Investment Thesis
LBS’ resiliency bodes well for MGB’s orderbook. MGB’s prospects for new contract wins should be underpinned by the resilient sales performance at LBS and its sizeable landbank, as well as future GDV of c.MYR30bn (Figure 2). Despite the slowdown in the property market, LBS has clocked in an impressive 3-year CAGR of 26% in new property sales to reach MYR1.2bn in FY16.
LBS’ market position and its focus on medium and medium-to-high end property development projects may have driven its resilient performance amidst headwinds in the property market.
Moving forward, LBS is targeting new sales of MYR1.5bn in FY17 (8M17: MYR799m), a potential 21% growth from FY16, backed by planned MYR2.3bn worth of new launches. We expect the solid sales momentum to be sustained as LBS continues to concentrate on addressing the market’s needs by offering an affordable range of products to capture demand amidst the soft market conditions.
LBS’ resilient property sales/launches augurs well for MGB’s orderbook replenishment as the majority of LBS’ wholly-owned property projects are awarded to MGB, whilst MGB also stands a chance in the JV projects via open tenders.
Affordable housing offers external opportunities. We think that the combined construction entity post the injection of MITC would increase MGB’s chances of securing more external jobs given the larger scale of business and platform. MGB currently has a tenderbook of MYR1bn of which 80% is external. We are hopeful of MGB securing more external projects given its competitive advantage in design-and-build capability, proven track record with 10 years of IBS experience and the expansion into its in-house IBS precast manufacturing.
The Ministry of Urban Wellbeing, Housing and Local Government, in a recent statement to the media revealed that the Government’s target of building 1m affordable housing units (RMM) is expected to be achieved by end-2017. According to the ministry, the total number of RMM units targeted for construction was 875,490 as at Apr 2017, of which 237,738 units had been fully completed.
With the Government’s ongoing efforts to provide affordable housing and pledge to build 1m affordable houses by 2018, MGB is looking to capitalise on the huge opportunity by targeting the affordable housing market. As such, it is aiming to enhance its proposition and strengthen its rapport with relevant government agencies by delivering quality products and services in order to get into the ranks of preferred contractors for government residential projects.
Investing for the future. In Jul 2017, MGB signed a MoU with Sany Malaysia on the setting up of a JV for its IBS precast manufacturing business. The JV (MGB: 51%, Sany Malaysia: 49%) will see the construction of the partnership’s first IBS plant in
Nilai,
Negeri Sembilan, which requires capex of MYR40m and can produce up to 2,000 house units per year upon reaching full capacity in 2H19. This compares with approximately 6,000 units of houses per year that MGB currently builds.
MGB’s role in the JV would be to promote the usage of precast concrete to its clients as well as sourcing labour for the operations, while Sany Malaysia would transfer the technical know-how.
Sany Malaysia is an indirect 70%-owned subsidiary of Sany Group Co Ltd (Sany Group). One of Sany Group’s core subsidiaries, Sany Heavy Industry Co Ltd (600031 CH, NR) was publicly listed on the Shanghai Stock Exchange on 3 Jul 2003, and has a market capitalisation of USD10bn. It is currently the largest provider of precast concrete equipment solutions in China, accounting for 50% of the market.
We are positive on the venture as it would reduce MGB’s dependence on manual labour and costs in the long run. Management indicated that the IBS solution could potentially reduce 15% of its construction workforce and 30% of the construction period for projects.
While the construction costs of IBS are expected to remain the same as current construction methods over the next two years after including transportation costs, it is able to serve as a buffer in the event of possible increases in labour-related costs, and/or labour shortages. The maiden production is expected to roll out in Jun 2018 for the construction of 764 units of houses under
SkyLake Residence.
In a recent media statement, Deputy Prime Minister, Datuk Seri Dr Ahmad Zahid Hamidi urged the construction industry to be prepared for the adoption of IBS within three years before it is made mandatory. The decision was made during a high-level committee meeting, chaired by the Deputy Prime Minister at Parliament on 25 Jul 2017.
Meanwhile, as outlined in the Construction Industry Transformation Programme (CITP), the Construction Industry Development Board (CIDB) is aiming to enforce 50% IBS usage in the private sector and 70% in the public sector by 2018. Hence, we believe the expansion into the IBS business bodes well for MGB given the commitment by the Government, while the strategic partnership with Sany Group would also pave the way for MGB to become one of the most efficient IBS manufacturers going forward, in our view.
Sizeable orderbook in hand. MGB currently has an outstanding orderbook of MYR2.1bn, which provides near-term earnings visibility for the next 2-3 years. Of this, slightly more than three quarters of the outstanding orderbook is derived from its parent company, LBS.
The Group has clinched new contracts/projects totalling MYR1.3bn so far in FY17. Moving forward, we assume new orderbook wins of MYR1.5bn, MYR1.1bn, and MYR1.1bn during FY17F-19F respectively. This would in turn power net profit growth of 71% and 21% in FY18F and FY19F respectively.
We believe that contract flow would be supported by the strong backing of its parent company, LBS, as well as the initiative to secure more external jobs in the affordable housing space. Via its indirect 70%-owned subsidiary, MGB Geotech, MGB is also looking to explore piling-related project opportunities in East Malaysia. In Jul 2017, MGB Geotech secured a MYR68m subcontract from Samling-Ekovest JV Sdn Bhd to undertake piling works at the Pan Borneo Highway projects.
Valuation And Recommendation
We initiate coverage on MGB with a BUY recommendation and TP of MYR1.46 (15% upside) derived from ascribing a target FD FY18F P/E of 14x. The valuation is in line with the 5-year mean P/E of 14x for the KL Construction Index. Although MGB’s market capitalisation of MYR501m is relatively smaller than the average of MYR1.1bn for the KL Construction Index members, we believe the prospective strong earnings growth and potential new orderbook replenishment are MGB’s strong points, on top of its IBS manufacturing initiatives.
MGB is similar to Suncon (SCBG MK, NEUTRAL, TP: MYR2.30) as both companies are supported by property developer parent companies that help to ensure a stable flow of new jobs. However, Suncon possesses additional capabilities in infrastructure-based construction while also being larger in terms of market capitalisation compared to MGB, hence justifying a premium valuation target multiple of 16x (vs the 14x target P/E for MGB).
The company is now trading at FY18F FD P/E of 12.3x, which is lower than the sector average of 13.1x despite the higher forecasted EPS growth. In addition, MGB provides the highest coverage in terms of outstanding orderbook/market capitalisation among all the construction stocks under our coverage (Figure 8). As such, we believe that its current valuations do not fully reflect its fundamentals and positive prospects.
Our valuation takes into account the potential enlarged share base from the conversion of 180m units of irredeemable convertible preference shares (ICPS). The ICPS were issued to fund the acquisition of MITC and are currently held by its major shareholders, namely LBS (135m shares or 75%) and Datuk Lim Lit Chek (45m shares or 25%). The ICPS can be converted in two phases starting Nov 2017 before being automatically converted upon the expiry in Nov 2021. Post conversion, MGB would still comply with the free float requirement of 25% (Figure 9).
Key Risks
Key risks to our recommendation and target price include:
i. Shortage of labour and rising labour costs;
ii. Single customer risk;
iii. Slowdown in the property segment which could lead to an inability to replenish its construction orderbook;
iv. Higher input costs, which may translate into poor margins for its construction business;
v. Competition within the construction sector.
Beginning Of a New Chapter
Company overview
After MGB completed its self-regularisation plan on 31 Oct 2014, MGB had on 11 Mar 2016 been successfully uplifted by Bursa Malaysia Securities Bhd from being classified as a PN17 company. Subsequently, on 11 Apr 2016, LBS made an unconditional mandatory takeover offer for MGB after it raised its stake to 50.9% from 32.0%. Accordingly, MGB became a subsidiary of LBS.
As part of LBS’ plan to streamline its construction business under MGB and its subsidiaries by consolidating the resources of MGB and MITC and its subsidiaries for a greater operational and financial efficiency, MGB had on 14 Sep 2016 entered into a share sale agreement for the acquisition of the entire issued and paid up share capital of MITCE for a purchase consideration of MYR300m.
Proven track record. The newly acquired subsidiary MITCE is an established construction player that has accumulated its track record for more than 10 years in constructing high-rise buildings and landed residential properties as well as commercial properties. Upon the completion of the acquisition in Nov 2016, the construction business had an outstanding orderbook of approximately MYR1.1bn, and the orderbook was subsequently expanded to MYR2.1bn as at Aug 2017.
Profile of key management team
Datuk Lim Lit Chek, chief executive officer – Datuk Lim, aged 41, was appointed to the board as executive director and chief executive officer on 1 Dec 2016. He holds a Master’s Degree in Engineering Management from the Ivy League Cornell University in New York after graduating with a First Class Honours Bachelor’s Degree in Civil Engineering and a Bachelor’s Degree in Business Administration with the highest distinction from RMIT University in Melbourne. He is a member of the Board of Engineers Malaysia, and has 16 years of experience in the field of property development and construction. In 2007, he founded MITC Engineering Sdn Bhd, a subsidiary of ML Global Berhad and holds the position of managing director.
Lim Kim Hoe, deputy chief executive officer – Mr Lim, aged 32, was appointed to the board as executive director on 1 Aug 2014. Mr Lim graduated with an Honours Degree in Bachelor of Engineering (civil) from the University of Melbourne, Australia. After graduation, he began his career with a listed property developer where he accumulated wealth of experience in business development, project planning and design. He later joined a construction company as executive director where he continued to extend his experience in the field of property development and construction. He is the son of Tan Sri Lim Hock San, the managing director of MGB.
Mr Wong Tack Leong, deputy chief executive officer – Mr Wong, aged 45, was appointed as Deputy CEO on 1 Dec 2016. He is responsible for the construction division and the company’s operations. He graduated with a Bachelor of Building (Quantity Surveying) from the University of South Australia. He has 21 years of experience working in pre- and post-contract administration and duties related to quantity surveying such as contract implementation, costing and feasibility studies. He is a member of Australia’s Institute of Quantity Surveyors, and an Associate member of the Malaysian Institute of Arbitrators and Institute of Value Management Malaysia.
Mr Chew Wee Seong, chief operating officer – Mr Chew, aged 47, is a Bachelor of Science (Finance) graduate of St. Cloud State University in the US. He is also a MBA (Merit) graduate from the prestigious Cardiff Metropolitan University in Cardiff, United Kingdom. Mr Chew joined LBS Bina Group in Aug 2000. He was appointed the chief executive officer from Aug 2014 to Nov 2016, before he was re-designated as COO on 1 Dec 2016.
Mr Lee Hon Meng, chief operating officer – Mr Lee, aged 38 graduated with a Bachelor of Science (Physics) from Universiti Sains Malaysia (USM). He has 14 years of experience in the field of Construction Management. Mr Lee’s areas of expertise are high-rise construction, vacant possession inspection and submission for development project, health and safety, plant and machinery and infrastructure works.
Ms Tan Suan Suan, assistant general manager, accounts & finance – Ms Tan, aged 34, was appointed assistant general manager, accounts & finance on 20 Dec 2016. She graduated with Bachelor of Commerce (Account & Finance) from Queensland University of Australia. She is also a member of Malaysian Institute of Accountants (MIA) and Certified Practising Accountants, Australia (CPA). She has more than 10 years of working experience accumulated from audit firm, Ernst & Young, and local listed entities, specialising in reporting and compliance.
Mr Yeo Wee Ching, company secretary – Mr Yeo, aged 34, was appointed as company secretary on 1 Sep 2016. He is an Associate Member of the Malaysian Institute of Chartered Secretaries and Administrators (MAICSA) since 2011 and graduated from Tunku Abdul Rahman College with Advance Diploma in Business Management in 2005. He started his career in year 2004. He has 12 years extensive working experience in corporate secretarial practices of public listed companies and private limited companies.
