MKH Bhd
(July 22, RM2.29)
Maintain buy with an unchanged target price of RM3.80: MKH is now trading at a bargain valuation of six times of its financial year 2016 (FY16) price-earnings ratio, 0.8 times of its price-to-book value and a 60% discount to our sum-of-parts valuation.

This is not justified, given the group’s sound earnings prospects. 

The current valuation implies that its 16,000ha fully-planted oil palm estate in East Kalimantan is largely ignored by investors. 

Assuming a market price of US$20,000 (RM75,825) per ha, the estate is worth up to RM1.1 billion, a reasonable price for a young estate with trees at an average of six years, which is commanding impressive operational statistics of 24 tonnes per ha and a 21% oil extraction rate.

Unbilled property sales reached a record high of RM843 million as at March 2015, representing 1.6 times its FY15 property revenue.

We understand that MKH’s property sales reached RM600 million as at June 2015, and are on track to meet the FY15 target of RM850 million.

This is largely driven by its focus on affordable homes, which remain popular with buy-to-stay homebuyers. 

MKH’s property crown jewel is the 220-acre (89.03ha) Kajang 2 flagship development, where more projects will be rolled out closer to the completion of the Mass Rapid Transit in 2017.

We conservatively estimate the land alone is worth over RM300 million.

The plantation business is already self-sustaining, and the group has started servicing its US$85 million borrowings since March 2015.

Thanks to the young tree profile, fresh fruit bunch volume for the first half of FY15 grew 41% year-on-year and helped to offset the impact of the low crude palm oil (CPO) price.

A sustainable recovery of the CPO price will be a major catalyst for MKH because of the naturally high operating leverage of the plantation business. — AllianceDBS Research, July 22

This article first appeared in The Edge Financial Daily, on July 23, 2015.