Lagenda’s 1H22 core PATAMI of RM97.6m (-0.9% YoY) were below expectations mainly due to higher than expected admin and marketing expenses. We lower our FY22 forecast by -8.8% while leaving FY23/24 forecasts largely unchanged to factor in the delay in revenue recognition in FY22 impacted by delay in launches and labour shortage. We believe that the demand for Lagenda’s product will remain resilient despite rising interest rate as the majority of its customer base are civil servants who are entitled for a fixed rate loan of 4%. Maintain BUY with a slightly lower TP of RM1.61 (from RM1.62) based on a 30% discount on estimated RNAV of RM2.30.

Below expectations. Lagenda recorded 2Q22 core PATAMI of RM50.6m (+7.7% QoQ; +18% YoY), bringing 1H22’s sum to RM97.6m (-0.9% YoY). The results were below our (41.4%) and consensus (41%) expectations. The negative deviation was due to higher than expected admin and marketing expenses. 1H22 core PATAMI was arrived at after excluding net EIs of +RM268k from loss on remeasurement of lease liabilities.

Dividend. 3 sen, ex-date: 14 Sept 2022 (2Q21: 3 sen). 1H22: 3 sen (1H21: 3 sen).

QoQ. Revenue increased by +34.1% due to (i) increase in sales of completed units; and (ii) contribution from sales of new launches (there were no launches in 1Q22). Subsequently, core PATAMI increased by a smaller magnitude of +7.7% due to (i) lower gross profit margin of 35% (vs. 42.6% in 1Q22) as there were more progress recognition from the key townships projects (BBSAP and LTI) in 1Q22 which has a better GP margin; and (ii) higher admin expenses of RM17m (+69.9%) mainly from higher salary payment due to increased hiring and bonus payment.

YoY. Revenue increased by +51.6% due to (i) increase in sales of completed units as the group scaled up its marketing initiatives to sell its completed units; and (ii) better construction activities as there was a construction halt in June SPLY from MCO3.0. Subsequently, core PATAMI increased by a smaller magnitude of +18% due to (i) lower GP margin of 35% (vs. 38.6% SPLY); (ii) higher admin expenses (+1.1x); (iii) higher marketing expenses (+39.7%); and (iv) higher tax expenses (+18%).

YTD. Revenue increased by +13% mainly due to increase in sales of completed units. Despite the increase in revenue, core PATAMI was flattish at -0.9% mainly due to (i) increase in admin expenses (+54.4%); and (ii) increase in marketing expenses (+39.6%).

Sales and launches. 2Q22 sales was RM211.8m (+46.5% QoQ; +43.1% YoY), bringing 1H22 sales to RM356.4m (+20.8% YoY) representing 39.2% of the group’s full year sales target of RM910m. The group launched RM700m of GDV in 2Q22, bringing 1H22 sum to RM700m (no launches in 1Q22), making up 70% of its FY22 launch target of RM1bn. Unbilled sales as at 2Q22 stood at RM634.1m (+4.8% QoQ from RM604.8m in 1Q22), representing 0.76x cover of its FY21 revenue.

Outlook. Lagenda ramped up its launches in 2Q significantly to make up for the absence of launches in 1Q. The group saw a strong pick up in sales in 2Q both sequentially and on a YoY basis supported by sales of completed units as well as sales from new launches. Nonetheless, earnings were lower than expected due to increase in hiring cost in preparation for new township launches as well as higher marketing expenses to clear completed units. We expect stronger 2H22 earnings supported by (i) better sales from the new launches; and (ii) more projects entering the development phases. We believe that the demand for Lagenda’s products will remain resilient despite rising interest rate as >60% of its customer base are civil servants who are entitled for a fixed rate loan of 4% and as such are not affected by the rising rate.

Forecast. We lower our FY22 earnings forecasts by -8.8% while we leave FY23/24 forecasts largely unchanged at -0.4%/-0.6% as we factor in slight delay in revenue recognition in FY22 impacted by (i) the back-loading of launches to 2Q-4Q; and (ii) the industry wide labour shortage issue which may impact Lagenda’s new launches.

Maintain BUY with a slightly lower TP of RM1.61 (from RM1.62) based on a 30% discount on estimated RNAV of RM2.30. We continue to like Lagenda for its exposure to the underserved affordable housing segment, its healthy PBT margin of >25% as well as decent projected FY22 dividend yield of 5.4%.

Source: Hong Leong Investment Bank Research - 23 Aug 2022