News  Last Friday, Hua Yang Berhad (HUAYANG) announced that it has entered into a conditional SPA with Nation Holdings Sdn Bhd to acquire a parcel of leasehold land measuring 8.09 acres in Selayang for a total consideration of RM120.0m or RM340.5psf.

Comments  This would be HUAYANG’s third land purchase in 2015, hot on the heels of the earlier two land acquisitions in Penang (for a total consideration of RM31m).

 This latest land acquisition is earmarked for an integrated commercial development (estimated GDV of c.RM800.0m), similar to its One South project, and will be targeted at the “affordable” market segment. The land cost appears fair at 15.0% of estimated GDV while neighbouring land prices with poorer accessibilities are quoted at RM270-RM300 psf. (refer overleaf for details).

 Management is expecting the land purchase to be completed in 2Q16, to be funded by the RM250.0m sukuk program already in place. Upon completion of the acquisition of the three parcels of lands, we expect its net gearing to climb up to a high of 0.84x from the current level of 0.50x (as of 9M15), and expected to end at 0.70x at the end of FY16, which is still beyond our comfort levels of 0.50- 0.60x for developers.  The acquisitions will increase their remaining GDV by 26.0% to RM3.9b from RM3.1b (including the recently acquired Penang projects with GDV of RM314.0m).

 While we are glad to see GDV replenishments, we are increasingly concerned about their relatively high net gearing levels post the said acquisitions, which is not ideal currently, especially when the property market is experiencing a longer-than-expected lull.

Outlook  Post-acquisition of the land in Selayang, we still expect landbanking news flow from HUAYANG, albeit at a slower pace, as it has always been management’s target to replenish RM5.0b worth of GDV. Upon completion of these three parcels of land acquisition, HUAYANG would have c.RM100.0m of its sukuk program left. In terms of target GDV replenishments, the group has met 22.0% of its targeted RM5.0b replenishments and we reckon that the group would be able to achieve that target in 1-2 years time. As highlighted earlier, with its relatively higher than average net gearing for a developer, cash calls would be welcomed to finance future land banking. However, management has not openly indicated that they intend to do a cash call in the near term.

Forecast  No changes to our FY15-16E earnings, as we expect the potential earnings contribution from the land to kick in earliest by FY18-19.

Rating Maintain MARKET PERFORM  We reiterate our MARKET PERFORM call on HUAYANG with an unchanged Target Price of RM2.20 (refer overleaf). While we still like HUAYANG for its edge in the affordable housing segment where demand remains highly resilient, this segment has also fallen victim to the ‘lower income earners’ trap, resulting in lower conversion of booking to SPA sales.

Valuation  No changes to our Target Price of RM2.20 based on 38.0% discount to its RNAV of RM3.52, as we had previously factored in RM1.67b (of which c.RM500.0m is remaining after taking into account the 3 land acquisitions this year) worth of GDV replenishments into our RNAV. Our applied discount of 38.0% is below its historical average level of 34.0% due to the more challenging property landscape and the fact that its net gearing will be higher than our comfort levels for developers.

Risks to Our Call  Failure to meet sales targets or replenish landbank.

 Balance sheet risk should its net gearing persistently stays above 0.5x.

 Sector risks, including overly negative policies. 

Source: Kenanga/servlets/staticfile/253968.jsp