This article first appeared in The Edge Malaysia Weekly, on July 18 - 24, 2016.

MKH Bhd’s share price has risen 13.7% in the past year, despite prevailing bearishness towards its core business segments — property and plantations. Much of the rally happened after it reported strong first-quarter results on Feb 25 before going on to post its highest earnings in nearly four decades.

Pre-tax profit (PBT) almost doubled year on year from RM46.6 million to RM90.3 million in 1QFY2016, largely due to a RM23 million unrealised foreign exchange gain, progressive billings of its ongoing developments and a RM11.7 million project grant from the government. For 2QFY2016, PBT more than tripled to RM75.2 million, thanks to higher contributions from both the property and plantation segments. It is worth noting that, net profit for the first half of FY2016 amounted to RM116.9 million — a record high in its 37-year history.

With the stellar performance in the first two quarters, MKH’s valuation is compressed to a single-digit trailing price-earnings ratio of just 6.4 times. AllianceDBS Research, the only broker that Bloomberg says actively tracks the stock, has a “buy” call on MKH and a RM3.20 target price. The latter implies a 29% upside potential from its RM2.48 close last Wednesday.

Aggressive investors who wish to have an alternative to the stock with lower capital outlay can consider its warrant, MKH-WB, which is up 31.6% this year — bouncing back from a 52-week low of 50 sen on Aug 25 last year.

Issued with rights shares in 2012, MKH-WB has a one-to-one conversion ratio and a RM1.89 strike price. It expires on Dec 30 next year.

If MKH rises 29% to reach AllianceDBS’ RM3.20 target price, MKH-WB will theoretically be worth RM1.31, assuming zero premium to the mother share. This represents an even higher upside potential of 49.7%. Whether or not the valuation will prove prescient, AllianceDBS Research analyst Quah He Wei opines that MKH’s earnings visibility is underpinned by its unbilled sales value of RM827.7 million (1.15 times its property development revenue in FY2015) and the growing contribution from its young palm profile with a weighted average age of only seven years.

Moreover, MKH’s vast exposure to affordable housing and landed properties in the Kajang-Semenyih growth corridor make it the largest beneficiary of the improved public transport connectivity within Kajang. The mass rapid transit project, expected to be completed by next year, will drive sales and the value of its property projects in Kajang and Semenyih.

MKH is currently acquiring a 2,445ha oil palm plantation in East Kalimantan, Indonesia, for RM15 million, as part of its long-term plan to expand plantations for public listing purposes.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.