This article first appeared in The Edge Financial Daily, on January 13, 2016.
Hua Yang Bhd
(Jan 12, RM1.89)
Maintain outperform with an unchanged target price (TP) of RM2.20: On Monday, Hua Yang Bhd announced that it would be acquiring Grand View Realty Sdn Bhd for a total consideration of RM75.6 million. The main rationale in acquiring Grand View Realty was to acquire the 73.2 acres (29.6ha) of freehold land adjacent to Kota Masai, Johor, owned by Grand View Realty. The purchase consideration for the land would translate into RM23.72 per sq ft (psf).
We are not surprised with Hua Yang’s land acquisition down south as management highlighted that it had been actively looking for landbanking opportunities in several locations, ie central, north and south. However, we opine that the replenishment of land bank down south as a timely move by management, as it serves as a replenishment for its existing township project, ie Taman Pulai Hijauan and Taman Pulai Indah.
The above-mentioned land that is strategically located within the vicinity of Eco Tropics, Taman Pasir Puteh, Eco Business Park 3, Sime Darby Business Park and Dover Business park would be earmarked for affordable housing township development consisting of landed residential products — cluster, semi-dee and bungalow, coupled with shop offices and the Johor affordable housing scheme with an estimated gross development value (GDV) of RM346.4 million.
In terms of land costs, we opine that they are slightly on the high side as the total purchase consideration of RM75.6 million implies a land cost to GDV ratio of 22%, which is beyond our comfortable threshold 20%. However, in terms of pricing psf the transacted price of RM23.72 psf is much lower compared with the average asking price of RM36 psf in that region. Nonetheless, we believe that Hua Yang would be able to further enhance its GDV in the future like how it managed with some of its projects — One South and Sentrio Suites. As of the second quarter ending Sept 30, 2015 (2QFY16), its net gearing remained fairly healthy at 0.32 times and we would expect its net gearing to come up to 0.56 times in FY16 ending March 31, as Hua Yang continues to embark on its landbanking ambitions.
We are still expecting management to launch approximately RM650 million worth of projects in FY16, but we do not rule out the possibilities that some of these planned launches might be pushed back again, depending on the market situation. Nonetheless, we remain certain that Hua Yang would continue to look out for more land bank in the near future, as the management is looking to beef up its existing GDV of RM4 billion to RM5 billion.
We reiterate “outperform”on Hua Yang with an unchanged TP of RM2.20, which is at a 38% discount to its disounted cash flow-driven revised net asset value at 10% weight average cost of capital of RM3.52. There are no changes to our TP of RM2.20, albeit the replenishment of GDV of RM346.4 million arising from the land acquisition, as we have previously factored in RM1 billion worth of assumptions with RM692 million remaining currently. At current levels, it is trading at an undemanding valuation of FY16E (estimate) price-earnings ratio (PER) of 4.4 times coupled with a highly attractive dividend yield at 7.0%, vis-à-vis its small- and mid-cap developer peers’ average PER of 7.9 times and dividend yield of 4.3%, respectively. Risks to our call include weaker-than-expected property sales, higher-than-expected sales and administrative costs, negative real estate policies and a tighter lending environment. — Kenanga Research, Jan 12
