We attended HUAYANG’s briefing feeling comforted by management’s decision to continue its focus on clearing inventories while holding back on launching the Puchong Horizon project. However, we still believe their FY19 sales target of RM400.0m is unachievable. Thus, we maintain our sales target at RM249.7-246.8m and earnings at RM6.5-7.9m for FY19-20E. Maintain MARKET PERFORM with TP of RM0.410.

Updates on Puchong Horizon. Puchong Horizon is HUAYANG’s next flagship mixed development project in Selangor, with a total estimated GDV of RM2.05b. However, management had stated that their current focus is on clearing its inventories and on-going project developments rather than launching this project. They will wait another 6 to 12 months before deciding when to launch. We are comforted by management decision to wait for a better timing and launch Puchong Horizon given the soft property outlook as otherwise, it will be extremely risky from a balance sheet point of view.

Management confident of achieving sales target, but we are less so. Management is confident of achieving its sales target of RM400.0m in FY19 after achieving sales of RM166.6m in 1H19. This is backed by planned launches of RM282.0m in 2H19 from on-going projects at Taman Pulai Hijauan, Elemence, Bandar University Seri Iskandar, and Bukit Mertajam, as well as continuous efforts to push for sales from its unsold GDV, which we estimate to be at c.RM440m. However, we remain conservative in view of the challenges with regards to this segment of mass housing buyers who are finding it tough to secure ideal financing margins, which is where HUAYANG is exposed to. Moreover, HUAYANG had previously been unable to meet its own sales target for four consecutive financial years. Thus, we prefer to maintain our sales target at RM249.7-246.8m for FY19-20E.

Effective tax rate to slowly normalise. Recent 1H19 earnings disappointed despite revenue coming in-line, mainly due to the higher- than-expected tax expense. Effective tax rate as of 1H19 stood at 59%. Based on our discussion with management, we understand that the high effective tax rate was due to the non-deductible tax expense arising from borrowings that they took to acquire MAGNA. The interest expense incurred from these borrowings is deemed as capital in nature and is not deductible. Moving forward, the effective tax rate will go lower as repayment of borrowings continues. As such, our recent cut to our FY19-20E earnings has already accounted for this.

Outlook. Despite the challenging operating landscape in the property sector, we believe that HUAYANG is taking the right approach in navigating these challenging times for they are focused on clearing inventories while holding back the launch of Puchong Horizon. We are also comforted by the group’s commitment to lower its net gearing as shown by the recent proposed disposal of 30% stake in Kajang Height Land for RM21.0m. We hope to see more aggressive efforts to do so as we still estimate that net FY20E gearing will remain at 0.75x. Unbilled sales had increased 28% QoQ and currently it stands at RM258.3m, providing slightly more than one year of earnings visibility.

Earnings maintained. Post briefing, we make no changes to FY19-20E earnings of RM6.5-7.9m.

Maintain MARKET PERFORM with unchanged TP of RM0.410 During the recent results review, we had lowered our RNAV from RM2.78 to RM2.74 on a project margin assumption to better reflect its current margin trend and widened our RNAV discount to 85% (from 83%) which is at the historical trough level.

Risks to our call include; (i) stronger/weaker-than-expected sales, (ii) higher/lower-than-expected administrative costs, (iii) changes in real estate policies, (iv) changes lending environment.

Source: Kenanga Research - 26 Oct 2018