Yesterday, HUAYANG announced that they will be acquiring 10.84% of Magna Prima Bhd for a cash consideration of RM66.6m as part of their landbanking strategy, which we are mildly positive due to MAGNA’s strategic landbanks in Klang Valley. No changes in FY17- 18E earnings. Maintain MARKET PERFORM, Target Price raised to RM1.18 (from RM1.10) on a higher RNAV of RM2.83 with an unchanged discount factor of 58%.

News. Yesterday, HUAYANG announced that they will be acquiring 10.84% of Magna Prima Bhd (MAGNA) for a cash consideration of RM66.6m - indicating RM1.85/share (vis-à-vis MAGNA’s closing price of RM1.63). The acquisition will be funded through HUAYANG’s internally generated funds.

Surprise. We are surprised with HUAYANG’s move in taking up 10.84% stake in MAGNA as part of its landbanking strategy as reported in its bursa announcement. The acquisition of the 10.84% stake at RM1.85 (implying 1.76x FY15 PBV) represents a 13.5% to its last closing price of RM1.63, and we would be expecting its 9M17 net gearing of 0.32x to increase to 0.43x post acquisition of the above mentioned stake.

Strategy unclear for now… While there is no information from management on how they intend to replenish their landbank through this exercise, we do not rule that there could be a potential merger and acquisition in play or a scenario like WCT to occur in the longer term as they have already been requesting for a board seat upon the completion of this particular exercise. To recap, it was reported by the Edge back in 20th-April-16 that the controlling shareholders of MAGNA are understood to be looking to hive off a large stake of about 30% in the company. If the reported news were to be true, we believe that HUAYANG would have the appetite to increase their stake in MAGNA by another 20% from this exercise bringing it up to 30.84%, as it would only bring its net gearing up to 0.66x which is still within a manageable level.

Outlook. HUAYANG’s move on MAGNA have further reinforced our view that there would not be any landbanking activities in the near term and dividends to be kept at a minimal level as highlighted in our previous report dated back in 19th-Jan-17. However, we are mildly positive on the deal as it would give them the opportunity replenish their landbank in Klang Valley should they be able to take control of the company or form a joint-venture to undertake the development of MAGNA’s landbank that is located right at KLCC (2.6ac), Seksyen 15, Shah Alam (20ac).

Earnings unchanged. No changes to our FY17-18E earnings. Its unbilled sales of RM215.6m only provide visibility for the next two quarters.

MARKET PERFORM maintained. We are still keeping our MP call on the stock despite a higher Target Price of RM1.18 (from RM1.10) based on unchanged 58% discount (near trough valuation) to its RNAV of RM2.83. We raised our RNAV higher to RM2.83 from RM2.64 previously after factoring the 10.84% stake of MAGNA into our RNAV. Our new TP implies FY17-18E PER of 5.9-6.7x, which is still lower compared to its small-mid cap peers average of 7.7x-7.0x.

Risks to our call includes: (i) Weaker-than-expected sales, (ii) Higher-than-expected administrative costs, (iii) Negative real estate policies, (iv) Tighter lending environments, and (v) Higher-than- expected dividend pay-out.

Source: Kenanga Research - 26 Jan 2017