Investment Highlights

• We maintain BUY on Lagenda Properties (Lagenda) with a lower fair value (FV) of RM1.79/share from RM1.86/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 revised valuation stems from lower FY22F–FY24F earnings after reducing our gross profit margin (GPM) assumptions.

• We trim our FY22F/FY23F/FY24F earnings by 3%/6%/6% to reflect a 1%/2%/2% decline in GPM in view of the increased proportion of launches of its new townships in Johor and Kedah in FY23F–24F. We expect the early phase of projects in new townships to carry lower margins than that of matured townships.

• Lagenda held an analyst briefing yesterday to shed more light on its 2QFY22 results. Here are the key takeaways:
  (i) Sales of its property launches in 1HFY22 were encouraging with take-up rates of 50% in BBSAP 4A and 35% in both Lagenda Teluk Intan (LTI) 3A and Lagenda Tropika (Tapah) (Exhibit 2).
  (ii) In 2QFY22, Lagenda launched 3,547 units of landed properties comprising largely terraced houses in Perak with a gross development value of RM778mil, with the main contributors from Lagenda Tropika, LTI and BBSAP (Exhibit 1).
  (iii) In 2HFY22F, Lagenda plans to launch >2.8K units of landed properties in both Kedah and Perak (Exhibit 3). We believe that Lagenda has deferred the official launching of the Mersing township to 1HFY23 from 4QFY22 due to delays in regulatory processes. Management is still committed to launch >6K units of properties in FY22F notwithstanding the rescheduled Mersing launches. This will be compensated with more launches from its Perak township project.
  (iv) Due to economies of scale and higher pricing for the later phase of launches, the GPM from its developed township, particularly BBSAP and LTI, is higher at 40%, whereas GPM of the smaller projects in the early phase of development will be lower at 30%–35%. As a result, its 1HFY22 GPM has decreased to 35% from 39% YoY due to higher mix of property sales from its smaller-scale projects, driven largely by Lagenda Tropika in Tapah. The average selling price per unit of Lagenda Tropika was 18%–22% lower than BBSAP 4A and LTI 3A (Exhibit 1).

• With the substantive FY22F property launches within its existing matured township in Perak, we expect 2HFY22F GPM to be higher at 38%–39% compared to 1HFY22F. Nevertheless, in FY23F–24F, we have accounted for lower GPM of 36% to reflect the lower product pricing in the group’s early phase of new township development in Johor and Pahang.

• Its GPM is expected to improve gradually over the longer term after more houses are launched in the new townships as the developer adjusts upwards the pricing for later launches. Notably, the pricing for a single-story terrace house in LTI's first launch phase in 2018 was only RM149K, compared to RM180K for the most recent launches.

• 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 15%, 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 - 24 Aug 2022