HUAYANG’s FY17 CNP of RM60.7m came in below expectations accounting for 87%/83% of our and consensus full-year estimates. Its sales of RM238.5m also came below our estimate and management's target of RM273.4m and RM300.0m, respectively. Positively, 2sen dividend was within our full-year estimates of 2sen. No changes to FY18E earnings, introduces FY19E earnings of RM72.0m. Downgrade to MARKET PERFORM with a lower Target Price of RM1.24 (previously, OP; TP: RM1.33).

Below expectations. FY17 CNP of RM60.7m came in below expectations, making up 87%/83% of our and consensus full-year estimates, due to higher than expected operating costs and lower than expected billings. Full year sales of RM238.5m came below our estimate and management's target of RM273.4m and RM300.0m, respectively. Proposed dividend of 2.0 sen was inline with our full-year target of 2.0 sen.

Results highlight. FY17 CNP decreased by 45% underpinned by the following reasons i) 55% decrease in revenue, ii) decrease in EBITDA margins by 3ppt to 22%, and iii) increase in interest cost (+140%). The decrease in revenue was due mainly to lower progressive billings from its on-going projects as most of its on-going projects have yet to reach a meaningful billing stage. Its net gearing saw marginal increase from 0.34x to 0.39x due to higher working capital requirements for its newly launched projects and the acquisition cost for 10.8% stake in MAGNA. QoQ wise, the 9% decline in CNP was largely due to the reasons above.

Briefing updates. Moving into FY18, management are targeting sales of RM400.0m backed by its planned launches of c.RM1.0b in FY17- 18. This time around, we believe that management’s sales target is now much more realistic vis-à-vis a target of RM500.0m for the start of the year in the past. However, our sales target for FY18 is much more conservative at RM331.0m which we believe that is achievable backed by its planned launches of RM1.0b.

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 RM214.0m which would only be adequate for another 1-2 quarters. However, we do not rule out potential cash call exercise if HUAYANG acquires the remaining c.70% stake in MAGNA in the future.

Introducing FY19E earnings. No changes to our FY18E earnings of RM61.7m, while we take this opportunity to introduce our FY19E earnings of RM71.9m. For FY18-19E, we are estimating property sales of RM331.0m and RM451.0m. Our FY19E sales estimate is much higher as we anticipate sales contributions from its Puchong West project to kick in by FY19.

Downgrading to MARKET PERFORM. Following its weak results performance, we are downgrading HUAYANG to MARKET PERFORM as with a lower Target Price of RM1.24 (previously, OP; TP: RM1.33) as we widen our discount factor to 60% to its RNAV of RM3.10 (previous discount factor at 57%) due to its consecutive disappointment in achieving its sales target. Our TP implies a 1-year FWD PER of 6.2x close to its peer average of 6.9x.

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) Lower-thanexpected dividend pay-out.

Source: Kenanga Research - 19 May 2017