Ho Hup’s construction business rejuvenated, rationalised

by **Cals** Sat 21 Jun 2014, 03:50

Business & Markets 2014

Written by Kenanga Research

Friday, 20 June 2014 10:08

Ho Hup Construction Co Bhd
(June 19, RM1.36)
Maintain trading buy with target price of RM1.55: Year-to-date, Ho Hup’s stock price has gone up by 9.6% since our first report in December last year. Even at its current price, Ho Hup is trading at only 4.2 times implied forward price-earnings ratio (PER), cheaper than that of its peers’ average PER of 7.1 times.

We deem Ho Hup’s stock as undervalued judging from its bright growth prospect driven by its property division’s crown jewel project in Bukit Jalil, that is Bukit Jalil City.

Ho Hup’s first quarter ended March 31 of financial year 2014 (1QFY14) net profit of RM11.3 million accounts for only 10% of our FY14 earnings estimate. The shortfall was mainly because we had overestimated its property division’s revenue and profit.

In our initial forecasts, we had expected its property division to recognise a portion of its joint-venture project on a 50-acre (20.2ha) tract in 1QFY14. Nonetheless, due to the timing of approvals for the project’s new plan and design, it will only start to contribute from 2QFY14 onwards.

However, the shortfall will definitely be made up in 2015. As such, we have revised lower our FY14 and FY15 net profit forecasts by 28% and 18% to RM80.6 million and RM126 million respectively.

Ho Hup’s Bukit Jalil City project with Malton Bhd comprises shop offices, serviced apartments, offices, a hotel and shopping mall. It will be officially launched by the end of 2014. The group is currently revising the plan and design of the project which will result in a higher gross development value (GDV) of RM4 billion to RM4.5 billion from RM2.1 billion previously.

Assuming the project’s GDV is RM4 billion and based on the agreement that Ho Hup is entitled to 18% of the GDV, on average we conservatively estimate that the project will contribute about RM45 million per annum in net profit throughout the 10-year period of development.

As Ho Hup’s construction division has been rejuvenated and rationalised, the company is back in business.

Going forward, we see clarity in Ho Hup’s earnings visibility as the group is on a clean slate to expand and focus on its property development business. A healthy balance sheet following its restructuring exercise puts Ho Hup in a favourable position to build a portfolio of development projects for future growth. — Kenanga Research, June 19

[You must be registered and logged in to see this image.]

[size]

This article first appeared in The Edge Financial Daily, on June 20, 2014[/size]