyed a take-up of between 95% and 100%, Chen points out.

Before it recently diversified its property offerings, now ranging from townships to integrated high-rise developments, MKH catered for the mid-end and affordable housing segments, which ensured a steady stream of customers who had been priced out of other locations in the Klang Valley. In these segments, sales volume more than offsets the lower margins as opposed to building high-end properties.

Its unbilled sales of RM823 million also serve as an earnings cushion for the group as it gradually recognises revenue from its projects.

The impressive take-up of its new launches indicates that MKH will be able to maintain the sales momentum in its property division, Chen says. “We saw overwhelming response to our soft launch of 33 shophouses in Taman Pelangi Semenyih a few weeks ago. Some 90% of the units have been sold even before the official launch.”

MKH’s recent foray into high-rises has been equally successful —85% of its [email protected] serviced apartments have been sold since they were launched in June.

While current negative sentiments have put a dampener on property prices, primarily due to what is perceived as an overheated market, Chen is confident the value of properties in Kajang will continue to rise, albeit at a slower pace of between 5% and 10% per annum. “The completion of MRT Line 2 in Kajang and the town’s proximity to downtown Kuala Lumpur will be the main growth catalysts,” he says.

While the group remains optimistic about the response to its new launches, there will be stiff competition in the affordable housing segment, particularly where MKH’s projects are situated. For instance, Mah Sing Group Bhd’s flagship Southville City development is right next door in Bangi and offers properties at mid-range prices.

Additionally, potential investors may be concerned about the impact of the impending implementation of the Goods and Services Tax on primary and secondary market transactions.

MKH posted a net profit of RM102.3 million in FY2014, slightly lower than the previous year’s RM103.9 million. Revenue at RM806.5 million was 17.2% higher than a year ago.

AllianceDBS Research attributes the weaker performance to higher operating expenses and slower profit recognition from MKH’s newly launched property projects, namely Hillpark Shah Alam, Pelangi Heights, Kajang East and MKH Avenue, which are still in the preliminary development stage.

The company’s plantation division saw a first year of solid earnings — a profit before tax of RM22.2 million —although there were unrealised foreign exchange losses amounting to RM17.79 million related to its operations in Indonesia.

Chen emphasises that the forex loss was unrealised and that it is not unexpected because the group’s loans for its Indonesian business are in US dollars. While acknowledging the volatility of the rupiah against the greenback, he says MKH is proactively dealing with the forex exposure.

“To mitigate the losses due to the weakening rupiah, we have bought USD to keep for loan repayments, which will only begin in September next year. Additionally, we have started exporting crude palm oil and sales are transacted in US dollars, which is a natural hedge against the forex risk.”

The increase in the company’s CPO output has been promising. In FY2014, MKH exceeded its year yield target of 270,000 metric tons (mt) by recording a fresh fruit bunch yield of 295,000mt. Having recently increased its CPO mill capacity to 90mt per hour, the group is targeting yields of 330,000mt in FY2015 and 400,000mt in FY2016, which implies a yield increase of more than 20% per annum over the next two years.

“We expect exponential growth in our plantation division in the coming years,” says Chen.

At its Dec 3 close of RM2.77, there is upside potential for the stock in the longer term due to the impressive revenue growth in both the company’s core businesses.

In a recent note, AllianceDBS Research reiterates its high conviction “buy” recommendation with a target price of RM5.40. “In our view, the stock is grossly oversold as its solid fundamentals remain intact. The group is least vulnerable to the property market slowdown, given its focus on affordable housing that targets genuine buyers. While CPO prices remain weak, the group’s FFB volume growth will more than offset the bearish prices,” it says.

This article first appeared in The Edge Malaysia Weekly, on December 8 - 14, 2014.