KUALA LUMPUR: CIMB Equities Research has raised the target price for property company LBS Bina Group Bhd from RM2 to RM2.15 following its corporate exercise to beef up its construction business.
Under the exercise, LBS is injecting its 75%-owned construction arm MITC Engineering into its 51% owned ML Global for RM225mil, to be settled via share issuance.
“This is a positive surprise as it unlocks the value of LBS’s construction arm,” said the research house on Thursday.
CIMB Research raised the target price to RM2.15 from RM2, still based on 40% discount to RNAV, to reflect the disposal value; but FY17-18F EPS has been cut by 4% to reflect earnings dilution from the disposal.
“LBS remains an Add, with this corporate exercise as a potential re-rating catalyst. Downside risk to our Add call is deterioration of sentiment in the property market,” it said,
LBS and the minority shareholder of MITC Engineering (MITCE) will be disposing their stakes in MITCE to Bursa-listed ML Global for RM300mil, to be settled entirely via share issuance. LBS will receive 201 million ordinary shares and 135 million irredeemable convertible preference shares (ICPS) in ML Global as payment for its 75% stake in MITCE.
To maintain the public spread of ML Global, LBS plans to place out 45 million ordinary shares in ML Global to third-party investors after the asset injection.
The research house said ML Global is currently a construction company with exposure in manufacturing and trading of roof tiles. Its market cap is only RM64mil, about 6% of LBS’s. The ICPS of ML Global is entitled to receive dividends like ordinary shares and can be converted into ordinary shares on 1-to-1 basis.
After the corporate exercise, MITCE will be wholly owned by ML Global, which will in turn be 60%-owned by LBS. We estimate the placement of 45 million ML Global shares could raise RM25mil to RM30mil for LBS.
“The disposal of MITCE is value-accretive to LBS’s share price as the implied trailing P/E of MITCE is 14.4 times, compared with LBS’s 13.3x. However, the disposal is earnings dilutive as LBS’s effective stake in MITCE will be reduced from 75% to 60%.
“MITCE contributed about 23% to LBS’s profit after tax and minority interest in 1H16 and LBS’s share of MITCE’s profit will be reduced after this corporate exercise,” it said.
MITCE's current order book stands at about RM1.5bil, of which 62% was awarded by LBS and the remaining 38% came from external parties. The key objective of this corporate exercise is to allow LBS’s construction business to expand more rapidly.
By putting the construction arm in a separate listed entity, LBS hopes that MITCE will be able to win more external jobs and gain improved access to both debt and equity markets for expansion.
“In our RNAV, we value ML Global at RM300mil, the disposal value of MITCE. As LBS’s sales have been rising rapidly, the jobs that it awards to MITCE could boost the latter’s revenue to RM600mil to RM700mil by 2017.
“If MITCE maintains its profit margins, its net profitcould jump from RM23mil in 2015 to c.RM35mil in 2017. This excludes the potential earnings from external jobs. As we currently accord 10 time to 11 times P/E to the valuations of small construction stocks, ML Global is potentially worth at least RM350mil to RM385mil,” said CIMB Research.
