Last Friday, HUAYANG announced the acquisition of a parcel of freehold land in Ipoh measuring 3.8 acre for RM15.3m which was a positive surprise as we did not expect land banking activities within this timeframe from the Group. Nevertheless, the acquisition will further enhance its remaining GDV of RM4.6b to RM4.9b. No changes to our FY17-18E earnings. Maintain OUTPERFORM with a higher Target Price of RM1.33 (previously, RM1.31) based on unchanged 57% discount applied to its RNAV of RM3.10.

News. Last Friday, HUAYANG announced that they are acquiring a parcel of freehold land measuring 3.8 acres in Ipoh, within the established area of Bandar Meru Raya and Government Offices of Perak, for a total consideration of RM15.3m. Interestingly, HUAYANG intends to develop 720 units of service apartments and 72 units of commercial shop lots, which would carry an estimated GDV of RM295.1m implying a decent land cost to GDV ratio of only 5%.

Positive surprise. We were rather surprised with HUAYANG’s move in acquiring another parcel of land as we did not expect HUAYANG to replenish its land bank so soon after raising its effective stake in MAGNA to 30.9%. The acquisition of this particular land bank will further boost its remaining GDV of RM4.6b to RM4.9b, excluding any plans involving MAGNA’s land, and we expect its 9M17 net gearing of 0.32x to climb up to 0.66x post completion of this acquisition and the MAGNA deal which still falls within management’s comfortable gearing level.

Outlook. Going forward, we would not expect any major land bank activities from HUAYANG, as we believe that they need to focus on their future launches and also future plans with MAGNA, considering their unbilled sales which have fallen to a low of RM215.6m, adequate for another 1-2 quarters. However, we do note that there could be a potential cash call exercise if HUAYANG acquires the remaining c.70% stake in MAGNA in the future.

Earnings unchanged. No changes to our FY17-18E earnings at this juncture as we have yet to factor in the potential earnings contribution from the land as we only anticipate the project to take off in late FY18 or beyond.

Maintain OUTPERFORM. We are maintaining our OUTPERFORM recommendation on HUAYANG, with a higher Target Price of RM1.33 (previously, RM1.31) based on an unchanged discount of 57% to its RNAV of RM3.10 factoring in the GDV replenishment of RM295.1m into our RNAV. Our new TP implies FY17-18E PERs of 6.7-7.6x, which is still lower compared to its small-mid cap peers’ average of 9.0-7.6x.

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

Source: Kenanga Research - 8 May 2017