Property developer with a plantation arm
- MKH is a property developer that has diversified into plantations, building materials trading and property investments.
- We project MKH’s earnings to peak in FY9/22F (+37% yoy) but fall in FY9/23F (-20% yoy) due to fluctuations in CPO prices and site activities.
- Initiate coverage with a Hold call due to its unexciting sector prospects but downside is capped by its low P/BV and P/E ratios, in our view.
A mid-size property developer with plantations in Indonesia
MKH Berhad (MKH) is a property developer that has diversified its business into several other sectors over the years: i) Property Development and Construction (PDC); ii) Plantation; iii) Hotel & Property Investment (HPI); and iv) Building Materials Trading & Furniture Manufacturing (BMT & FM). Currently, it owns about 566 acres of landbank with a remaining gross development value (GDV) of RM9.5bn and c.16.4k ha of planted palm oil estates in the East Kalimantan region. The plantation unit is the biggest earnings contributor, at 63% of FY21 profit before tax (PBT), followed by PDC (c.23% of PBT).
Core earnings to peak in FY9/22F
We project MKH’s core EPS to rise 37% yoy in FY22F, driven by a 35% yoy jump in CPO prices, stronger contribution at PDC in tandem with increased site activities post lockdowns. We expect FY23F core EPS to decline 20% yoy as the 18% drop in CPO prices should offset the 62% yoy jump in PDC PBT (lifted by scheduled handover of projects) and for FY24F core EPS to improve 18% yoy mainly driven by stronger performance at the plantation division (+4% rise in FFB yields and lower operating costs).
Plantation earnings could gain dominance if it pursues M&A
MKH’s plantation segment has become more significant over the past two years (23%/63% of the group’s FY20/21 PBT vs. FY17-19’s average of 7%) as rising CPO prices coincided with weaker PDC division earnings. We forecast the former segment to contribute 26-56% of FY22-24F PBT, despite weaker CPO prices. MKH plans to actively seek plantation land in East Kalimantan based on its recent investor slides and, if they come to fruition (see Fig 23), could position it as a commodity play down the road.
MKH is a Hold due to challenging sector outlook
We initiate coverage on MKH with a Hold call. We value the stock using sum-of-parts (SOP) methodology with a target price of RM1.34, ascribing: i) 0.4x FY21 P/BV to its property landbanks, on par with the property sector’s average P/BV valuation; ii) 0.5x FY21 P/BV to investment properties, at the lower range of small-size REIT players, given lower dividend yields; (iii) EV/ha of US$7,000 on FY21 planted area, broadly in line with replacement costs to account for regulatory risks; and (iv) 6x FY23F P/E to its BMT & FM unit, similar to furniture manufacturing peers. We also apply a 15% discount on SOP valuation to factor in ESG/liquidity risk. Key upside risks include higher CPO prices and favourable policies for the property sector; downside risks are higher operating costs and macro headwinds.
