We came away from HUAYANG’s briefing felling less assured with management’s sales target of RM400.0m for FY19 due to the soft property outlook. Hence, we maintain our FY19 sales target of RM246.8 but reduced our FY19-20E earnings by 12%-9% after lowering our margin assumptions in anticipation of further cost escalation. Maintain MARKET PERFORM with a lower Target Price of RM0.465 (previously, RM0.470).

Striving to raise the bars. Moving into FY19, management remains mildly optimistic with the property outlook as they are targeting to achieve sales target of RM400.0m for the year, backed by their unsold GDV of c.RM570.0m coupled with planned new launches of RM284.0m. However, we are less optimistic on the property market outlook due to the influx of affordable housing priced around RM350.0k flooding into the market. Hence, we are maintaining our sales target of RM246.8m.

Update on Magna Prima (MAGNA). We expect new launches from its associate, i.e. MAGNA to be slow as there are not much planned launches in the pipeline for the near-term. However, MAGNA has launched the first phase of its The View Residence, Shah Alam (GDV: RM220.0m) back in Sep 2017. The first phase of the project comprises 105 units of residential apartment of with an estimated GDV of RM73.0m. To date, they only managed to sell 18 units which we believe may be due to its pricing range of between RM730.0k- RM1.18m for built-up of 980sf-1281sf.

Kajang the next frontier. All this while, the management has been on the look-out for land bank replenishment within the Klang Valley. Last year, they finally managed to secure 19.8 acres of freehold land in Kajang for a total consideration of RM70.0m with an estimated GDV of RM800.0m. In terms of GDV, this would be HUAYANG’s second largest project in the Klang Valley that would help sustain their launch pipeline in the region for another 5-6 years. However, we do not expect any launches from Kajang in the near-term as it is still in planning stages.

Outlook. Going forward, we expect the operating landscape in the sector to remain challenging. Hence, we believe that HUAYANG needs to prioritise their focus in clearing inventories and aggressively drive sales from on-going projects. Unbilled sales of RM178.9m which is only sufficient for another 1-2 quarters.

Reviewing FY19-20E earnings. Post briefing, we are lowering our FY19-20E earnings by 12%-9% as we lower our margin assumptions in anticipation of further escalation in costs, i.e. sales and administration expenses.

Maintain MARKET PERFORM. We reiterate our MARKET PERFORM call with a lower Target Price of RM0.465 (from RM0.470) on HUAYANG, as we further lower our project margin assumptions in RNAV to better reflect its current margin trend, while maintaining our RNAV discount of 83%, which is at -2.5SD level.

Risks to our call include; (i) lower-than-expected sales, (ii) higher- than-expected administrative costs, (iii) negative real estate policies, (iv) less conducive lending environment, and (v) lower-than-expected dividend pay-out.

Source: Kenanga Research - 24 May 2018