MRCB downgraded, FY13 and FY14 forecasts cut

MALAYSIAN RESOURCES CORP BHD

By RHB Research

Target price: RM1.32

Neutral (from trading buy)

RHB Research has downgraded Malaysian Resources Corp Bhd (MRCB) to “neutral” from “trading buy,” cut its financial year ending Dec 31, 2013 (FY13) forecast numbers to a loss from a profit, and lowered its FY14 forecast by 76%.

The research house believes it will have to overcome several company-specific issues as well as headwinds in the property sector before it can capitalise on its enlarged size and scale for growth post the merger with the Gapurna group.

Its fair value has been slashed by 35% to RM1.32 (from RM2.02).

RHB Research believes that MRCB has a number of issues that will take time to be addressed or sorted out, namely the RM167mil provisions in its latest quarterly results, its recent removal from the syariah-compliant list and the legal tussle with the Selangor state government with regards to the acquisition of Lot 12 of PJ Sentral.

There is also long overdue issue on the Eastern Dispersal Link in Johor; the delay in the implementation of the redevelopment of the Rubber Research Institute land in Sungei Buloh, in which MRCB is expected to play a significant role; the impact of overall weakened sentiment and hence sales in the property market; as well as reduced investors’ appetite towards property stocks following various cooling measures introduced by the Government recently, and finally, investors’ lack of familiarity with MRCB’s new management and the new management style it brought in with it.

RHB Research cut FY13 forecast to a loss from a profit and slashed FY14 forecast by 76% to factor in MRCB’s weakened earnings prospects on company-specific issues as well as headwinds in the property sector, as mentioned.

MRCB is not a good proxy to the construction sector given its seemingly downsized construction operation, coupled with persistent construction losses due to weak project execution.

While we do acknowledge that MRCB has good assets comprising landbank and investment properties in prime locations, their value can only be fully unlocked over the longer term.

The research house has cut its fair value by 35% to RM1.32 (from MYR2.02) to reflect a weakened earnings outlook coupled with the dilution from an enlarged share base post the merger with Gapurna.

AEON CO (M) BHD

By RHB Research

Target price: RM15.90

Neutral (maintained)

AEON Co (M) Bhd participated in the 2nd Annual Emerging Markets Conference organised by RHB Research’s partner, Espirito Santo Investment Bank (ESIB), in London.

Fund managers were generally drawn to AEON’s strong brand name, unique business model and solid earnings record.

The research house’s partner ESIB played host to 12 companies from six regions during the two-day event, at which AEON was the sole representative from Asean.

Investors were generally positive on the company’s outlook given its strong branding and aggressive expansion. They were interested in the group’s expansion plans, potential synergy and cannibalisation with AEON Big, as well as the competitive landscape in Malaysia.

On Nov 27, AEON opened its 27th mall in Kulaijaya in Johor, which has a net lettable area of around 457,000 sq ft.

The four-storey mall comprises two retail floors and two levels for car parks.

In financial year ending 31, 2014 (FY14), the group will open three new malls – one each in Bukit Mertajam in Penang, Taiping and Klebang in Perak.

RHB Research sees some procurement synergies from the collaboration with AEON Big due to the larger collective orders.

Cannibalisation should be negligible as AEON Big operates hypermarkets that target the lower- to mid-income earners, while AEON is a department store-cum-mall operator targeting the middle-income group.

Competition between mall operators is, however, heating up with construction players venturing into mall operation (eg WCT’s Paradigm Mall), department stores starting to operate malls (eg Parkson’s Festival City Mall), and hypermarkets like Tesco revamping their tenant mix.

That said, AEON is unique as most of its outlets are close to residential/suburban areas, while its strong branding is a crowd-puller.

RHB Research revises its FY13 and FY14 earnings forecasts slightly lower – by 3%-4% – owing to higher depreciation from the heavier capital expenditure arising from new stores.

The research house maintains “neutral” with a new fair value of RM15.90 (from RM16).

The stock is currently trading near its historical price earnings of 23 times, which RHB Research deems fair.

LAND & GENERAL BHD

By Malaysia Equity Research

Trading buy

LAND & General Bhd (L&G), with a share price of 41 sen and market cap of RM258mil, is an old guard which has been given a new lease of life post-Asian financial crisis with the emergence of a new major shareholder in 2007.

Mayland Group owner Tan Sri David Chiu (affiliated to Hong Kong-based Far East Group) acquired a 17% stake from Tan Sri Wan Azmi (who currently holds only a 2% stake), and has since increased his stake to 29% (if irredeemable convertible unsecured loan stock (ICULS), already in-the-money, are exercised).

A debt-restructuring exercise undertaken in 2008 had cleaned up L&G’s books, allowing for the launch of its first new project in 2009, i.e. 8trium in Bandar Seri Damansara (recently completed).

Its two latest projects, Elements@Ampang (JV with Mayland) and Damansara Foresta launched in 2010 and 2012 respectively, have seen strong take-up of more than 90% – a positive sign that buyers are warming up to L&G’s products again.

Long before the emergence of the critically-acclaimed Desa ParkCity, L&G has been developing the 1,200-acre Bandar Sri Damansara township.

It still has 93 acres remaining, with Damansara Foresta spanning over 42 acres, Sri Damansara Club 36 acres (to be redeveloped into a mixed development in the near future) and private school Sekolah Sri Bestari 15 acres.

Its land cost is more than RM20 per sq ft (psf) versus commercial land value of higher than RM300 psf in nearby Mutiara Damansara, and above RM500 psf for Desa ParkCity bungalow lots.

L&G also owns 230 acres in Seremban, 14 acres of industrial land in Tebrau (Iskandar Malaysia) and 2,500 acres of plantation land near Lembah Beringin (may be developed in the longer term).

L&G has about RM800mil unbilled sales for Elements@Ampang and Damansara Foresta Phase 1, which will be completing in the second quarter of calendar year 2014 and the fourth quarter of 2015, respectively.

This works out to be 4 times financial year ended March 31, 2013 (FY13) property development revenue, translating to a RM200mil profit, to be recognised over the next three years.

Much stronger growth is already being seen for second quarter FY14, with earnings jumping to RM23mil vs RM2mil in the previous corresponding period and RM10mil in the first quarter of FY14.

In 2014, L&G is planning to launch RM1.5bil worth of residential projects, i.e. Damansara Foresta Phase 2, Elements 2@Ampang and Seremban Phase 1.

While property demand has been dampened by further tightening measures and rising inflation, the research house expects take-ups to remain relatively resilient for prime location and landed properties.

L&G justifiably trades at a discount – in part likely due to scepticism over some related party transactions.

However, its 70% discount to revised net asset value (RNAV) and 5 times March FY15 forecast fully diluted price earnings (PE) seem too steep compared with 48% and 9 times current average for small-mid-cap property developers respectively.

Not only has earnings visibility improved (estimated 3-year compound annual growth rate of 35%), L&G’s net cash has also grown to RM250mil (matching market cap) with potential maiden dividends to be declared next year.

The research house’s fair value of 65 sen is based on 50% discount to RNAV of RM1.30 versus 30%-40% used to derive target price for small-mid-cap property developers under its coverage.