After attending its briefing, we are reassured with HUAYANG’s longterm prospects despite the subdued property market as management’s FY16 planned launches of RM633.0m and its sales target of RM500.0m backed by new and on-going projects are much more realistic under current market circumstances. While we have lowered our FY16E sales by 9.0% to RM482.0m, we raised on FY16E net profit by 8.0% to RM112.0m as we bumped up our margin assumptions due to improved operating efficiencies underpinned by lower construction costs and we still like the stock for its positioning in the affordable housing market. Hence, we are maintaining our OUTPERFORM call on HUAYANG with an unchanged Target Price of RM2.20 that is based on a 38.0% discount to its RNAV of RM3.52 and at current levels, its dividend yield remains highly attractive at 6.4% for FY16, which is above its peer average of 5.3%.

Slower launches ahead. In view of a subdued market, management scaled down its FY16 planned launches to RM633.0m vis-à-vis FY15’s planned launches of RM1.1b to reposition its project launches. For FY16 launches, management has rescheduled its Puchong West project (GDV: RM300.0m) to FY17, and will be launching Mines South (GDV: RM368.0m) in early FY16. That aside, management has also set sales target of RM500.0m for FY16 underpinned by both its planned launches and on-going projects i.e. One South Cube and Zeta (GDV: RM195.0m) and Citywoods (GDV: RM217.0m).

Earnings bump, despite lowered sales. Post-briefing, we lowered our FY16E sales by 9.0% from RM529.0m to RM482.0m, while introducing our FY17E sales of RM546m, adjusting to management’s newly planned launches of RM633.0m. However, we raised our FY16 earnings estimates by 8.0% to RM112.0m as we bumped up our margin assumptions due to recent improvements in operating margins underpinned by lower construction costs, and roll-out our FY17E net profit of RM115.0m that is well supported by its unbilled sales of RM701.0m.

GDV of RM5.0b target still on-track. Since FY15, landbanking has become a priority for HUAYANG and they have managed to replenish RM1.1b worth of GDV back in FY15 bringing its existing GDV up to RM4.0b. Management highlighted that their GDV target of RM5.0b remains on-track as they are still actively looking for landbanks across Malaysia, i.e. Klang Valley, Penang, Johor, Sabah (Kota Kinabalu) with its RM250m Sukuk facility. Post-acquisition of its Penang and Selayang lands, we would expect its net gearing to climb up to 0.56x from 0.49x, but still within our comfortable level of 0.5x-0.6x. However, should HUAYANG acquire another large tract of land amounting to RM150.0m, we would expect its net gearing to soar to 0.83x, which we opine that HUAYANG could opt for equity fund raising to maintain an optimal net gearing ratio of 0.5x-0.6x.

OUTPERFORM maintained. We continue to reiterate our OUTPERFORM recommendation on HUAYANG with an unchanged TP of RM2.20 which is at a 38.0% discount to its DCF-driven RNAV @ 10.0% WACC of RM3.52. Our applied discount of 38.0% is slightly higher compared to its affordable housing developer peers’ discount rate of 25.0% i.e. MATRIX given its higher net gearing levels but still below our sector average of 55.0%. That aside, at current levels, its dividend yield remains highly attractive at 6.4% for FY16 which is above its peers’ average of 5.3%.

Source: Kenanga Research - 26 May 2015