INVESTMENT MERIT

Since uplifted from PN17 in 2014, HOHUP has been doing fairly well registering impressive net profit growth of 192% for that year itself followed by 8% growth in 2015. However, its aggressive landbanking activities have led to multiple cash call proposals and we expect near-term prospect to be subdued as we are only projecting a mild earnings growth of 2-3% for FY16-17E. Hence, we are bringing a closure to our previous “Trading Buy” recommendation as we believe that it has fairly valued at RM0.84 based on Sum-of-Parts (10x, construction and 5x, property FY17E PER) implying FY17E PER of 5.8x which is inline with the smaller cap property players.

Doing well since exiting PN17. Since its exit from PN17 back in 2014, HOHUP have been doing relatively well registering an impressive PATAMI growth of 192% in 2014, followed by a moderate growth of 8% in 2015 as a result of a higher earnings base, underpinned by its development project in Bukit Jalil and also better construction earnings visibility.

Continuing its strong performance in 9M16. HOHUP reported 6% decline in 9M16 revenue as a result of a lower contribution from its own development project namely Aurora Place, Bukit Jalil, as the project is nearing to completion. However, they still manage to register a decent growth of 12% in bottomline driven by better margin contribution from its construction division, which saw its net margin expanded by 1.6ppt to 8.9% coming from its newly secured projects.

Getting ambitious. Since the uplift of its PN17 status, HOHUP has been relatively aggressive in acquiring land bank for replenishment purposes as they have been heavily dependent on its Aurora project in Bukit Jalil and Bukit Jalil City’s development (joint venture with Malton) of 60 acres in total. Currently, they have land bank/rights over land bank for potential development to 486 acres of land. On the construction front, HOHUP has recently won a contract award for rehabilitation works along Sungai Besut amounting to RM221.4m by far the single largest replenishment since 2015. We conservatively estimate HOHUP to have an outstanding orderbook of c.RM350.0m which would provide 2- years earnings visibility to the group.

Ambition requires funding. Due to its aggressiveness in landbanking, HOHUP’s current net gearing now stands at 0.53x which leaves them little room to gear up for development purposes should they require to maintain a comfortable net gearing level of below 0.60x. Hence, back in Jan-16 management have proposed rights issuance of new shares (1 for 5) and RPS (1 for 5) of which both are entitled for 1 free warrant for every rights share and RPS subscribed to raise up to RM68.1m to pare down its gearing and working capital for its existing construction and development project. Currently, the exercise has been granted extension up till April-17. To recap, HOHUP has successfully raised RM34.9m back in Jan-15 through placement of 31.1m new shares.

NOT RATED. For FY16-17E, we are projecting a mild growth of 2- 3%, respectively premised on its existing construction projects and contribution from Bukit Jalil City. For FY17E, we have a conservative orderbook replenishment assumption of RM250.0m. At the same time, we bring closure to our previous “Trading Buy” call on the stock, as we believe that its share price to be fairly valued at RM0.84 based on Sum-of-Parts (10x, construction and 5x, property FY17E PER) implying FY17E PER of 5.8x which is inline with the smaller cap property players

Source: Kenanga Research - 16 Feb 2017