MKH’s 1HFY24 results missed our forecast but met market expectations. Its 1HFY24 core net profit rose 30% YoY driven by strong property and plantation profits. We like MKH for its affordable and transit-oriented development (TOD) property offerings and expanding plantation business in Kalimantan. We cut our FY24-25F earnings forecasts by 9% and 8%, respectively, but maintain our TP of RM2.11 and OUTPERFORM call.

MKH’s 1HFY24 core net profit missed our expectation at only 42% of our full-year forecast but met market expectations at 47% of the full-year consensus estimate. The variance against our forecast came largely from softer-than-expected property sales.

YoY, its 1HFY24 revenue increased 20% on stronger top line performance from property development (driven largely by higher billings from MIRAI Residences @ Kajang 2 Precint 1, Akina @ Kajang 2 Precint 3), plantation (as a 2% increase in FFB production cushioned a 2% fall in average CPO price realised) and trading (on an improved product mix with higher margin building materials). Its core net profit rose sharper by 30% thanks largely to lower plantation input cost.

QoQ, its 2QFY24 revenue eased 12%. Weaker top line performance from property development (as key projects were already at the tail-end) and trading (which typically tracks the performance of property development), was partially cushioned by strong showing from plantation (a 5% rise in average CPO price realised more than offset a 2% contraction in FFB production). Corresponding, its core net profit declined by 12%.

Outlook. It is putting into the market service apartments and retail commercial shops with a total GDV of RM520m in FY24. These launches will be staggered in accordance with take-up rate. Unbilled sales of RM611.5m should sustain its property earnings over the next two years. Its TOD projects will continue to attract buyers for their accessibility to public transport. We expect a stable outlook for its plantation segment on firm CPO prices and a rising production volume.

Forecasts. We cut our FY24-25F earnings forecasts by 9%, and 8%, respectively, largely to reflect softer property sales assumptions.

Valuations. However, we maintain our SoP-derived TP of RM2.11 based on: (i) a 50% discount to RNAV on the group’s property segment, which is lower than our sector average of 60%, supported by its higher exposure to affordable products, (ii) a 13x FY24F PER to its plantation sector earnings, at a 20% discount from its large cap peers owing to its smaller scale operations, and (iii) a 12x FY24F PER on its hotel & property investment segment, also at a 20% discount from larger property investors. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 6).

Investment case. We continue to like MKH for: (i) its property business focusing on affordable and TOD projects, (ii) its expanding plantation business in Kalimantan and its proximity to the new capital city of Indonesia offering various opportunities, and (iii) a potentially value- accretive spin-off of its plantation unit. Maintain OUTPERFORM.

Risk to our call include: (i) overhang in the high-rise, affordable home segment, (ii) unfavourable CPO price fluctuations, (iii) higher-than-expected input and production costs, and (iv) regulatory changes, namely concerning the palm oil industry in Indonesia.

Source: Kenanga Research - 27 May 2024