Investment Highlights

• Unaffordability Housing Woes. The demand for affordable housing remains neglected while unsold units in other segments remain high as they exceed affordability levels. Limited transportation access and low demand for high-rise properties contribute to oversupply. Insufficient supply of affordable housing despite strong demand, but a shift towards affordability is emerging. House price-to-income ratio worsened, indicating rising prices and declining incomes.

• An Equitable Pricing Method. Recognising the unaffordability issue, Lagenda employs a pricing strategy to address the critical issue of affordable housing in Malaysia. They recognize the importance of making homeownership attainable for the B40 income group, and to achieve this, they have adopted a reverse engineering approach. Instead of setting prices arbitrarily, Lagenda determines housing prices based on the income and affordability of their target buyers, being the B40 group, in the vicinity of their projects

• Better Deals in the Backwoods. The Group’s success in achieving a 20%+ profit margin despite offering affordable products is attributed to its strategic advantages. These include acquiring large parcels of low-cost land in non-urban areas, inhouse construction capabilities, strategic partnerships, and achieving economies of scale through developing over 10,000 units in their key townships, distinguishing them from competitors.

• Low-risk Buyer Profile. Lagenda targets the B40 public sector employees, with 80% of buyers coming from this group. They benefit from stable incomes and government-assisted financing, resulting in a high conversion rate. A large exposure customer base in the public sector provides stability and shields Lagenda against economic downturns.

• Steady track record and Revenue visibility. The Group’s ongoing projects have a strong track record, having launched over 20,000 units across multiple townships. Currently, four key projects are in progress, with impressive take-up rates. The total GDV launched for these ongoing projects is RM4.4b, and unbilled sales of RM811.2m as of 30 June 2023 ensure earnings visibility for the coming years.

• Adequate Landbank and Prospect Launches. Lagenda's extensive landbank of 4,700 acres across Malaysia sets the stage for future projects. Recently, they acquired 1075.5 acres in Kulai, Johor. They plan to launch new townships annually, aiming for 7,300 units in 2023. The total remaining GDV for the remaining landbank and future launches is at RM12.7 billion.

• Resilient Revenue Growth. Lagenda has managed to triumph above the challenges of Covid and dampened sentiment of the property market achieving double-digit topline growth throughout 2020 and 2021. However, FY22’s performance was subdued at 3.8%. We forecast a conservative revenue growth of 10%-15% for the coming years driven by the near completion of certain projects while being offset by new ones.

• Viable Earnings. The Group’s earnings have been observed to grow at a CAGR of 15.8% since its turnaround from loss-making, increasing from RM95.9m in FY19 to RM178.1m in FY22. We project a moderate escalation in earnings induced by higher interest rate costs.

• Profound Margins. Gross Profit margins have achieved a historical average of over 35% while Net Profit margins have managed to sustain an average above 20%.

• Net Cash Position. Their Net Gearing Ratio has been in a downslope and has managed to achieve -0.1x in FY22 which also signifies the Group’s capacity for new ventures. The Group is dedicated to keeping its net gearing below 0.5x.

• Average ROE >20%. Lagenda has delivered an average performance of more than 20% ROE over the last five years, denoting a well-managed business.

• Steady Dividends. The Group has a dividend policy of paying out at least 25.0% of its yearly net profit. We estimate a 3.5% and 4.2% dividend yield for FY23f and FY24f based on the minimum payout ratio.

Valuation / Recommendation

• We arrive at a fair value of RM1.52 based on a 20% discount on Lagenda’s estimated RNAV. The target price represents a 22.3% potential upside from its current price of RM1.24 and an 18.0% forward PE discount against its peers. We also project a 4.2% return from dividends in FY24f based on its 25% payout ratio dividend policy.

Risks

• Low Barriers of Entry.

• Inability to acquire a suitable landbank.

• Unexpected Rise in Costs.

• Changes in Government Policies.

Source: JF Apex Securities Research - 22 Aug 2023