MKH Bhd
(Nov 18, RM1.44)
Maintain buy with a higher target price (TP) of RM1.70: Despite MKH Bhd’s strong share price rally of approximately 25% year to date, we believe it remains undervalued. Trading at 10 times financial year 2020 (FY20) price-earnings ratio and 0.5 times FY20 price-to-book ratio, MKH offers decent earnings visibility with high property unbilled sales that buck the market trend and strong recurring income from its young and mature plantation estates as well as a steady portfolio of investment properties in Kajang/Semenyih.

 
Its plantation estates in Indonesia have reached a prime age profile with a weighted average age of 10 years, which would be able to reap the full benefit of a strong crude palm oil (CPO) price recovery. The CPO price has rebounded strongly to an average of RM2,240 per tonne in October to November 2019, compared with RM1,981 in FY19. This is set to be a key growth driver in FY20, coming from a low base. Also, the business is self-sustaining with strong cash flow generation to pare down its US dollar borrowings which stand at US$50 million, compared with US$85 million as at March 2015.

We estimate that an additional 10% increase in our CPO price assumption would lift MKH’s FY20 earnings by 14%.

MKH’s approximately 500 acres (202.34ha) of land bank in Kajang/Semenyih carried at a low cost will underpin its launch pipeline of affordably priced properties going forward. The completion of key infrastructure (a RM62 million flyover in Kajang 2 and the Sungai Buloh-Kajang Mass Rapid Transit Line), which has been operational since July 2017, is expected to further enhance the appeal of MKH’s property developments in Kajang/Semenyih in the long run.

We bump up our sum-of-the-parts-derived TP to RM1.70 after incorporating our earnings upgrade. We continue to like MKH for its undemanding valuation and clear earnings visibility.

A key risk to our view is margin compression. Rising construction cost could erode profit margins of property projects. Exposure to fluctuations in CPO prices can increase earnings volatility. — AllianceDBS Research, Nov 18