MCH MK 12Feb20
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13 Feb 2020 Matrix Concepts Buy Relative outperformer; Initiate at Buy Price We initiate coverage of Matrix Concepts (MCH) with Buy and TP of RM2.25, based on a Property RM1.91 25% discount to our RNAV of RM3.00. We expect its sales to hold (peers are | | experiencing declining sales) with stable earnings in FY20F and to expand by 9% in Target Price RM2.25 FY21F. MCH offers better cash return to shareholders with high dividend yields of 5- 6% (industry: 2-3%). It also offers further upside on potential monetisation of Sendayan Icon Park and its Indonesia’s project. MCH is trading at a PBR of 1.0x FY20F and PNAV Market Data of 0.6x FY20F, at a premium to the industry. We believe the premium is justifiable given Bloomberg Code MCH MK its strong balance sheet, stable earnings, and high dividend yields. No. of shares (m) 822.8 Financial Highlights Market cap (RMm) 1,571.6 FYE Mar 2017 2018 2019 2020F 2021F 52-week high/low (RM) 2.02 / 1.87 Revenue (RMm) 775 818 1,046 1,054 1,150 Avg daily turnover (RMm) 0.7 Core net profit (RMm) 185 213 218 217 237 KLCI (pts) 1,551.5 Core EPS (Sen) 31.5 28.2 28.8 24.4 26.6 Source: Bloomberg, KAF EPS growth (%) (31.2) (10.4) 2.1 (15.2) 9.1 DPS (Sen) 13.8 12.8 12.6 10.6 11.6 Core PE (x) 6.1 6.8 6.6 7.8 7.2 Div yield (%) 7.2 6.7 6.6 5.6 6.1 Equity | Malaysia | Equity Major Shareholder (%) ROE (%) 19.4 19.1 17.2 14.4 13.5 Dato' Lee Tian Hock (34.7%) Net Gearing (%) 15.3 2.9 7.4 6.2 4.2 EPF (8.1%) PBV(x) 1.1 1.2 1.1 1.0 0.9 Asia Core Properties (4.4%) Source: Company, KAF *Prices as of 11-Feb-2020 Free Float 439.9 Source: Bloomberg, KAF Further upside on Indonesia project and Sendayan Icon Park. MCH has a 30% stake in a JV company with Salim Group, Agung Sendayu, and PT Nikko Sekuritas for a project called Islamic Twin Tower at PIK2, Jakarta (Indonesia) with a GDV of c.USD250m. Future development of the remaining acreage of PIK2 would potentially represent more Performance opportunities for MCH to expand into Jakarata. 3M 6M 12M In addition, Sendayans’ remaining GDV of RM5.3b excludes the 110-acre of land that had Absolute (%) - 1.1 (4.4) been earmarked for Sendayan Icon Park. The icon park would be developed into a CBD and Rel Market (%) 3.7 5.2 4.1 will be the key highlight of the entire Sendayan township. Potential GDV to be churned out from the icon park is estimated to be c.RM6.0b. As the icon park is still at preliminary stage 2.2 and would only start in year 2025 with 10-15 years of development period, we exclude the number from the icon park from our RNAV calculation. The improvement in the speed of 2.0 monetising the 110-acre of land would potentially provide an upside to the company. 1.8 Higher margin from low land cost and low gearing. Low land cost and low gearing give MCH a competitive edge over other developers in the industry. Its land cost only makes up 1.6 Feb-19 May-19 Aug-19 Nov-19 c.6-7% (industry: c.15-20%) of its GDV. MCH’s low borrowings had translated into low net MCH MK FBMKLCI Index gearing for the group. MCH had a net gearing of 7% (industry: c.36%). All things considered, it managed to consistently registered higher net profit margin (>20%) than the industry Source: Bloomberg, KAF (c.12%). As we expect its sales to hold up, its profit margin would likely to maintain in FY20- 21F. Healthy inventory level. MCH had consistently recorded healthy inventory level than its peers i.e., inventory-to-sales ratio of less than 10% (industry’s 5-year average: 28%). Its fast- moving inventory was also illustrated in its days of inventory outstanding (DIO) of 56 days (peers’ range: 134-240 days). The healthy inventory-level trend is indebted to its price-point strategy. A cash yield company. From stable earnings and strong balance sheet, MCH has able to provide generous dividend payout in the range of 40-45% of its earnings in recent years. (dividend policy: 40% of earnings). Price-to-dividend ratio measures actual cash received by investors. A lower price-to-dividend multiple translates to better cash return for shareholders. MCH has a price-to-dividend multiple of 15.1x in FY19 (industry: 23.6x, bigger peers: >30.0x). The inverse for price-to-dividend is dividend yield. MCH has consistently reported higher Analyst dividend yields than the industry. At current market price, the dividend payout by MCH Izzul Hakim Abdul Molob translates into a yield of 6-7% (industry: 3-4%). Despite the private placement, conversion of (603) 2171 0502 warrants, and ESOS in FY20F, we estimate that MCH is still able to provide a payout that [email protected] would potentially translate into a yield of 5.6% (industry: 2.9%) this year. Produced by KAF Equities Sdn Bhd Important disclosures can be found in the Disclosure Appendix Matrix Concepts Company Background Matrix Concepts Berhad (MCH)’s core business is property development. MCH is a renowned property developer in Negeri Sembilan. Its primary projects are The Sendayans (Negeri Sembilan) and Bandar Seri Impian (Johor). These made up c.75% of its overall remaining GDV of RM10.4b. About 85% of its projects are residential-type, of which mainly are landed properties. MCH has recently made its debut in the Klang Valley with the launch of a 33-storey serviced apartment project called Chambers worth RM333m of GDV. It was launched on Aug-2018 and is located close to Putra World Trade Centre (PWTC). MCH is planning to launch 2 more projects in Klang Valley i.e., Puchong and Cheras with a combined GDV of c.RM800m in FY21-22F. As for its overseas projects, MCH had ventured into several projects in Melbourne (Australia) and PIK2 Sendayu Indo City – North Jakarta (Indonesia). Other segments include education and hospitality. Core operation – property development This segment comprises development of residential and commercial properties. MCH is a property developer in Malaysia that offers sizable properties at affordable prices with a strong presence in Negeri Sembilan. Other locations include Kuala Lumpur, Selangor, Australia, and Indonesia. More than 50% of its remaining GDV is located in Negeri Sembilan. Property development is the core operation of MCH, comprising c.97% of the group’s total revenue. Other operation – hospitality & education These segments provide diversification to its property development business. MCH involves in managing and operating a clubhouse (d'Tempat Country Club) and hotel (d'Sora Boutique Business Hotel). It also owns Matrix Medicare that provides services in healthcare centres relating to non-clinical matters including financial, administration and management of resources in return for management fees. For its education business, it has a 51% stake in Matrix Educare that operates Matrix International School, Matrix Private School, and early years’ education. However, its non- property development segment only contributed c.3% of the group’s total revenue in FY19. Exhibit 1: MCH’s revenue composition 100% 90% 80% 70% 60% 50% 100% 98% 97% 96% 97% 40% 30% 20% 10% 0% 2014 15MFY16 FY17 FY18 FY19 Property Development Hospitality Education and others Source: Company, KAF Major shareholders – Dato’ Lee Tian Hock MCH was established in Malaysia in 1996 and was listed on the main market of Bursa Malaysia in 2013. MCH’s major shareholder is Dato’ Lee Tian Hock. The holdings are directly via his own and his private limited companies i.e., Shining Term, Ambang Kuasa, Magnitude Point, and Yakin Teladan. Ultimately, he owns about 35% stake of MCH. Other shareholders are Employee Provident Fund (EPF) with 8% stake and Asia Core Properties with 4% stake KAF Equities Sdn Bhd 2 Matrix Concepts Investment Thesis We initiate coverage of Matrix Concepts (MCH) with a Buy and TP of RM2.25, based on a 25% discount to our RNAV of RM3.00, based on the following premises: 1) Higher margin supported by low land cost and low gearing 2) Adequate lanbanks to support earnings contribution for the next 8 years 3) Strong balance sheet 4) A cash yield company 5) Sizeable GDV from Sendayan Icon Park – yet to be accounted for 6) Potential further upside from the JV with Salim Group 7) Healthy inventory level with minimal DIOs Higher margin supported by low land cost and low gearing Low land cost and low gearing give MCH a competitive edge against other developers in the industry. About 10 years ago, MCH bought its land in Bandar Sri Sendayan (BSS) for about RM3psf. In 4Q19, MCH had entered into separate SPAs with individual land owners to acquire 86 parcels of vacant agriculture lands measuring c.68.2 hectares, situated in BSS for a total consideration of RM73.4m or RM10psf. BSS has a remaining GDV of RM3.3b with a weighted average GDV psf of RM160. Despite the higher land acquisition cost based on the latest transacted price of RM10psf, the land cost only makes up c.6% of its remaining GDV. Therefore, MCH still enjoys a high development margin. As a result of low land cost, MCH had consistently registered the higher gross profit margin than the industry.