• Impact from M-Space TOP
• Target for S$20m recurring income
• Downgrade to HOLD

M-Space boost within expectations

3QFY14 PATMI came in at S$33.6m – up 178% YoY – mostly due to a boost from the TOP of M-space, a 55%-owned industrial development. This is within expectations, and 9MFY14 PATMI now makes up 78% of our FY14 forecast. Topline for the quarter is S$257.5m, up 122% similarly from MSpace’s impact. The construction order book currently stands at a healthy S$1.1b as at end Feb-14. Looking ahead to FY15, we expect contributions from key development projects, Spottiswoode Suites and Midtown Residences, to flow in as progress recognition begins.

Target: S$20m recurring income per annum

Management targets to grow its recurring income base to ~S$20m p.a. (est. 31% of FY15F PATMI) through its ready-mix concrete, asphalt and dormitory businesses. Already we have seen the ready-mix concrete business contribute S$5.8m last year and also expect its new asphalt pre-mix plant, in which it has a 40% stake, to be operational by end 2014. In addition, its 55%-owned Mandai dormitory is anticipated to contribute ~S$7m in earnings every year. We believe this strategic direction is sound, given growing uncertainties in the private construction space as we enter a housing downturn.

Fairly valued here; downgrade to HOLD

After updating for latest datapoints and acquisitions, our FV estimate increases to S$0.65 from S$0.58 previously. We value Lian Beng using a sum of the parts (SOTP) methodology in line with peers: 1) for its construction/materials-related segment, we apply a 5x PE to FY14/15F blended earnings and, 2) for its real estate development segment, we apply a 30% RNAV discount. Note that, just two months ago, we had reiterated Lian Beng (at S$0.52) as a buy in our special situation piece “Anticipating Earnings Spikes” but now see the shares to be fairly valued after appreciating 28% after. That said, its price volatility has spiked over the last weeks; while its share price could run ahead of fundamentals in the near-term, we would refrain from adding exposure here. Downgrade to HOLD.

Source: OCBC Research - 15 Apr 2014