(Aug 26, RM1.18)
Maintain buy with an unchanged target price (TP) of RM1.50: Excluding RM3.3 million unrealised foreign exchange gain, MKH Bhd’s third quarter ended June 30, 2019 (3QFY19) core earnings came in at RM20.8 million (+5% quarter on quarter [q-o-q], -25% year-on-year [y-o-y]). This takes nine months ended June 30, 2019 (9MFY19) core profit to RM58 million, comprising 75% of our FY19 projection.
The property division’s earnings before interest and tax (Ebit) came in at RM45 million (+18% q-o-q, +261% y-o-y), on the back of segmental revenue of RM178 million (-14% q-o-q, -17% y-o-y). Ebit margin was also stronger at 29%, compared with 19% in 2QFY19 and 6% in 3QFY18, due to progressive billings of its ongoing projects in the Klang Valley.
3QFY19 property sales came in at RM188 million (+2% q-o-q, +31% y-o-y). This takes 9MFY19 property sales to RM520 million (-2% y-o-y), largely contributed by its projects in Kajang-Semenyih and Shah Alam. Accordingly, unbilled sales remained high at RM1.03 billion as at end-June, mainly driven by Inspirasi Mont’Kiara, TR Residence and Hillpark Shah Alam North.
The plantation division turned around to deliver Ebit of RM5.2 million, compared to RM2.3 million operating loss in 2QFY19 due to higher revenue of RM65 million (+45% q-o-q, -18% y-o-y). This is largely driven by its strong quarterly fresh fruit bunch production of 120,800 thousand tonnes (+13% q-o-q, -15% y-o-y), though realised crude palm oil (CPO) price remained weak at RM1,870 per tonne (+5% q-o-q, -14% y-o-y).
While Malaysia’s property market remains saddled with various challenges, MKH is expected to perform relatively better given its niche focus on affordable housing in Kajang-Semenyih. Its unbilled sales of RM1.03 billion will offer healthy earnings visibility going forward. Meanwhile, the recent improvement in Malaysia’s palm oil inventory to a one-year low augurs well for MKH’s plantation business which has also seen a CPO price recovery lately.
We maintain our “buy” rating with our sum-of-parts-(SOP)-derived TP of RM1.50. Trading at 8.5 times FY19 price-earnings ratio and 0.4 times FY19 price-to-book value, MKH offers decent earnings visibility with high unbilled property sales that bucked the market trend. Some 20% of the company’s earnings are underpinned by recurring income from its young and mature plantation estates, as well as a steady portfolio of investment properties in Kajang-Semenyih. — AllianceDBS Research, Aug 26