Leader of affordable housing. HYB has established a solid reputation of providing affordable housing mainly in Klang valley, Perak and Johor Bahru. Its Klang valley developments are mainly catered to affordable niche housings priced below RM600k/unit to target its preferred customer base of first home owners. Unlike most of the developers under our coverage, affordable housing only makes up <50% of their respective total GDV. Hence its demand profile is extremely resilient against the typical property cycles. 

We believe the re-rating will continue, since the theme of affordable housing will likely last a while. HYB is the only developer under our coverage whose PBV and PER valuations have re-rated over the last 12 months which is a big departure from larger peers. We attribute this phenomenon to its defensive business model which strengthens its dividend payout abilities. This is particularly so when there are a lot of economic uncertainties while GE is just around the corner. We expect the re-rating momentum to continue as long as affordable housing remains in "vogue". 

Decent dividend yield. The group has been consistently distributing dividends in the past 5 years with average net payout ratio of 24% and of late, 34%. Management is comfortable with 25% payout p.a., which translates to FY13-15E NDPS of 10.9sen, 11.2sen and 13.3sen; implied net dividend yields of 7.0%-8.6% are attractive against small-mid cap developers 1.0%-7.4%.

Estimating FY13-15E earnings of RM72m, RM89m and RM106m, driven by 1) FY13-15E property sales of RM452m, RM613m and RM753m; 2) unbilled sales of RM506m which provides about 1 year visibility. Balance sheet wise, we are comfortable with their FY13-14E net gearing of 0.4x-0.2x which will allow them to continue their 2-year forward landbanking strategy of up to RM600m worth of GDV. Risks to our estimates are weak property demand, failure to replenish land and project financing issues.

Initiate coverage on HYB with OUTPERFORM and TP of  RM2.10, which provides a total return of 44%. Our TP is based on 40% discount to our DCF-driven RNAV of RM3.52 (10% WACC), which implies 0.9x FY14E PBV. We are comfortable with our valuations as our  RNAV discount rate is higher than our average applied 32% to reflect the  smaller market capitalisation.  

Source: Kenanga