Investment Highlights

• We maintain our BUY recommendation on Lagenda Properties (Lagenda) with a lower fair value (FV) of RM1.88/share after factoring in higher finance cost for the Lagenda Teluk Intan (LTI) project into our RNAV calculation. Our FV is based on a 20% discount to its RNAV (Exhibit 4), and reflect a 3% premium based on an unchanged ESG rating of 4 stars (Exhibit 5).

• We lower FY22F/FY23F/FY24F core net profit by 8%/6%/4% to incorporate higher finance cost from the increase in borrowings to fund the LTI land acquisition.

• Lagenda entered into a sale and purchase agreement with Ladang Awana (vendor) to acquire a 422-acre leasehold land situated within Mukim Durian Sebatang, Daerah Hilir Perak, Perak for RM92mil (Exhibit 1). As the gross development value (GDV) of the newly acquired land has already been factored in earlier, we make no changes to our remaining GDV and sales assumptions in our RNAV calculation.

• The acquisition will be funded by the combination of bank borrowings and internally generated funds in equal proportion.

• As at March 2022, Lagenda has RM194mil in cash with a net gearing ratio of 0.05x. We expect the group’s net gearing ratio to increase to 0.15x post-acquisition with 50% of the purchase consideration of the land funded by bank borrowings. Nevertheless, we foresee sales proceeds with a fast turnaround of its project of 2 to 2.5 years to pare down its net gearing ratio.

• The acquisition price at RM5.00 psf implies a cost-to-GDV ratio of 10%, which is below the industry’s average land cost-to-GDV ratio of 15–20%. While there are not many identical transactions within the area recently, the asking price for residential land surrounding the area ranges from RM7 psf to RM7.50 psf. Hence, we deem the acquisition price to be fair after taking into account the conversion premium in converting the land from agricultural to residential title.

• The land acquisition is expected to be completed by 1HFY23. We estimate that the project, which will have an estimated GDV of RM920mil, could potentially contribute up to 12% of Lagenda’s earnings from FY24F to FY27F.

• The subject land consists of 42 block titles of development and agricultural land, adjacent to LTI, which is Lagenda’s master planned ongoing affordable township development featuring commercial and residential developments together with other supporting public amenities, infrastructure, recreation and open areas.

• The township is strategically located about 4km off the West Coast Expressway to its west. The Teluk Intan town centre is located 7km due north of LTI.

• Phases 1 and 2 of LTI which were launched in FY19–20 have shown a strong take-up rate of over 99% as at end-June 2022. Meanwhile, Phase 3A of LTI Intan, which was launched in April 2022, has achieved a take-up rate of 30% up to the end of June 2022. To sustain the momentum, Lagenda plans to launch Phase 3B of LTI on its existing land in 4QFY22.

• For the newly acquired land, Lagenda has obtained planning approval to develop Phase 4 of LTI on 232 acres of land (details in Exhibit 2) with the remaining plots measuring 190 acres maintained as agricultural land. Lagenda currently does not have any planning approvals on the 190-acre land but the group intends to seek approvals in the future to further expand its existing township. Meanwhile, Lagenda is in negotiations with the relevant authority to convert the land from agriculture to residential titles.

• This land comes with a restriction that it cannot be transferred, leased, charged or encumbered without the approval of the Menteri Besar of Perak. The proposed acquisition is subject to shareholders’ approvals at the forthcoming extraordinary general meeting in October 2022.

• Overall, we are positive on the acquisition which will help sustain Lagenda’s property earnings over the medium term. Lagenda’s FY23F dividend yield of 7% is attractive against the 10-year MGS yield of 4%.

• We continue to like Lagenda due to:
  (i) its FY22F earnings growth of 20%, backed by growing unbilled sales and substantive new sales from the upcoming projects identified in Exhibit 3;
  (ii) the company’s niche in the underserved landed affordable housing development in second-tier states with a large population of B40 and M40 income groups; and
  (iii) its focus on ESG (via installation of PV solar system in homes) is a step in the right direction.

• Risks to our call are:
  (i) weaker-than-expected property sales;
  (ii) slower-than-expected progress billings due to Covid-19 related disruptions; and
  (iii) lower-than-expected margins.

Source: AmInvest Research - 10 Aug 2022