(Listing on Jan 17, IPO offer price RM1 per share)
Initiate coverage with buy call and fair value RM1.90: We initiate coverage on Benalec Holdings Bhd with a “buy”, and a sum of-parts-derived fair value of RM1.90 per share. Benalec is to be listed on Bursa Malaysia on Jan 17 with an initial public offering (IPO) price of RM1 per share.
Benalec is a marine engineering specialist on the rise. It enjoys an 18% share of the Malaysian marine construction market dominated by only five major players. Hence, Benalec should trade at a scarcity premium. The closest peer, Hock Seng Lee Bhd, trades at FY11F/12F price-earnings ratios of eight to 10 times against Benalec’s six to eight times (at the IPO price of RM1).
Benalec prides itself on being an integrated marine engineering outfit operating in a niche market, including ownership of 91 vessels. Its construction margins averaged circa 26% (ex-land sale gains from reclamation projects) over the past three years against 3.2% to 5.4% for IJM, Gamuda and WCT.
A key value proposition is its unique business model solidified by an ability to offer turnkey land reclamation proposals on a design and build basis. Leveraging on its success in Melaka, Benalec could gain unencumbered access to prime seafront land via strategic partnerships with state governments, notably in Penang and Johor.
With a stronger balance sheet post-listing, we see significant scope for geographic expansion into regional markets — with Asean as the immediate focus. Certainly, sister company Oceanlec’s success in landing a landmark contract to supply and deliver construction materials to the Singapore government back in 2008 is testament to Benalec’s deepening executional capabilities.
Its highly scalable business model could also serve as a springboard to secure more value-accretive deals, including specialised industrial hubs.
We project FY11F core earnings at RM93 million (+83%), accelerating by a further 19% to 28% to RM119 million to RM141 million in FY12F/13F, translating into a solid earnings compound annual growth rate of 41% from an earnings base of just RM51 million in FY10.
Benalec’s prolific contract pipeline should help underpin share price performance in the coming months. Near-term, it is a frontrunner for at least three jobs worth a combined RM680 million — Glenmarie Cove, The Lights reclamation works and more construction materials (supply and delivery) contracts in Singapore. We have assumed new contracts of RM650 million to RM800 million for FY11F/13F (FY10: RM77 million).
Valuations are a steal at FY11F/13F PERs of five to eight times against robust earnings CAGR of 41%, return on equities of 26% to 27% and FY11F net gearing of only 11%. Further valuation support should come from its planned dividend policy of 30% translating into attractive FY12F/13F yields of 6% to 8% during this period. — AmResearch, Dec 30
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