Investment Highlights

• We maintain BUY on Lagenda Properties (Lagenda) with a lower fair value (FV) of RM1.79/share (from RM1.81/share previously). Our FV is based on a discount rate of 30% to our RNAV (Exhibit 5), and a 3% premium to reflect its 4-star ESG rating (Exhibit 6).

• The FV implies an FY24F PE of 8x, at parity to the current average of smaller cap property stocks.

• The lower FV stems from the lowering of FY23F/FY24F/FY25F core net profit (CNP) by 22%/16%/16% after accounting for slower-than-expected progress billings owing to delayed construction progress, resulting in the possible deferment of launches. We expect that Lagenda to push the majority of its FY23F launches to 4QFY23 as opposed to our earlier assumption in 2Q-3QFY23.

• Lagenda’s 1HFY23 core net profit (CNP) of RM68mil came in below expectation, making up 33% of our FY23F earnings.

• The variance to our forecast was mainly due to lower-thanexpected revenue as a result of slower construction progress experienced during 1HFY23.

• We understand that Lagenda is currently transitioning from traditional construction methods to industrialised building systems (IBS) for its recently launched projects in Bandar Baru Setia Awan Perdana (BBSAP), Lagenda Teluk Intan (LTI) and Kedah Darulaman. This transition will temporarily lead to slower construction pace in 1HFY23.

• Nevertheless, we believe that construction progress will see a gradual improvement moving forward, driven by the full implementation of IBS in these projects. Hence, Lagenda’s revenue and earnings are expected to improve in 2HFY23 to catch up from a slow 1HFY23.

• YoY, Lagenda’s 1HFY23 revenue fell 16%, mainly due to lower revenue recognition from its newly-launched projects in BBSAP, LTI and Kedah Darulaman. These projects are still in the early stages of construction progress.

• Meanwhile, Lagenda’s 1HFY23 CNP dropped 30% YoY, mainly attributable to the decline in revenue contribution from higher margin projects in BBSAP and LTI. The portion of revenue recognised from these higher margin projects was down to 48% in 1HFY23 from 63% in 1HFY22.

• QoQ, Lagenda’s 2QFY23 revenue grew 9%, primarily attributed to higher sales conversion from booking, particularly from projects in Kedah Darulaman. However, its CNP fell 4% QoQ given the higher administrative expenses and lower revenue contribution from higher margin projects in BBSAP and LTI (45% in 2QFY23 vs. 50% in 1QFY23).

• In 1HFY23, Lagenda’s new sales rose 42% YoY to RM507mil, attaining 56% of its FY23F sales target of RM900mil (Exhibit 2). We gather that 48% of its 1HFY23 sales were driven by the conversion of bookings in Kedah Darulaman Lagenda. Notably, Darulaman Lagenda has achieved an impressive take-up rate of 99% as at end-June 2023.

• The group has secured lower outstanding bookings of RM348mil (-20% QoQ) as at 30 June 2023 due to increased sales conversion and absence of launches in 2QFY23. We believe that the bulk of its booking will be converted to sales because the major buyer group comprising public servants typically have a higher sales conversion ratio of 90%.

• With no launches in 2QFY23, Lagenda’s 1HFY23 launches of RM347mil (-50% YoY) were only 23% of its FY23F targeted launch of RM1.5bil. Management alluded that the majority of planned launches will take place in 4QFY23, with a primary focus on LTI, Lagenda Tapah and its new township in Mersing, Johor (Exhibit 3).

• As at end-June 2023, unbilled sales rose to RM811mil (+28% YoY, +4% QoQ), representing a cover ratio of 0.9x FY23F revenue (Exhibit 2). Driven by the fast turnaround of projects (2 to 2.5 years) and adoption of IBS in its newer projects, we expect Lagenda’s unbilled sales to be mostly recognised in FY23F and FY24F.

• Lagenda declared its first interim dividend per share of 3.0 sen (flattish YoY) in 2QFY23, representing a 12-month trailing dividend yield of 5.2%.

• We continue to like Lagenda due to the company’s niche in underserved landed affordable housing developments in second-tier states with a large population of B40 and M40 income groups.

• The stock currently trades at a compelling FY24F PE of 5x vs. the industry average of 11x while dividend yields are attractive at 6%.

Source: AmInvest Research - 22 Aug 2023