Tanjung Piai is the wild card
The Tanjung Piai maiden reclamation contract is still Benalec's wild card in 2014 as it would pave the way for a mega reclamation deal (1,000 acres) for an oil & gas terminal. However, the limited progress indicates that there could be delays.
We cut RNAV to factor in further delays in the new land reclamation for the Tanjung Piai project. This lowers our target price, still pegged to a 50% RNAV discount. Benalec‘s FY14 earnings outlook hinges on the signing of the SPA for the Tanjung Piai reclamation project expected by end-2013. Under our new rating structure, our call changes from Neutral to Hold. Switch to Muhibbah Engineering.
The delayed progress of reclamation works, timing of land sale gains and rising reclamation costs are likely to weigh on Benalec's fundamentals in the medium term. However, the group‘s earnings could be boosted by its prospects in Greater Iskandar, namely the mega reclamation contract to build the oil & gas terminal in Tanjung Piai. This would pave the way for the reclamation of over 1,000 acres of land, just for phase 1. Tanjung Piai will be the group's maiden contract beyond Melaka and its first large-scale land reclamation order in the state of Johor. The competition is limited as the group has secured exclusive rights to reclaim land in both Tanjung Piai and Pengerang.
Melaka land sale gains to materialise
The incoming land sale gains from the group's Melaka project will drive profitability in the coming quarters. The group targets to monetise 181 acres of land over the next three quarters at an indicative price of RM38-39 per sq ft, with a 35-40% EBITDA margin, based on our estimates.
Tanjung Piai overhang
Benalec‘s share price has been languishing at low levels, mainly due to the uncertainty over the finalisation of the sale and purchase agreement (SPA) for the Tanjung Piai reclamation works by end-2013 and the internal management tussle, which shows no sign of an amicable settlement soon. In FY14, the focus will be on Tanjung Piai. The negotiations for Tanjung Piai are ongoing but there are no meaningful leads. We think that there are still timing risks and a possible delay in the conclusion of the SPA. The share price overhang is likely to sustain.
Publish date: 10/12/13