Benalec Holdings - Kicking off Johor land development

News  Benalec announced that it had signed a term sheet with the State Secretary, Johor (Incorporated) and 1My Strategic Oil Terminal Sdn. Bhd for the reclamation works and sale of approximately 1,000 acres of land off the coast of Tanjung Piai, Johor for the purpose of constructing and operating a crude oil and petroleum storage facility together with a private jetty, which has long been anticipated.

Comments  We are positive on the announcement as it finally showed some progress on its Johor land development, which has been long overdue since its initial approval in principle form UPEN, Johor back in Nov-11 due to the prolonged EIA studies here. Details are still lacking at this juncture.

 Assuming a market price of RM80psf with an operating margin of 30% over 4 years, we are likely to raise our FY14E EPS by 104% to 33.5sen.

 Our SOP of RM1.71/share has already factored the 1,000ac land deal although we conservatively assumed a land valuation of RM45.00psf on the back of lower land cost assumption of RM31.50psf previously. Johor has experienced a sharp re-rating in capital values over the last 12 months due to growing G2G agreements between Singapore and Malaysia. Based on our understanding, the asking price of lands in the area is now at around RM80.00psf. At this valuation with a land cost assumption of RM56.00psf, it will increase our SOP valuation by 27% to RM2.17.

 Given the massive project size of 1,000 acres and an assumed reclamation cost of RM2.4b over 4 years, we believe that Benalec will need to gear up further by at least another RM180m per annum to execute the project assuming that the project is based on a progressive payment basis rather than on a build- than-sell basis. This will bring up its net gearing from 0.03x to 0.36x for the first year, which is still at a comfortable level.

Outlook  We believe Benalec would be the key beneficiary from Abu Dhabi’s partnership with Malaysia, which potentially includes development of the RM21b strategic petroleum reserve facility in Johor, Malaysia. The facility is likely to have a storage capacity of 60m barrels of crude oil and petroleum storage facility, which will be used exclusively by Abu Dhabi.

 Note that this 1,000ac land development forms part of (19%) the total 5245ac Johor land development (Tanjung Piai; 3,485ac and Teluk Penggerang; 1,760ac), which was granted the approval in principle previously. So, over the next 12-18 months, we expect the group to firm up more of such similar contracts, which has yet to be reflected in our estimates or SoP.

Forecast  We look to reflect the new earnings contributions, pending the land price details. So for now, we maintain our estimates.

Rating    Maintain OUTPERFORM

 We are maintaining our OUTPERFORM call on Benalec given the ample capital upside of 37% and the likely future boost from the development of its Johor land, which is already benefiting from the sharp increase in land prices in the area.

Valuation  We are keeping our TP unchanged at RM1.71 based on a SOP valuation at this juncture.

Risks  (1) A sharp increase in material prices and (2) a slowdown in its land sales.

Source: Kenanga