MKH's FY24 results missed expectations with flattish earnings dragged by its property segment despite encouraging growth in plantations. Still, we like MKH for its expanding plantation business in Kalimantan. Though we appreciate its exposure to affordable and transit-oriented development (TOD) property offerings, declining sales trajectory prompted us to cut our FY25F earnings by 10% and raise our property discount to RNAV to 60% (from 50%) due to poorer translation to profits. Our SoP-TP now stands at RM1.64 (from RM1.80) with our OUTPERFORM call maintained.

MKH's FY24 core net profit missed our expectations at only 91% of our full-year forecast and market expectations at 89% of the full-year consensus estimate. The variance against our forecast came largely from softer-than-expected property sales.

YoY, its FY24 revenue was flattish on moderate top line performance, due to poorer property development (largely from higher profit recognition from MIRAI Residences @ Kajang 2 Precint 1, Akina @ Kajang 2 Precint 3). Also, with the lower margins from these projects, it had offset the stronger performance from the plantation segment (4% revenue growth, 90% operating profit growth) thanks to higher oil extraction rate and CPO prices (FY24: RM3,494/MT, FY23: RM3,348/MT). This led to its core net profit to also end flattish.

QoQ, its 4QFY24 revenue rose by 8% from better top line performance from property development (as key projects were already at the tail-end) and plantation (higher production of fruit bunches). All in, its core net profit increased by 73%.

Outlook. Landed retail commercial shops with a total GDV of RM835.6m will be introduced in FY25 to fuel MKH's property pipeline, with launches staggered based on take-up rates. Unbilled sales of RM547.3m should sustain its property development 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 supported by stable demand for CPO from high-consumption countries such as China and India.

Forecasts. We cut our FY25 earnings largely to reflect softer property sales assumptions given the poorer project realizability being expected.

However, this was cushioned by better inputs for its plantation sector, led by our revised CPO target of RM4,000/MT which translated to net earnings cut of 10%. Meanwhile, we introduce our FY26F numbers.

Valuations. In relation to the abovementioned changes to our outlook, we lowered our SoP-derived TP by 9% to RM1.64 (from RM1.80) as we raised our property segment's discount to RNAV to 60% (from 50%) owing to the declining unbilled sales since FY18 (from RM1.0b to RM547.3m in FY24. Meanwhile, our (i) a 13x FY25F PER to its plantation sector earnings, at a 20% discount from its large cap peers owing to its smaller scale operations, and (ii) a 12x FY25F PER on its hotel & property investment segment, also at a 20% discount from larger property investors are unchanged. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 6).

Investment case. Despite its earnings miss, MKH is still merited for its long-term viability backed by: (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. 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 - 29 Nov 2024