Lian Beng - Share buyback 1st day 21/5/2015

The last time the company did a share buyback (Nov 2014), the share price went from 55 to 65 cents.

UOB Kay Hian initiated this morning with a TP of $0.725.

MONEY TALK LIAN BENG GROUP LTD (LBG SP)

Undervalued Stock With A Rising Recurring Income

We initiate coverage on Lian Beng with a BUY and SOTP target price of S$0.725, representing a 39.4% upside. Lian Beng has nearly S$90m of unrecognised development profits that will be progressively recognised from FY15-18, setting the profit base as its recurring income grows. We forecast Lian Beng&rsquo s core profit to grow at FY14-17 CAGR of 8.3%, driven primarily by highly recurring rental income from investment properties such as the Jalan Papan workers&rsquo dormitory. Excluding development profits, Lian Beng is currently trading at 7.8x core FY15F PE that is set to compress to only 6.1x FY17F PE. Of note, 40% of core profit will be derived from highly recurring rental income by FY17F deeming current valuations too attractive to ignore.

INVESTMENT HIGHLIGHTS

 Initiate coverage with a BUY and SOTP target price of S$0.725. With a FY16F dividend yield of 4.7%, a growing recurring income primarily driven by rental from investment properties and nearly S$90m of development profits yet to be recognised, we believe Lian Beng offers good value at current price levels. Lian Beng is currently trading at 35% discount to its net asset value of S$0.806 (where 55% of its assets are in the form of cash, investment securities and properties)

 Bulging property development portfolio with locked in sales. Currently, Lian Beng has stakes in 10 property development and investment projects, with nearly S$90m of development profit that will be progressively recognised from FY15-18. With the exception of Floraville and Hexacube, most of the development projects have locked in sales of more than 78%. (Profit from the Floraville and Hexacube projects represents only 7% of the development profit yet to be recognised.)  Building its recurring income and strong cash flow. We estimate income from the supply of RMC, leasing of equipment and investment properties may grow from S$13m in FY15 to S$25m in FY17-18, driven primarily by high recurring rental income as various investment properties (eg workers&rsquo dormitory at Jalan Papan) come on stream. Rental income from investment properties is estimated to form 40% of core profit by FY17-18. We have not factored in contribution from the supply of asphalt and as such, this may also provide further upside to our earnings forecasts.

 Deep potential value waiting to be unlocked. We note management has tried to spin off its construction-related businesses (leasing of equipment, supply of RMC) in 2011. While the plan was abandoned due to unfavourable market conditions, we believe there is potential value waiting to be unlocked from the construction-related segment and this may be a potential price catalyst. We also do not dismiss the possibility of Lian Beng monetising some of its investment properties if the price is right, such as in the case of its hotel investment at Middle Road.

 Consistent dividend payout. Lian Beng paid out 9-18% of its earnings as dividends in the last four financial years. For FY16, we expect Lian Beng to pay a dividend of S$0.024/share, based on a 15% payout ratio, translating into a dividend yield of 4.7%. Share price may also be supported if Lian Beng resumes its share buyback programme. In Oct-Dec 14, Lian Beng repurchased 19.6m shares (about 3.7% of total outstanding shares) at S$0.60-0.68/share.