We initiate with Trading Buy instead of an Outperform as the stock should be event-driven. Our target price is set at a 20% discount to RNAV. It is high time to relook its potential as a major player in land reclamation. The signing of an SPA for the first phase of the reclamation job at Tanjung Piai should be a major catalyst. The stock is a laggard among Iskandar plays and is now our top pick in the smaller-cap space. 

Benalec started off as a coastal protection and reclamation contractor 12 years ago. Today, its superior land-reclamation margins of over 20% are second to none: higher than the 4-16% pretax margins for contractors under our coverage. Operating efficiency has enabled the group to tender at very competitive prices. The group focuses on Malaysia, especially initiatives under the Economic Transformation Programme (ETP). It plans to leverage its land-swap reclamation model to expand from Melaka to Johor/Iskandar. This is where its growth potential lies. 

Massive petrochemical complexes and oil & gas hubs under the ETP are expected to take off in a big way in the next five years in Iskandar. Various coastal developments would require land reclamation. For Tanjung Piai Phase 1, we conservatively calculate a potential land-sale gain of up to RM566bn for Benalec over the next four years, or RM142m p.a. Another potential gain in Iskandar is from 1,760 acres in Pengerang. Melaka reclamation jobs and land sale gains provide an earnings base before Iskandar jobs take off. 

Valuations are attractive even if we exclude Tanjung Piai's prospects. Its RNAV/share drops from RM2.51 to RM2.35, excluding the latter. At a 20% RNAV discount, the stock should be worth RM1.88 (for 35% upside). Optimistically, we estimate a 51% upside to RNAV/share of RM2.51 if we factor in all the potential land sale gains including Pengerang land.

Source: CIMB Daybreak - 05 June 2013, Full PDF Report