9M19 CNP came above our/consensus estimates at 133% due to stronger-than-expected property billings and associate contribution. Property sales of RM239.7m came above our sales target as we were previously overly conservative. No dividend declared as expected. Upgrade FY19-20E CNPs by 68-71% after assuming higher sales and stronger associate contribution. Upgrade to OUTPERFORM but maintain Target Price at RM0.410.

Above expectations. 9M19 Core Net Profit (CNP) of RM8.7m came above both our and consensus estimates, at 133% each of full-year estimates. The positive deviation came mainly from stronger-than- expected property billings and stronger contribution from its associate – MAGNA (MP; TP:RM0.955). Property sales of RM239.7m also came in higher than our FY19E sales target at 96%, of which Astetica Residences project made up c.37% of the sales. Our sales target was previously overly conservative as the group had previously been unable to meet its own sales target. No dividend declared as expected.

Results highlight. YoY-Ytd, 9M19 CNP increased by close to four times to RM8.7m driven by: (i) better billings from its on-going projects and sales from its completed units, which saw inventories falling by 29%, (ii) positive contribution from its associate MAGNA of RM3.7m (vs. loss of RM1.5m in 9M18), and (iii) lower effective tax rate at 43% (- 30.0 ppts) as the previously high effective tax rate was due to the non- deductible tax expense arising from borrowings they took to acquire MAGNA back in CY18. QoQ, 3Q19 CNP was higher by 204% mainly from: (i) improvement in EBITDA margin to 15% (+4.0 ppts), likely from recognition of better margin products and lower operating costs, (ii) lower net interest expense (-22%), (iii) stronger contribution from its associate (+46%), and (iv) lower effective tax rate at 28% (-20.0ppts) from the same reason above.

Outlook. Despite the challenging operating landscape in the property sector, we think that HUAYANG is on the right path given their continuous effort in clearing inventories as shown by the 29% drop (from FY18 to 9M19) in inventories from completed projects. Moreover, we are also comforted by the group’s commitment to lower its net gearing as shown by the recent disposal of 30% stake in Kajang Heights Land for RM21.0m completed in October 2018 that saw net gearing now at 0.70x. We expect to see more aggressive efforts to reduce gearing with FY19-20E net gearing estimated at 0.69-0.67x. Unbilled sales currently stand at RM217.3m, providing slightly less than one year of earnings visibility.

Increase FY19-20E earnings by 68%-71%. Post results, we increased our FY19-20E earnings to RM11.0-13.4m after revising our sales target up to RM300m for both FY19-20E (from RM249.7-246.8m) and also factoring in the stronger-than-expected associate contribution seen in 9M19. Our sales target is still lower than the management's guided sales target of RM400m for FY19 because we prefer to remain conservative as HUAYANG had previously been unable to meet its own sales target for four consecutive financial years.

Upgrade to OP but maintain TP at RM0.410. Our target price is left unchanged and is based on a RNAV discount of 85% (at historical high level) to its RNAV of RM2.74. We will only seek to review our target price should HUAYANG shows stronger earnings over the next 1-2 quarters as previously earnings had been volatile. However, we upgrade our call to OUTPERFORM as share price has seen a sharp retracement recently. At our current Target Price, our valuation implies a Fwd. FY19-20E PBV of 0.2-0.2x, which is still at its historical trough levels.

Source: Kenanga Research - 24 Jan 2019