News     Proposed acquisition of 3.73ac in Sri Kembangan for RM56.9m or RM250psf. The land is opposite The Heritage Service Apartment (part of the Mines Resort City area),  which  is  c.  300m  walking  distance  to Serdang KTM commuter station and 120m to the Mines Shopping Fair via a tunnel. 

Comments    This comes as no surprise to us as we expected them to landbank and had factored in a GDV replenishment assumption of RM250m into our RNAV earlier. Our assumption is just slightly lower than the Sri Kembangan’s project GDV of RM285m. 

We are positive on the acquisition as we believe this development, which includes 2 blocks of service apartment and retail units, has good catchment being in matured residential areas near The Mines Resort City, which would appeal to upgraders or even first home owners. Land cost is considered fair, given that it makes up 20% of GDV (refer overleaf). 

We believe the service apartment units will likely be ranged between 500sf and 1000sf per unit and the prices will still be considered affordable at the range of RM300k up to RM700k. Based on the historical track records, the group should be able to reap 25% gross margins. 

The acquisition will likely be completed by Mar 2014 and take around 12-18 months for approvals before launch it around Jun 2015 or FY16.  Thus, we expect its FY14 net gearing to increase from 0.26x to 0.40x, which is still within our comfort zone.

Outlook    We remain positive on Hua Yang as we understand the management is still actively looking for pocket landbanks in Klang Valley. Moreover, its FY14E sales target of RM613m will be mainly driven by on-going projects OneSouth, Taman Pulai Hijauan and new projects such as Section 13 (Shah Alam), etc. Sales from t newly acquired project will only be felt towards end FY16E onwards.

Forecast   We expect significant project earnings to contributions form FY17E onwards. As a result, there are no changes to our FY14-15E earnings.

Rating   Maintain OUTPERFORM

We continue to like affordable housing developers. Note that Hua Yang does not employ any DIBS scheme on its projects.

Valuation    Maintain our TP of RM3.52 as the acquisition has already been factored for (refer overleaf). Our TP is on parity with our DCF-driven RNAV @ 10% WACC.

Risks   Unable to meet sales targets or replenish landbank.

Sector risks, including negative policies.

Source: Kenanga