HIL is acquiring a company that owns 7.4 acres of land in Kota Kemuning, Klang, from related parties for RM46m cash. The land has been earmarked for a residential project with a total GDV of RM416m. We believe HIL is getting a fairly good deal here. We raise our FY24F net profit by 28%, lift our TP by 12% to RM0.87 (from RM0.78) but maintain our UNDERPERFORM call.

A new property project in Klang. HIL is acquiring Broadwise Corporation Sdn Bhd (BCS) for RM46m from related parties comprising Puan Sri Catherine Yeoh Eng Neo (wife of HIL Industries executive chairman Tan Sri Ng Boon Thong, who is also a major shareholder of HIL Industries and BCS), Datuk Milton Norman Ng Kwee Leong (son of Tan Sri Ng Boon Thong) and Konsep Kekal Sdn Bhd (Datuk Milton is the director of the company). The proposed acquisition is expected to be completed by 1QCY24.

BSC owns 7.4 acres of land in Kota Kemuning, Klang, which has been earmarked for a residential development project known as Residensi Rimbun Amverton 2 comprising two 21-storey blocks with 630 condominium units and 25 shop units with a total GDV of RM416m.

Valuation. BCS had a debt of RM162k and adjusted net asset of RM46.6m as of 30 June 2023. At RM46m, this represents a discount of RM0.6m of the adjusted net asset of BCS, translating to RM145 psf for its land. A quick online check on listings shows that asking prices for comparable land surrounding the area range between RM155 psf and RM518 psf. Meanwhile, independent valuer Weise International Property Consultants Sdn Bhd values the land at RM62m or RM192 psf. We believe HIL is getting a fairly good deal here.

Impact on earnings and gearing. The GDP of Residensi Rimbun Amverton 2 is estimated at RM132.7m, translating to a gross profit margin of 32% based on a GDV of RM416m. Assuming completion in four years, the project will increase our discounted RNAV by 31.8% to RM131.1m. Postacquisition, HIL will still be in a net cash position of RM84.8m. The new project will raise HIL’s total GDV to RM887.5m.

Forecasts. We raise FY24F net profit forecast by 28% to reflect the initial 10% contribution of Residensi Rimbun Amverton 2.

We also raise our SoP-derived TP by 11.5% to RM0.87 from RM0.78 to reflect the contribution of Residensi Rimbun Amverton 2 (see Page 2). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see page 4).

Outlook. We believe HIL’s manufacturing division will continue to do well, underpinned by strong orders for auto parts with robust demand for new car models, i.e. Perodua Axia and Alza, upcoming models i.e. Perodua D66b and possibly with the addition of Proton X90 (which may have an even higher localisation rate). Its auto part order backlogs currently range from two to six months, depending on customers. However, we are mindful of HIL inherently having little bargaining power with its customers, i.e. large auto makers. This puts it in a precarious situation on a rising cost environment. Also, from the standpoint of equity investors, they have better proxy to the booming local auto market via significantly larger and more liquid auto makers/distributors. Meanwhile, we are cautious on the outlook for the property sector given the elevated mortgage rates while property lending by banks remains restricted. Consumers may also postpone property purchases amidst high inflation that eats into their disposable incomes. Maintain UNDERPERFORM.

Source: Kenanga Research - 13 Oct 2023