S&P raises Malton to strong buy

Raised to strong buy, target price 50 sen: We raise Malton’s recommendation to strong buy (from buy) and lift our 12-month target price to 50 sen (from 49 sen).

We arrive at our 12-month target price by applying a target price-to-net tangible asset (P/NTA) multiple of 0.4 times (unchanged) to Malton’s prospective FY10 NTA of RM1.25 per share. We continue to ascribe a target P/NTA multiple that remains within the valuation metrics of 0.4 times-1 times for small- and mid-cap property developers within our coverage.

Our strong buy call reflects its improving earnings visibility over the next two years. This is backed by its unbilled property sales of RM400 million, stronger property development margins and the CONSTRUCTION [] start on some of its projects that will sustain its earnings growth.

Furthermore, improved earnings have lowered its prospective FY10 and FY11 PERs to 6.3 times and 5.1 times (from 17.2 times and 16.7 times) respectively, which is attractive as they are at the lower end of the 5 times-11 times price earnings ratio range of small- to medium-sized construction and property developers within our coverage.

Risks to our recommendation and target price include: (1) slower-than expected take-up rates for its future launches, which includes Phase Three of the Amaya Saujana development and its projects in Puchong, (2) profit margin compression due to higher building materials cost, and (3) failure of its construction division to secure more external contracts.

Malton’s RM400 million in unbilled property sales from the Amaya Saujana (75% sold) and the VSQ corporate suites (65% sold) developments will continue to underpin property earnings over the next two years.

We raise our FY10 and FY11 net profit estimates to RM19.4 million (from RM7.2 million) and RM24.1 million (from RM7.4 million) after imputing higher property sales on its ongoing projects. — Standard & Poor’s, Dec 4