We initiate coverage on Lagenda with a BUY rating and TP of RM2.01 (20% discount to RNAV of RM2.52), implying an upside potential of 21.8%. Our TP implies a forward P/E of 8x, lower than the average peers of c.10x. We project a 3-year earnings CAGR of 22.7%. In a nutshell, we like Lagenda for its exposure to the underserved affordable housing segment, stable clientele base (public sector workers with government financing access), low land cost, high booking conversion rate and superior margins.

Poultry to property transformation. Lagenda Properties is involved in property development and construction businesses. Its primary focus is to build affordable houses with sales price of ≤RM200k to cater the B40 and M40 income group. Its listing did not go through an IPO or a reverse takeover, but through embarking on a business model transformation since 2018 where the listed entity disposed its entire stake in its former poultry business and subsequently acquired property business.

Proxy for affordable housing. Notwithstanding the nationwide glut of overhang residential units, we believe there remains a strong demand for the underserved affordable housing segment (3Q20 residential transactions show 62.2% are priced <RM300k). Most of Lagenda’s clientele are from the public sector (civil servants, police, army), which are able to get LPPSA financing (100% financing up to RM200k with minimum monthly income of RM1.7k), ensuing a high booking conversion rate (>90%) for Lagenda’s properties. With low retrenchment probability within the public sector, we believe Lagenda’s products are more resilient to the economic ebb and flows.

Sustainable high profit margin. While Lagenda’s products are priced affordably at below RM200k, it is able to derive a 20-30% PAT margin as compared to 5-15% from other peers in affordable market range. We believe this high margin is sustainable (20.2% of PAT margin achieved in FY20) driven by Lagenda’s ability to acquire sizeable lands at cost of c.RM2-3 psf, which is only 5-6% of GDV.

Healthy project pipeline. Lagenda currently has 2 flagship developments, notably, Bandar Baru Setia Awan Perdana (BBSAP) in Sitiawan and Lagenda Teluk Intan (LTI) in Teluk Intan, Perak. The company has a total landbank of over 2,274 acres with a total remaining GDV of RM4.1bn to be developed for the next 5 years. Judging from the pace of recent acquisitions and developments, we believe there is more to come from the company with its aspiration to grow. Lagenda aims to launch 1 new township annually with target launches including 2021 in Tapah and 2022 in Sungai Petani. Concurrently, Lagenda is looking at launching new phases of current township in Sitiawan & Teluk Intan.

>20% earnings growth per annum over the next 2 years. We estimate FY21-FY23 to register a profit of RM219.3m (+55.7% YoY), RM264.6m (+20.6 YoY) and RM319.6m (+20.8% YoY) supported by new sales of c.RM1bn per year and unbilled sales of RM502m (which should provide earnings visibility for at least 2-3 quarters). Current bookings remain encouraging with RM280.6m registered as of mid-March 2021. Lagenda aims to launch 1 township annually with capacity to build 6-8k units of houses. Each township should translate into RM1-1.5bn GDV each year.

Initiate coverage on Lagenda Properties with a BUY rating and TP of RM2.01, implying an upside potential of 21.8%. Our TP of RM2.01 is based on 20% discount on estimated RNAV of RM2.52 per share. We like Lagenda for its strong take-up, fast project turnaround and superior margin given the low land cost (well below 10% of GDV). The company has outlined a dividend policy of 25-35% payout and still aiming for strong double digit growth for the next few years. As such, we are assuming 30% payout ratio, which translates to FY21-23 dividend yields of 3.5%, 4.2% and 5.1%.

Source: Hong Leong Investment Bank Research - 8 Apr 2021