What’s New

• HCK Capital’s indirect wholly-owned subsidiary HCK Builders Sdn Bhd (HCKBSB) has entered into a joint venture agreement (JVA) to take over the development of Empire Remix 2 with land owner Projek Muara Sdn Bhd (PMSB) and beneficial owner Dergahayu Sdn Bhd (DSB).

• The JVA came after PMSB and DSB has released and discharged the previous developer True Renaissance Development Sdn Bhd (TRDSB) from its obligations to complete the development.

• The Empire Remix 2 development in USJ Subang Jaya consists of: - Office Tower A - Office Tower B (28 storeys) - Office Tower C (28 storeys) - Office Tower D (20 storeys) - 2-storey commercial podium, facilities and basement car park

• To recap, HCK purchased 2 properties en bloc in the development from TRDSB in 2012 but were not completed due to the latter’s financial troubles: - The Duo: 28-storey serviced office suites (studio) with GDV of RM285m - The Cubiz: 12-storey office suites with GDV of RM95m

Comment

• Neutral on the acquisition. This news confirms an earlier media report that the group is keen to take over the project. We are neutral on this development due to current supply glut in the Klang Valley office/commercial property market.

• Earnings accretive amid high gearing – With the move of taking over the whole development, it could potentially boost the group’s future earnings. However, gearing level could rise significantly to finance the development.

Valuation & Recommendation

• Maintaining earnings forecast – We are keeping our EPS estimates pending further details as the management finalizes its plan for the development and submits to authorities for approval. HCK has sold over half of The Duo units but revenue could only be recognized when the properties are delivered upon completion in 36 months.

• Maintain SELL call with an unchanged target price of RM1.06 based a discount of 40% on its realizable net asset value (RNAV)/share of RM1.78. The steep discount is due to the gloomy outlook on the property sector.

Source: JF Apex Securities Research - 16 Jan 2019