Monday, April 04, 2011

Benalec, This Is My Playground

The recent listing of Benalec brings forth a unique company onto the board. Many are still to discover just how unique their business is. Scale is important, which is what they have. Track record is solid. The niche industry is expanding rapidly and they will be a major beneficiary. This is one stock to buy and hold for 6-12 months without much worry. If Buffett is here, he would buy and hold this for sure, it has an entrenched position, relatively high barriers to entry, track record, and able to extract high margins owing to their 'one-stop business model'. For a niche industry that is going to be worth RM3bn a year and growing at a rapid pace owing to the evolving demands of the related industries, Benalec is a solid exposure to have.

Benalec is involved in marine construction which include:
(i) land reclamation & dredging
(ii) rock revetment, shore protection, breakwater construction & beach nourishment
(iii) marine pilling & structures.

It owns a fleet of 91 vessels to support its marine engineering works and for 3rd party charters in Singapore. For land reclamation works, Benalec employs a unique model whereby it also accepts part of the reclaimed land as payment. This enables the job to be awarded even if the client is tight on cash as no initial outlay is needed (i.e. Benalec provides indirect financing).

Reaping high margins. At 30-50% for FY08-10, Benalec’s gross construction margins arearguably one of the industry’s highest. Larger contractors such as IJM, Gamuda and WCT have their margins at 4-12%. Benalec’s above industry margins are due to:
(i) the lucrative nature of marine engineering vs civil works
(ii) owning its own vessel fleet with in-house repair and maintenance
(iii) minimal subcontracting at 18% of project value
(iv) ability to adapt to various environments via innovative construction methods to cut costs.

Its main raw materials are diesel (for its vessels) and sand (for reclamation). The Malaysian marine construction industry is estimated at RM2.87bn from 2006-2009 which grew at an 18.8% CAGR. Frost & Sullivan estimates another RM60bn in marine construction industry revenue within the next 10 years. Some 1500 hectares of land in Penang will be reclaimed by 2020 costing RM6.5bn. The Melaka State Govt has approved land reclamation activities estimated at M6.3bn. Various sites in Iskandar have also been earmarked for reclamation to facilitate waterfront developments and dredging for port expansion.

Benalec is the main beneficiary of more marine construction jobs given its 17.9% market share in the industry. We can expect most of its contract flows to come from Melaka, Penang and Johor. Aside from the domestic front, there should be a constant flow from Singapore, whereby its sister company Oceanlec has won a building material supply contract. Oceanlec has signed an undertaking to (i) not compete for jobs that Benalec is bidding and (ii) provide Benalec the first right of refusal as subcontractor for jobs that Benalec is not licensed to directly bid for.

OSK: At the core earnings level (i.e. ex land disposal gains), we expect growth rates of 38%, 48% and 30% for FY11-13 respectively. This implies a significant 3 year CAGRf of 38%. Underpinning this strong earnings growth is the kick start of the RM468m reclamation works for 720 acres at Mukim Klebang, Melaka.

Benalec Holdings Bhd announced two weeks back that the group had on 21 March 2011 accepted the letter of award for a reclamation contract in Klang. The contract was awarded to wholly owned Benalec Sdn Bhd by COMTRAC Sdn Bhd on behalf of Glenmarie Cove Development Sdn Bhd - a unit of DRB-HIcom Bhd. Glenmarie Cove is a low-density riverfront residential resort development (~200 acres) that is located at Teluk Gong, Klang. The contract value is RM37mil, with a work programme of 14 months – i.e. until 17 May 2012. The project entails earthworks, river protection works as well as other associated works at Precinct 4 of the development. This, in turn, should put the group in a position to secure additional reclamation works scheduled within the area. This represents the second contract that the group has successfully clinched in a week following the Kota Laksamana project in Malacca announced in early March.

Arab Research: We re-iterate our BUY recommendation on Benalec with a fair value of RM1.90/share – based on the sum-of-parts methodology. Benalec is trading at an undemanding FY11F-13F PEs of only 6x-9x against solid earnings CAGR of 41% and FY11F net gearing of 11%. We believe this is unjustified, given the group’s deepening progression as an integrated marine engineering specialist – with access to prime seafront land via its unique business

I like its pick up in volume and price over the last 2 weeks. Once past RM1.50, I expect this to move up very fast.

At present, the order book size is c. RM360m for marine construction contract while eyeing for at least 5 states in Malaysia to ramp up its order book with collectively valued at c. RM1b. Due to its niche position in the market, we see Benalec will be the main beneficiary for land reclamation works in Malaysia and Singapore.

Catalysts: I expect more local funds to start establishing a substantial position in the stock. I also expect more deals being secured in the weeks ahead. RM2.00 within this year should not be a problem.

NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). I may have a position in the counter already. The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

4 comments: said...

My favorite construction stock so far. However, the main concern is the ability of the company to monetize the land value, sitting around ~RM260mil. I do hope to see this company moving up the value chain, on top of what they are doing by becoming a property developer. Since, they do not experience being a developer, a JV could be an option. That way, not only they could add value to the land (another margin enhancement) but also another way to monetize the land.

AmLiange said...

I see risk in terms of its consideration for the services it provides in the form of reclaimation land. When you say "part-financing", may i ask who is financing Benalec then. Financing to Benelac comes at a cost. I am quite unsettled to know that they actually accept this form of payment as we all know cash is king. You need cash to pay salary, cash to finance work capital. Reclaimed land is not liquid and is subjective in value.

jeremy tan said...

Been buying this company since IPO. The only downside would be the prices of petrol and diesel that they heavily rely on.

gabriel said...

The Notice of Person Ceasing to be a Substantial Shareholder (Form 29C) dated 11 April 2011 was received by the Company on 12 April 2011.

Kumpulan Wang Persaraan (Diperbadankan) had disposed the following shares in open market:-
4 April 2011 - 3,000,000 ordinary shares
5 April 2011 - 812,900 ordinary shares