Investment Highlights

• We maintain BUY on Lagenda Properties (Lagenda) with a lower fair value (FV) of RM1.86/share from RM1.88/share. Our FV is based on a 20% discount to its RNAV (Exhibit 4), and a 3% premium to reflect its 4-star ESG rating (Exhibit 5).

• The lower valuation stems from a 2.2x increase in net debt. Despite the jump in net debt, the company’s net gearing ratio remains healthy at 0.05x.

• Lagenda’s 1HFY22 core net profit (CNP) of RM97mil made up 41% of both our and consensus’ FY22F earnings. We deem 1HFY22 earnings to be within expectation in view of the substantive new sales ahead to be derived from its upcoming newly launched projects with a total gross development value (GDV) of RM300mil–400mil in 2HFY22F (Exhibit 3).

• In 2QFY22, Lagenda launched over 3,000 units of landed properties comprising largely terrace houses with a GDV of RM600mil–700mil. The projects launched are mainly in its existing township development in Perak, Bandar Baru Setia Awan Perdana (BBSAP) 4A, Lagenda Teluk Intan (LTI) 3A and Lagenda Tropika.

• We understand from management that Lagenda has begun construction for BBSAP 4A and Lagenda Tropika in 2QFY22. Driven by the fast turnaround of its projects (2 to 2.5 years), we anticipate that 10–15% of the sales of 2QFY22 property launches will be recognised in FY22F.

• With stronger new sales and aggressive new launches anticipated in 2HFY22F, our revenue estimate of RM1.1bil remains on track. Hence, we make no changes to our earnings forecast.

• YoY, Lagenda’s 1HFY22 revenue improved 13% to RM451mil, thanks to the higher sales of its completed inventories, coupled with pre-existing sales recognition for its ongoing project. However, 1HFY22 CNP dropped 1% YoY due to the decline in gross profit margin (GPM) to 35% from 39% in 1HFY21.

• This was mainly attributed by the increase in sales of its smaller-scale projects (mainly from Lagenda Tropika in Tapah), which carried a lower profit margin due to lack of economies of scale. Nevertheless, we expect that its 2HFY22F GPM to normalise to 38%–39% from substantive property launches within its existing matured township in Perak which have higher profit margins. 
  In addition, Lagenda’s 1HFY22 administrative expenses were 2x YoY higher, mainly attributed to higher employee expenses and the recognition of one-off stamp duty expenses on revolving facilities.
• QoQ, Lagenda’s 2QFY22 revenue expanded 34% while CNP increased 7%. The stronger revenue was offset by the higher administrative expenses (+70% QoQ) and decline in GPM (to 35% from 43% in 1QFY22) due to higher sales from its low margin smaller-scale projects, thus led to lower growth in CNP.
• Lagenda registered 1HFY22 new sales of RM356mil (vs. RM295mil in 1HFY21), attaining 40% of its FY22F sales target of RM900mil (Exhibit 2). 2QFY22 sales were mainly derived from BBSAP in Sitiawan, LTI in Teluk Intan and Lagenda Tropika in Tapah.

• As at end-June 2022, unbilled sales stood at RM634mil (+13% YoY, +5% QoQ), representing a cover ratio of 0.6x of FY22F revenue (Exhibit 2). It will mostly be recognised this year.

• Lagenda declared its first interim gross dividend of 3.0 sen/share in 2QFY22, which represented a dividend payout ratio of 26%. As management guided a dividend payout ratio of 25%–30%, we lowered our forecasted dividend payout ratio for FY22F-24F to 26% from 30% to reflect the more prudent dividend payout.

• The stock currently trades at a compelling FY23F PE of 4x vs. the industry average of 9x while FY23F dividend yields are attractive at 7%.

• We continue to like Lagenda due to:
  (i) its FY22F earnings growth of 20%, backed by growing unbilled sales and substantive new sales from upcoming projects (Exhibit 3);
  (ii) the company’s niche in the underserved landed affordable housing development in second-tier states with a large population of the 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 from higher building costs.

Source: AmInvest Research - 23 Aug 2022