Malton ... Feb10

S&P Results Review & Earnings Outlook

• Malton’s 1HFY10 (Jun) net profit of MYR12.9 mln (+270% YoY) was ahead of expectations as it reached 66% of our previous FY10 estimate. Although revenue fell 15% YoY to MYR196 mln, it was within expectations (52% of our FY10 estimate) after the completion of a sizeable construction project in FY09.

• The better-than-expected earnings were due to higher margins (1HFY10 EBIT margin of 11.2% vs. 3.4% in 1HFY09) that resulted from its cost containment measures and improved margins on its property development projects.

• Following the completion of the Pearl Villas and Bayu Villas developments as well as the Carrefour Hypermarket project in 2QFY10, earnings recognition will be slower in 2HFY10. However, Malton’s prospects remain firm in FY11, underpinned by unbilled sales of MYR350 mln from the Amaya Saujana, VSQ corporate suites and Mutiara Puchong projects, where recent take- up rates have improved. Its construction arm’s orderbook of MYR700 mln will also help to sustain earnings in FY11, with the construction of an MYR370-mln shopping mall in Petaling Jaya expected to commence in 4QFY10.

• We have fine-tuned our assumptions and after imputing maiden earnings from a newly acquired associate, we lift our FY10 net profit forecast to MYR21.5 mln (from MYR19.4 mln). For FY11, however, we trim our net profit estimate to MYR23.6 mln (from MYR24.1 mln), following the earlier completion of some of its projects.

Recommendation & Investment Risks

• We maintain our Strong Buy recommendation and 12-month target price of MYR0.50.

• Our target price is derived from applying an unchanged P/NTA multiple of 0.4x to Malton’s prospective FY10 (unchanged) NTA of MYR1.26 per share. We continue to ascribe a target P/NTA that remains within the valuation metrics of 0.4x-1.0x for small- and mid-cap property developers within our coverage. We also continue to leave out a dividend forecast from our target price, as it has not declared any
dividend in the past two years.

• Our Strong Buy call continues to reflect Malton’s improving earnings visibility over the next two years, which is backed by strong unbilled property sales and improving development margins. Furthermore, the start of some of its construction projects will also add resilience to its forward earnings. Trading at prospective FY10 and FY11 PERs of 5.8x and 5.1x respectively, Malton’s valuation remains attractive, as they are at the lower end of the 5x-11x PER range of small- to mediumsized construction and property developers within our coverage.

• Risks to our recommendation and target price include: (i) slower-than expected take-up rates for its future launches, which include Phase three of the Amaya Saujana development and its projects in Puchong, (ii) profit margin compression due to higher building materials cost, and (iii) failure of its construction division to secure more external contracts.