Hua Yang Bhd
(April 20, RM1.07)
Upgrade to outperform with an increased target price of RM1.31: This week, Hua Yang Bhd announced that it will be acquiring another 20.12% stake in Magna Prima Bhd (Magna) for a cash consideration of RM123.75 million, indicating RM1.85 per share that raises its stake to 30.96%.

The acquisition will be funded through Hua Yang’s internally generated funds, with the exercise expected to be completed by second quarter of 2017 should there be no objections from its extraordinary general meeting.

Following the acquisition on the additional 20.12% stake, we expect its net gearing for the first nine months of financial year 2017 of 0.32 times to increase to 0.66 times, which still falls within management’s comfort level. However, there will not be any mandatory general offer for Magna from Hua Yang as it is still below 33%.

This allows Hua Yang to extend its reach in the Klang Valley by tapping into the potential of Magna’s strategic land bank, which measures about 35 acres (14ha) with a potential gross development value of RM1.6 billion which is located in Shah Alam. That said, they are also able to come up with a collaborative agreement to engage similar resources, while future identified land bank would be jointly developed on a 50:50 basis.

Hua Yang’s move on Magna has further reinforced our view that there would not be any land banking activities in the near term with dividends to be kept at a minimal level as highlighted.

However, we are mildly positive about the deal as it will give them the opportunity to replenish their land bank in the Klang Valley by undertaking the development of Magna’s land bank located at KLCC (2.6 acres), and Seksyen 15, Shah Alam (20 acres).

We do not rule out any potential mergers and acquisitions (M&A) play in the future. — Kenanga Research, April 20