Investment Highlights

• We maintain BUY on Lagenda Properties (Lagenda) with a lower fair value (FV) of RM1.64/share from RM1.82/share. Our FV is based on a higher discount rate of 30% (from 20% previously) to its RNAV (Exhibit 4), and a 3% premium to reflect its 4-star ESG rating (Exhibit 5).

• Our higher discount rate stems from the lowering of FY22F/FY23F/FY24F core net profit (CNP) by 24%/13%/18% after taking into account the slower pace of new launches in FY22F-23F with the expectation of a potential deferral in the regulatory approval process for new projects, particularly for its new township outside of Perak.

• Lagenda’s 9MFY22 CNP of RM125mil was below expectations, making up 54% of our FY22F earnings and 56% of consensus.

• The variance was mainly due to higher upfront cost incurred for its upcoming projects outside of Perak, coupled with an absence of new launches in 3QFY22.

• Management is still committed to launch 2.7k units of properties in 4QFY22F which involve the projects in Sungai Petani (1,000 units), Bandar Baru Setia Awan Perdana (900 units) and Lagenda Teluk Intan (800 units).

• YoY, Lagenda’s 9MFY22 revenue improved 8% to RM632mil, as a result of higher sales of its completed inventories, coupled with pre-existing sales recognition for its ongoing project.

• However, 9MFY22 CNP dropped 13% YoY due to upfront costs incurred in preparation for multi-state project launches in the coming quarters and a provision for prosperity tax of RM4.8mil.
  In addition, the lower CNP was caused by the change in sales mix in favour of its smaller-scale projects (mainly from Lagenda Tropika in Tapah), which carried a lower profit margin due to lack of economies of scale.

• QoQ, Lagenda’s 3QFY22 revenue fell 30% while CNP declined 44%. This was mainly due to a weaker sales conversion from completed units as compared to 2QFY22, coupled with a prosperity tax provision.

• Lagenda registered 9MFY22 new sales of RM553mil (+12% YoY), attaining 61% of its FY22F sales target of RM900mil (Exhibit 2). Given that all its 2HFY22 planned launches are scheduled to be launched in 4QFY22, we view that it would be tough for Lagenda to meet its FY22F sales target.

• The group has secured RM331mil bookings as at 30 September 2022, and remains focused on converting these into sales.

• As at end-September 2022, unbilled sales stood at RM654mil (+11% YoY, +3% QoQ), representing a cover ratio of 0.6x FY23F revenue (Exhibit 2). Driven by the fast turnaround of its projects (2 to 2.5 years), we expect its unbilled sales will mostly be recognised in FY23F.

• Lagenda also announced the adoption of a dividend policy, with a payout ratio of not less than 25% of its consolidated profit after tax and minority interest, which will be effective in FY22.

• We continue to like Lagenda due to 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.

• The stock currently trades at a compelling FY23F PE of 4x vs. the industry average of 9x while FY23F dividend yields are attractive at 6%.

• 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 - 22 Nov 2022