We came back from HUAYANG’s analysts’ briefing feeling lukewarm on the property sector and downgrading HUAYANG to MARKET PERFORM with a lower Target Price of RM1.94 based on a wider RNAV discount of 45% to its RNAV of RM3.52 (previously, OP, RM2.20), due to unattractive yields of only 2.2%/2.0% for FY17E/FY18E.

Repositioning for FY17. At its briefing, management highlighted that FY16 sales had been slower than expected owing to poor property market sentiment as home buyers are adopting a wait and see stance coupled with high loan rejection rates, which prompted them to delay some initial planned launches, i.e. Astetica, Mines South (GDV: RM368.0m) to focus on clearing “inventories” (GDV: RM370.7m) from previously launched projects.

Launches, all about timing... While management are looking to launch up to RM721.0m worth of projects, i.e. Astetica (GDV: RM368.0m), landed residential in Johor (GDV: RM33.0m), BUSI, Perak (GDV: RM100.0m) and Prai, Penang (GDV: RM220.0m), they did not rule out potential delays should the poor property market sentiment remains. However, management sounded confident on Astetica and Prai projects as these two particular projects have received fairly good response from previous road shows.

Targeting RM500.0m sales for FY17. Despite weak sales performance in FY16, managements are targeting RM500.0m worth of sales for FY17 backed by planned launches of RM721.0m and unsold projects of RM370.7m. However, we think that managements' target is slightly too ambitious given the current market condition coupled with potential delay in future launches. Hence, we opt tomaintain our FY17E sales of RM409.2m.

Cash conservation mode. During the briefing, management indicated while they are still committed to paying cash dividends, they could not guarantee the same dividend pay-out ratio (DPR) of >30% as they are looking to conserve more cash for future land banking opportunities as they intend to replenish their GDV up to RM5.0b (remaining, RM3.8b). Based on its recently concluded results, we are reducing our DPR assumptions to 10% from 31% previously. At DPR of 10%, we are looking at dividend per share of 4.0 sen/3.7 sen for FY17E/FY18E which implies a yield of 2.2%/2.0%.

We leave our FY17E earning unchanged at RM106.1m while introducing our FY18E earning of RM96.7m. Unbilled sales of RM463.4m provides visibility for a year.

Downgrade to MARKET PERFORM. Post briefing, we are downgrading HUAYANG to MARKET PERFORM with a lower Target Price of RM1.94 based on a wider RNAV discount of 45% (FY15 average discount) to its RNAV of RM3.52, due to unattractive dividend yields coupled with the challenging property market scene. The 45% discount is lower compared to the sector average of 56% due to their positioning in the affordable space which still provides property projects priced at the range of RM500.0k. Our TP implies FY17-18E PER of 4.8x-5.3x. Previously, OP, TP: RM2.20 at a 38.0% discount to its DCF-driven RNAV @ 10.0% WACC of RM3.52. Risks to our call includes: (i) Weaker-than-expected property sales, (ii) Higher-than-expected sales and administrative costs, (iii) Negative real estate policies, (iv) Tighter lending environments, and (v) Higherthan- expected dividend pay-out. 

Source: Kenanga Research - 20 May 2016