Lagenda reported 1Q22 core PATMI of RM47m which came in below expectations due to lower-than-expected construction progress and sales activities. We lower our earnings forecasts by -7%/-17.5% for FY22/FY23 as we pencil in lower sales and margin assumptions and introduce FY24 forecasts. Maintain BUY with a lower TP of RM1.62 (from RM2.00) based on a higher 30% (from 20%) discount on estimated RNAV of RM2.31 per share as we factored in lower earnings forecasts, execution risks as it venture out of its home turf as well as the weakening property market. Nonetheless, we still like Lagenda for its exposure to the underserved affordable housing segment.

Below expectations. Lagenda recorded 1Q22 core PATMI of RM47m (-16.8% QoQ, -15.5% YoY). The results were below our (18.5%) and consensus (18.2%) full year forecasts. The negative deviation was due to lower-than-expected construction progress and sales activities.

QoQ. Revenue declined by -23.2% due to lower ongoing projects as several projects were completed in the previous quarter as well as lower sales achieved in the current quarter. Core PATAMI declined by a smaller magnitude of -16.8% due to higher gross profit margin achieved (42.6% vs. 38.3% in 4Q21 due to more progress recognition from the Lagenda Teluk Intan project which has a better GP margin).

YoY. Revenue declined by -15.7% due to lower construction activities resulting in lower revenue recognized in property (-12.2%) and construction (-84.6%) segments. Consequently, core PATAMI declined by -15.5%.

Sales and launches. 1Q22 sales was RM144.6m (-44.6% QoQ; -1.6% YoY) representing c.15.9% of the group’s full year target of RM910bn. There were no launches in 1Q22, but management believes that they are still on track to achieve their full year launch target of c.6k units with GDV of RM1bn. The launch pipeline in the remaining quarters of FY22 include new phases in Lagenda Teluk Intan, Lagenda Tapah and maiden launch in Sungai Petani (Kedah) township. Unbilled sales as at 1Q22 are RM604.8m (+0.1% QoQ), representing 0.72x cover of FY21 revenue.

Outlook. Lagenda will be venturing out of its home turf Perak (to Kedah, Johor and Pahang) for the first time starting from FY22. Its townships in Perak were highly successful and enjoyed >90% take up rate with superior PBT margin of >30%. While we believe there remains a strong demand for affordable housing in the states that Lagenda are expanding, nonetheless, the group will likely encounter early speed bumps in replicating its business model outside of its home ground in Perak due to the lack of familiarity with the local demographic and regulatory framework as well as the need to rebuild new working relationship with local contractors, suppliers and other stakeholders. As such, this will likely result in a slower speed of execution and possibly lower margin especially in the initial stage of launches.

Forecast. We lower our earnings forecasts by -7%/-17.5% for FY22/FY23 as we pencil in lower sales and margin assumptions due to reasons highlighted above. We introduce FY24 forecasts.

Maintain BUY with a lower TP of RM1.62 (from RM2.00) based on a higher 30% discount (from 20%) on estimated RNAV of RM2.31 to reflect (i) the execution risk (as highlighted above); and (ii) the weakening property market due to interest rate upcycle and persistent rise in construction cost. Having said that, we still like Lagenda for its exposure to the underserved affordable housing segment.

Source: Hong Leong Investment Bank Research - 24 May 2022