Period

2Q16/1H16

Actual vs. Expectations

1H16 core net profit of RM58.6m is within expectations accounting for 52% and 50% of our and streets’ full-year estimates, respectively.

In terms of sales, 1H16 sales of RM174.8m is still slower than expected as it only makes up 36% of our full-year estimates due to the lack of new launches coupled with home buyers’ wait-and-see attitude especially for high rises.

Dividends

No dividend was proposed in 1H16 as expected. HUAYANG normally declares dividend in the second half of the year, and we would be expecting NDPS of 13.1sen for FY16E, representing yield of 7.2%.

Key Results Highlights

YoY, its 1H16 core net profit improved by 17% to RM58.6m underpinned by 6% growth in revenue coupled with improvements in EBITDA margins to 27% (+2ppt). The growth in revenue was driven by a steady recognition of progressive billings from all of its on-going projects across Malaysia i.e. Sentrio Suites, Metia Residence, One South, Bandar University Seri Iskandar and also the completion of Flexis @ One South. The improvement in margins was mainly due to lower operating costs driven by management’s on-going effort in enhancing its workforce efficiency.

QoQ, 2Q16 core net profit was marginally down by 4% to RM28.7m, albeit a 6% improvement in its revenue of RM150.6m. The group enjoyed a better margin previously as they have successfully handed over one of its projects namely Flexis @ One South back in 1Q16. On a positive note, its net gearing saw a major improvement as it came down significantly from 0.4x to 0.3x.

Outlook

Sales target remains intact at RM500.0m. While its 1H16 sales growth appear to be slower-than-expected at only RM174.8m, management is still maintaining its FY16 sales target of RM500.0m by clearing off its “inventories” from previous launches i.e. One South Cube and Zeta (GDV: RM195.0m) and Citywoods (GDV: RM217.0m), coupled with its planned new launches of RM648.0m. As such, we are also maintaining our FY16E sales of RM482.0m as we are banking on launches being skewed to 2H16. Thus, our FY16-17E earnings estimates remain unchanged.

Change to Forecasts

No changes to our FY15-16E core net profits.

Rating

Maintain OUTPERFORM

Valuation

OUTPERFORM maintained. We maintain OUTPERFORM 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 peers in the affordable housing with discount rate of 25.0% i.e. MATRIX, given its higher net gearing levels and we also expect HUAYANG to benefit from the upcoming Budget 2016 in the event the government decides to assist first time home buyers. That said, at current levels, it is trading at an undemanding valuation of FY16E PER of 4.3x coupled with a highly attractive dividend yield at 7.2%, vis-à-vis its small-mid -cap developer peers’ average of 7.9x and dividend yield of 4.3% .

Risks to Our Call

Weaker-than-expected property sales.

Higher-than-expected sales and administrative costs.

Negative real estate policies.

Tighter lending environments.

Source: Kenanga Research - 22 Oct 2015