HUAYANG is disposing a 30%-stake in its Kajang Heights land for RM21.0m at costs. Hence, there is no gain or loss. We are positive over the disposal, as HUAYANG has expressed their commitment in lightening its balance sheet. The move will see current net gearing level reduced to 0.76x from 0.80x. Maintain MARKET PERFORM with an unchanged TP of RM0.465.

News. Last Thursday, HUAYANG announced that they proposed to dispose a 30%-stake in four parcels of freehold land measuring 19.76ac located in South Klang Valley between Kajang and Bandar Baru Bangi for RM21.0m or RM81.3psf to KVC Properties Sdn Bhd. To recap, HUAYANG had completed the acquisition of this land on 4 May 2018 for RM70.0m (RM81.3psf) with an estimated GDV of RM800m. No net gain from this disposal and we expect the disposal to complete by 2Q19.

Positive on the disposal. We are positive on this move, as it will allow them to lighten their balance sheet. Net gearing level as of 1Q19 is at 0.80x, which is beyond our comfortable net gearing level of 0.5-0.6x. The proceeds of RM21.0m will see current net gearing level lowered to 0.76x. Moreover, the disposal will still enable them to keep a majority stake of 70% and allows them to realise the value through commercial and residential developments. However, we do not expect any launches from these lands in the near term as it is still in the planning stages.

No changes to estimates. As the selling price of the lands is the same as the acquisition price of RM81.3psf, there will not be any net gain or loss on the disposal. While net gearing will be reduced, there is no major income statement impact as interest on land acquisitions tend to be capitalised instead of expensed. Moreover, should there be any net gains on disposal it will be treated as a one-off item. Thus, we maintain FY19-20E CNP of RM10.3-11.3m.

Outlook. Despite the challenging operating landscape in the property sector, we believe that HUAYANG is on the right path to recovery given their focus on clearing inventories. Its unbilled sales in 1Q19 improved by 12% QoQ, from RM178.9m to RM201.4m with 1-year visibility. Moreover, we are encouraged by this disposal as we deem that HUAYANG is committed in lowering its net gearing.

Maintain MARKET PERFORM. We reiterate our MARKET PERFORM call and maintain TP of RM0.465. Our RNAV per share is only reduced by 3.0 sen to RM2.78 after taking into account the reduced stake on this piece of land, which has a minimal impact to our TP of RM0.465. Our RNAV discount of 83% is maintained, which is at -2.0SD and at historical high level. We believe its profitability will improve backed by its recent sales performance, which we deem to be encouraging under current market circumstances.

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 - 03 Sep 2018