Investment Highlights

• We maintain BUY on Lagenda Properties (Lagenda) with a higher fair value (FV) of RM1.85/share (from RM1.79/share previously) after accounting for contribution from the new Kota Tinggi project into our RNAV calculation. Our FV is based on an unchanged discount rate of 30% to our RNAV (Exhibit 4) and a 3% premium to reflect its 4-star ESG rating (Exhibit 5).

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

• Lagenda’s wholly-owned Opti Vega entered into a development rights agreement (DRA) with Intact Corporate Approach. The DRA involves the development of 4 parcels of land and 164 lots of adjoining vacant lands measuring 112 acres in Kota Tinggi, Johor for RM85mil cash.

• While maintaining FY23F earnings, we raise FY24F/FY25F core net profit by 2%/4% to factor in the earnings contribution from this project.

• The land size is calculated on an initial net basis after factoring out an area of 36 acres that has been surrendered to the state government for public utilities and major infrastructure.

• The estimated gross development value (GDV) of Kota Tinggi land is RM576mil. The project will be developed over a span of 3-4 years.

• Based on the preliminary development plan, the Kota Tinggi land is slated for a mixed development with a proposed GDV allocation of 70% for landed residential and 30% for commercial units.

• The residential component (1,200 units) comprises double-storey terrace house with an indicative built-up area of 20’ x 70’.

• The initial selling price for double-storey terrace house at RM330K-RM350K or RM236 psf-RM250 psf is reasonable compared to Scientex’s projects in Kota Tinggi, which are priced in the range of RM257 psfRM385 psf.

• The commercial component consists of double-storey shop offices (300 units) with a built-up area of 2,500 sqft and prices ranging from RM500K-RM600K.

• We expect the proposed DRA to be completed in early 2QFY24.

• Assuming the cost for development right to be the land cost, the land price translates to RM17.50 psf and implies a land cost-to-GDV ratio of 15%, which is within the industry’s average land cost-to-GDV ratio of 15%-20%.

• We deem the land to be reasonably priced, despite a 20% premium compared to Crescendo’s acquisition of agricultural land in Kota Tinggi in 2023, which was priced at RM14.50 psf. The premium is justified given certain parcels of the land already having development and building plans in place (Exhibit 2). As a result, Lagenda can promptly initiate project launch and sales within a short period of time, estimated to occur within 6 months from the execution of the DRA.

• Lagenda plans to launch 50% of the GDV for the Kota Tinggi project in the middle of FY24, with the remaining 50% scheduled for launch within the next 6 to 12 months after the launch of first phase.

• We assume the payment of development right of RM85mil to be mainly funded by cash (70%) with the remainder in borrowings (30%) based on management guidance. Following the completion of payment for development right, we expect the group’s FY24F net gearing ratio to increase to 0.11x from 0.06x.

• The land is strategically located just 15km from Kulai town center, 27km from Senai Airport and only 8km from Lagenda’s previously acquired Kulai land (Exhibit 1).

• The gross margin for Kota Tinggi project is expected to be in the range of 25%-30%, which is comparatively lower than the 35%-40% range observed in Lagenda’s existing matured projects in Setiawan and Teluk Intan.

• Despite this, our outlook remains positive for the project due to the swift turnaround prospects of the land, leading to increased cash conversion and reduced finance and holding costs. Moreover, the development of the Kota Tinggi project serves as a strategic move to establish Lagenda's reputation in Johor swiftly, particularly before the planned launches of its flagship township in Kulai in late 2024 or early 2025.

• Furthermore, Lagenda has obtained an exclusive option to develop additional parcels of land measuring 139 acres (on an initial net basis after excluding 93 acres surrendered to the state government) at RM99.6mil. The additional lands are adjacent to the Kota Tinggi land. The option is set to expire on 10 January 2026, 2 years from the date of the DRA.

• 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 5.6x vs. the industry average of 11x while dividend yields are attractive at 5.5%.

Source: AmInvest Research - 11 Jan 2024