• Downgrade to NEUTRAL from Buy, with new MYR0.93 TP from MYR0.82, 5% upside. We are positive on LBS Bina’s proposed disposal of its entire equity interest in Lamdeal Investments Ltd (LIL) for MYR124.7m, which owns a 60% stake in Zhuhai International Circuit (ZIC). That said, we downgrade our call as we think the positives are largely priced in and upside is limited following the recent strong share price performance.

• Details on the disposal. LBS has entered into two agreements with Huafa Urban Operation (HK) for the disposal of 100% of LBS’s equity interest in LIL for MYR124.7m, and a loan settlement for the amount owed by LIL to LBS totalling MYR147.9m. LBS will record a net gain of MYR80m, and the proposals are expected to be completed by 31 Oct 2024.

• Background. Since acquiring LIL and its 60% interest in ZIC in 2013 for an original cost of investment of USD1, the racing circuit has experienced yearly losses mainly caused by the amortisation of the land. It also faces tough challenges due to increasing stringent sustainability compliance requirements. In 2020, LBS announced that it had entered a MoU with Zhuhai Jiuzhou (which holds the remaining 40% stake in ZIC), but the deal failed to materialise with the MoU expiring in Mar 2021. LIL carries a negative net book value of MYR54m as at end-FY23.

• We are positive on the disposal as it strengthens the group’s balance sheet, with the net asset per share expected to increase by 9 sen (10%), and the group’s gearing ratio to decrease to 0.38x from 0.42x as at Dec 2023. The improved balance sheet should help to fund other projects and investments. Part of the proceeds could be paid out to shareholders in our view; although there has been no official confirmation of such plans yet.

• We increase FY25F-26F earnings by 3% after lowering our interest expense estimates. We incorporate the gain from the disposal into our RNAV estimates, and lower our discount to RNAV to 55% from 60% in line with the overall sector re-rating.

• Key risks: Unsuccessful monetisation, soft than-expected property market, delayed project launches, and rising competition in the affordable housing segment. The converse represents the upside risks. Our TP includes a 2% ESG premium based on our in-house methodology.

Source: RHB Research - 20 Jun 2024