MK Land's earnings to soften in FY15

MK Land Holdings Bhd
(June 13, 47.5 sen)
Maintain outperform with target price of 80 sen: A meeting with management recently revealed that the group is still working on launching a few projects in Damansara Damai and Damansara Perdana with a combined gross development value (GDV) of more than RM1 billion. Unbilled sales remain at RM300 million. We understand that the land sale of its 9.6 acres (3.88ha) land in Damansara Perdana in April 2013 will be recognised in the fourth quarter of the financial year 2014 ending June (4QFY14). Separately, we are disappointed to learn that the late charges for its Armanee Terrace have not been resolved as initially thought because the construction progress is slower than expected due to difficult site conditions. MK Land is now targeting completion of the structures by end-2014, and expecting liquidated and ascertained damages (LAD) to the tune of RM20 million, which will be recognised in the next few quarters.

New projects in the pipeline include two condominium projects in Damansara Damai and another two in Damansara Perdana. Approvals are slower than expected, but MK Land is hopeful to unveil the mid-range condominium projects (16 acres) at Damansara Damai by mid-2015, which will then be followed by the condominium projects (20 acres) at Damansara Perdana. Meanwhile, near-term earnings will be driven by selling the remaining semi-detached units at Rafflesia (circa 200 units remaining valued at RM700 million). With Metropolitan Square condos almost sold out, and the remaining unsold units comprising mostly Rafflesia semidees which are slow moving, the timing of the project launches is essential to maintain its earnings.

We understand MK Land is still looking to dispose of non-strategic assets and the next asset to be sold is the Setiawangsa land valued at circa RM96 million. We understand the sale is taking longer than expected because approvals for the land have lapsed and MK Land wants to sell the land outright without securing new approvals.

LAD from Armanee Terrace is still haunting MK Land despite earlier guidance that the issues have been resolved with the engagement of a new contractor. We understand that the project is now in the seventh year, and the LAD booked already more than RM100 million. Clearly, this is a disappointment, but the management is hopeful that structural works will be completed by end-2014, and architectural works should then move fast and target to handover by 2015. All told, an additional RM20 million LAD is expected that will be recognised in the next few quarters. That said, we adjust our FY15 downwards by 38% and FY16 by -27% to account for LAD and timing of launches.

Maintain “outperform” and target price of 80 sen or circa 50% discount to its realisable net asset value estimate of RM1.67 from RM1.56 after updating the balance sheet items and recent land disposal. — PublicInvest Research, June 13

This article first appeared in The Edge Financial Daily, on June 16, 2014.