INVESTMENT MERIT

- Coming Back. HOHUP is poised to make a comeback after an extended break from the property & construction scene following a lengthy corporate turnaround exercise. The financial regularisation exercise is near completion to uplift HOHUP from PN17 status, which will enable the company to reap benefits from the development of its crown jewel, the 60-acre prime land in Bukit Jalil. We expect a strong turnaround for HOHUP, with forecasted net earnings of RM17.1m, RM106.3m and RM146.8m for FY13E, FY14F and FY15F, respectively, from multi-year losses since 2006.

- Regularization exercise. HOHUP has undergone a series of regularisation plans, which involves capital reduction, rights issue of loan stocks with free detachable warrants and a scheme to repay its creditors. (Please refer to Appendix for details). Post-exercise, the company will have a clean balance sheet and a potential inflow of fresh capital from the exercise of rights issue of loan stock (≈RM51m) and warrants (≈RM30.6m).

- Upliftment from PN17 status. To recap, HOHUP was categorised as a PN17 company in July 2008 after making consecutive losses during a period when the group’s top line shrunk from RM350m in FY2000 to less than RM100m in FY2008. Although the group managed to register gross profit during those times, it was chalking up huge operating losses due to: (i) provision for doubtful debts, (ii) LAD charges, and (iii) exceptional charges resulting from unsuccessful oversea ventures. Postrestructuring, HOHUP would be lifted from PN17 status after posting net profits for 2 consecutive quarters subsequent to the regularisation plan. It is noteworthy that HOHUP had already been registering 4 consecutive quarters of profits.

- The Crown Jewel – 60 acres prime land in Buklit Jalil. The 60-acre commercial freehold land, which comprises 10-acre BJDSB Land and 50-acre JD Land, is the main driver for HOHUP’s future earnings. HOHUP will have the sole development right to the BJDSB Land, while a joint development agreement was signed between Malton Bhd and HOHUP for the JD Land. Under the joint development agreement, HOHUP will be entitled to 18% of the gross development value (“GDV”) of RM2.1b or a minimum of RM220m from Malton, as well as a cash advance of RM80m. Currently, a revised master plan for the JD Land has been submitted, pending approval, where the revised GDV is estimated at more than RM4.0b from RM2.1b currently. The project is believed to contribute in the next 7-10 years. (Please refer to Appendix for the current and proposed land development).

- Greater earnings visibility for now. Going forward, we see clarity in HOHUP’s earnings visibility as the group is on a clean slate to expand and focus on its property development businesses. A healthy balance sheet post the restructuring exercise (which will enable the company to undertake more landbanking activities) coupled with visible earnings stream from the 60-acre development place HOHUP in a favourable position to build a portfolio of development projects for future growth. In addition, as the company is rationalising its construction (to contribute ≈7%-20% of FY13-FY14 gross profit) and concrete manufacturing (≈1%- 3%) division operations, profitability of HOHUP is expected to strengthen further.

- Valuations & recommendation. The RNAV of HOHUP could be ranging from RM1.55 to RM2.55, or RM2.05 on average, as asking prices for land within that area are ranging from RM250psf to RM400psf. Based on our small cap property stocks’ Average Discount to RNAV of 25%, the stock should be valued at ≈RM1.55, representing a targeted FY14 PER of 5.7x, which is not demanding in contrast to peers’ PER average of 7.1x. Trading Buy.

Source: Kenanga