Investment Highlights

• We maintain BUY on Lagenda Properties (Lagenda) with a higher RNAV-based fair value (FV) of RM1.98/share (from RM1.95/share previously). Our higher FV stems from a revaluation of gross development value (GDV) for Lagenda’s projects.

• Our FV is based on a discount rate of 30% to our RNAV , and a 3% premium to reflect its 4-star ESG rating .

• The FV implies an FY25F PE of 7x, 1 standard deviation above its 4-year average.

• Lagenda witnessed a decline in revenue and earnings YoY in FY23, attributed to delays in construction progress during the transition from conventional construction methods to Industrialised Building System (IBS).

• Nevertheless, with the IBS process operating at full capacity since July/August 2023, we foresee Lagenda’s construction activities to accelerate, resulting in improved YoY revenue recognition in FY24F.

• Meanwhile, Darulaman Lagenda, which accounts for 47% of total unbilled sales, is poised to enter mid-cycle development in FY24F. This phase typically yields higher revenue recognition due to accelerated construction progress following the completion of groundwork.

• Moreover, Lagenda is expected to achieve another record- breaking sales in FY24F. This surge will be driven by more aggressive launches (8,257 units with a total GDV of RM1.9bil) in FY24F, along with the debut launches of townships in Kota Tinggi, Penor, Bernam Jaya and Kulai.

• Lagenda is presently trading at a premium price-to-book- value ratio (P/BV) of 1.1x vs. its peers’ average P/BV of 0.5x- 0.6x. However, the high P/BV is supported by Lagenda’s asset-light approach and quick turnaround model.

• From an earnings perspective, Lagenda’s FY24F/FY25F PE of 6x/5x is appealing as compared to its peers’ average of 12x-15x while FY24F/FY25F dividend yields are attractive at 5%/6%. 

ANTICIPATION OF HIGHER FY24F REVENUE

• Record-breaking sales in FY23 to FY23

In FY23, Lagenda achieved a landmark achievement with record-breaking sales totaling RM1bil (+32% YoY). This significant growth was primarily driven by its matured township in Perak, which contributed 56% to total sales. Additionally, the newly-developed township in Kedah made a substantial sales contribution of 41%. The remaining 3% of sales were attributed to the recently-launched township in Mersing, Johor (Exhibit 1).

• Weaker YoY revenue in FY23

Despite achieving a record high in sales, Lagenda did not see a commensurate increase in revenue for FY23 (-3% YoY) due to:

1. slower pace of construction progress, and

2. newly-launched projects still in the early stages of construction progress.

•  An upturn in FY24F revenue on improving construction progress

In FY23, Lagenda was transitioning from traditional construction methods to industrialised building system (IBS). However, this transition faced delays due to the late arrival of moulds coupled with the necessity for labour training to adapt to the IBS system. This temporarily slowed down construction progress in FY23, resulting in weaker YoY revenue.

Currently, both LTI 3 and Darulaman Lagenda have fully embraced the IBS method, with the system operating at full capacity since July/August 2023. As construction activities pick up pace, we anticipate improved YoY revenue recognition in FY24F.

• Newly-launched projects reaching mid-development cycle in 2024

Generally, revenue recognition of a project peaks during the mid-cycle of development due to the ramp up of construction progress following the completion of groundwork. As Lagenda's several projects enter this mid-development phase in FY24F, we anticipate faster revenue recognition compared to FY23 when most projects were in their early stages (Exhibit 2).

• Higher progress billing from Kedah Darulaman Lagenda in FY24F

As at 31 December 2023, Lagenda had unbilled sales of RM732mil, with almost half coming from Kedah Darulaman Lagenda (Exhibit 3).

The construction period for a single-storey landed house typically takes a shorter period of 2 to 2.5 years. Lagenda launched 1,924 units of houses between October 2022 and August 2023 in Kedah Darulaman Lagenda (Exhibit 4). With the resolution of the issue regarding the transition to IBS in FY23, we expect an uptick in construction progress for Kedah Darulaman Lagenda in FY24F.

As at 31 December 2023, Kedah Darulaman Lagenda has achieved a construction progress milestone of 15%. As Kedah Darulaman Lagenda enters mid-cycle development in FY24F, we anticipate that unbilled sales from the Kedah township will be mostly recognised in FY24F.

Meanwhile, improving progress of ongoing developments in BBSAP (4A and 4B), LTI (Phase 2, 3A and 3B) and Lagenda Tropika are expected to contribute positively to FY24F revenue.

As such, we foresee Lagenda's progress billings continuing to improve as construction activities escalate in Kedah, Perak and Johor, thereby bolstering the group’s revenue and profitability.

MULTI-STATE EXPANSION IN FY24F

• Anticipating another record-breaking sales in FY24F driven by aggressive launches

In FY24F, Lagenda has set a sales target of RM1.2bil, representing a 15% increase YoY. This target is supported by aggressive FY24F launches amounting to RM1.9bil, which is 2.6x the size of the FY23 launches totalling RM762mil (Exhibit 5). 

Lagenda has currently launched projects in Perak (Setiawan, Teluk Intan & Tapah), Kedah (Sungai Petani), and Johor (Mersing). For FY24F, Lagenda intends to extend its presence to Selangor (Ulu Bernam) and Pahang (Kuantan) (Exhibit 6).

• Johor townships to contribute significantly after FY24F

Notably, Lagenda plans to ramp up launches in highly soughtafter Johor townships, specifically in Kulai, Mersing and Kota Tinggi. These launches in Johor account for 45% of Lagenda’s FY24F planned launches.

As at 31 December 2023, Lagenda's land holdings in Johor are substantial, comprising 43% of the group's total remaining gross development value (GDV) (Exhibit 10). Based on our estimates, we anticipate that the projects in Johor could potentially contribute up to 20% of Lagenda's earnings from FY25F to FY32F.

We believe that the timing of entering the Johor market is opportune. Residential properties outside of Johor Bahru, including areas like Skudai, Pulai, Pasir Gudang and Kulai may benefit from the spillover effect of rising property prices in Johor Bahru. These areas could attract Johoreans working in Johor amid increasing property prices, especially after the completion of Rapid Transit System (RTS), given the affordability of the products offered by Lagenda.

Furthermore, improved connectivity of RTS and the potential introduction of Johor light rapid transit (LRT) may help to propel developments in less matured areas and unlock values.

This is mainly because a better transportation system will help the population to disperse and find more affordable home prices that are further away from the city, catalysing increased demand for suburban areas.

According to a statement by the Johor state executive councillor, Lee Ting Han, the Johor state government has officially proposed designating the Iskandar Malaysia region as the Johor-Singapore special economic zone. Iskandar Malaysia includes Ibrahim Technopolis in Sedenak town, which is only 25km or a 30-minute drive away from Lagenda’s Kulai land.

If Sedenak becomes part of the Special Economic Zone, Lagenda is positioned to emerge as a beneficiary due to its significant exposure in Kulai and Kota Tinggi, Johor.

• Newly-launched projects in recently expanded state garnering strong interest

In Kedah, Darulaman Lagenda (launched in end-2022) has garnered an overwhelming response, boasting a 99.6% takeup rate for Phase 1 & 2 (1,413 units) and an 83% take-up rate for Phase 3A (511 units). Similarly, Lagenda Suria in Mersing (launched in end-2023) has achieved a promising take-up rate of over 95% by the end of February 2024.

The strong take-up rates of Lagenda's projects in newly expanded states indicate a strategic decision to offer suitable products at competitive prices to meet the needs of the underserved affordable market in Malaysia.

• Joint venture with Sime Darby Properties

In January 2024, Lagenda signed a shareholder agreement with Sime Darby Property’s wholly-owned Seed Homes to set up Seed Homes Lagenda, a 50:50 joint venture to develop affordable homes. Seed Homes Lagenda is set to embark on its first affordable township project in Gurun, Kedah.

We favourably view this development, which capitalises on its strategic location and the potential spillover effects of industrial growth in Gurun.

Looking ahead, there is potential for expanded collaboration between Lagenda and Sime Darby Property, enabling Lagenda to leverage on Sime Darby Property's extensive land bank in Malaysia for further development in the affordable housing segment.

Currently, Lagenda and Sime Darby Property are exploring opportunities to expand their collaboration in Johor. While discussions are still in the preliminary stages, several potential locations have been identified, including Kluang, Muar, Pagoh and Kulai.

OTHER DEVELOPMENTS 

• Launching of Kampung Tersusun land in 1HFY24

To recap, under the package offered in Kampung Tersusun, buyers can purchase the land at prices starting at RM80,000 per lot (with a land size starting at 50’ x 90’) and construct the building at any time.

The launch has been delayed as Lagenda awaits land valuation. Without this valuation, buyers are unable to apply for bank financing. Based on current progress, Lagenda anticipates launching the first phase of Kampung Tersusun in 1HFY24. Notably, full revenue from the land sale will be recognised upon signing the Sales and Purchase Agreement (SPA), potentially providing more upside to our earnings forecast.

• Acquired 15% stake in Northern Solar

Lagenda has acquired 15% stake in Northern Solar at RM13.5mil. As part of this initiative, Lagenda will propose to install solar panels on homeowners’ rooftops. Lagenda will then sell the generated electricity to TNB. In exchange, Lagenda will pay homeowners a rental fee of RM100-RM200 per month.

While the impact on the bottom line may not be substantial, this initiative is expected to boost property sales due to the potential additional income for homeowners.

VALUATION

• High P/BV ratio but attractive P/E ratio

Lagenda is presently trading at a premium price-to-book-value ratio (P/BV) of 1.1x, surpassing its peers’ average P/BV of 0.5x-0.6x following the property rally in mid-FY23.

Nevertheless, the high P/BV is supported by its asset-light strategy and rapid turnaround, characterised by swift launches and short construction periods of 2 to 2.5 years. Consequently, Lagenda avoids incurring high holding costs for its landbanks.

From an earnings perspective, Lagenda's valuation appears lucrative. Particularly, its FY24F/FY25F price-to-earnings ratio (P/E) of only 6x/5x is notably attractive when compared to its peers’ average of 12x-15x.

• Appealing dividend yield of 4.8%-7% for FY24F-FY26F

In November 2022, Lagenda announced the implementation of a dividend policy by committing to a payout ratio of not less than 25% of its consolidated profit after tax and minority interest. Since then, Lagenda has consistently rewarded its shareholders with dividend payouts ranging from 31% to 36%.

We are projecting the FY24F/FY25F/FY26F dividend payout ratio to remain at 31%, translating to a dividend per share (DPS) of 7.2sen/8.8sen/10.4sen. This implies a decent yield of 4.8–7% for FY24F–FY26F. (Exhibit 9).

Source: AmInvest Research - 20 Mar 2024