Investment Highlights

• We maintain BUY on Lagenda Properties (Lagenda) with a higher fair value (FV) of RM1.82/share (from RM1.64/share previously) after factoring in future earnings contribution from the development of the recently acquired Kulai land. Our FV is based on a 30% discount to its RNAV and 3% premium to reflect its 4- star ESG rating (Exhibits 7 & 8).

• While maintaining FY23F earnings, we lower FY24F core net profit by 3% to incorporate higher finance cost from the increase in borrowings to fund the Kulai land acquisition. Notably, 90% of the purchase consideration (largely funded by borrowings) is expected to be settled by 1QFY24 (Exhibit 3).

• Lagenda kicked off its first land deal in 2023 with a proposed acquisition of 2 parcels of freehold vacant land totaling 1,075 acres in Kulai, Johor for RM398mil cash (37% of market cap) from PNB’s wholly-owned Seriemas Development (Exhibits 1 & 2).

• The acquisition will be funded by a combination of bank borrowings (80%) and internally generated funds (20%). Post-acquisition, we expect the group’s FY24F net gearing ratio to increase to 0.05x from a net cash position.

• The proposed acquisition is subject to the approvals being obtained from the shareholders of Lagenda, Estate Land Board and Economic Planning Unit (Exhibit 4).

• Upon completion of the acquisition, Lagenda’s accumulated landbank will substantively increase by 29% to 4,801 acres from 3,726 acres.

• The acquisition price translates to RM8.50 psf and implies a cost-to-GDV ratio of 10%, which is below the industry’s average land cost-to-GDV ratio of 15%–20%.

• Based on our channel checks, the asking price for agricultural lands surrounding the areas ranges from RM10 psf to RM16 psf. Hence, we deem the acquisition price to be fair.

• The Kulai township is planned as a mixed-use development comprising of 12,000 residential units accompanied by commercial portions. Hence, Lagenda is required to pay for the conversion premium (15% of land value) for the change of land use from agricultural to residential.

• Prior to receiving the planning approval, we expect that the layout and property types of its residential units will be similar to those of its existing townships, which are single-storey terrace and semi-D cluster houses.

• Due to the higher B40 maximum affordability level in Johor as compared to Perak and Kedah (Exhibit 5), we believe that the average selling price per residential unit in Kulai township will be higher than its existing townships in these 2 states.

• Based on the estimated GDV of RM4bil, the average selling price is anticipated to be RM300K/unit.

• The township in Johor is scheduled to debut in FY25F. We estimate that the project could potentially contribute up to 20% of Lagenda’s earnings from FY25F to FY32F.

• Johor has the highest residential overhang units in Malaysia with properties priced at <RM300K accounting for only 4% of the overhang residential units as at end 3QFY22. Meanwhile, residential properties priced between RM300K and RM500K made up of 8% of total unsold completed units.

• From 4QFY21 to 3QFY22, there were only 760 units of affordable housing launched vs. 12,800 transacted units. We believe that the lack of affordable house supply in Johor provides opportunity for Lagenda to penetrate the underserved B40s in Johor with competitive pricing strategies.

• Kulai land is strategically located within the proximity of multiple industrial parks and the region’s economic hub of Johor Bahru. It is only 18km away from Senai International Airport with its associated logistics and industrial hubs and 39km away from Johor Bahru city centre.

• Overall, we are positive on the acquisition which is envisaged to help sustain Lagenda’s property earnings over the medium and long term. The stock currently trades at a compelling FY24F PE of 4x vs. the industry average of 9x while FY24F dividend yields are attractive at 6%.

• We also 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.

Source: AmInvest Research - 14 Feb 2023