FY19 recorded CNL of RM12.6m, which missed our estimated CNP of RM11.0m, mainly attributable to the losses in its associate MAGNA. Property sales of RM287m came within our, but fell short of management’s target. No dividend declared as expected. Post-results, we cut FY20E earnings by 39% after lowering MAGNA’s contribution. Maintain MP with lower TP of RM0.335 after lowering valuation for its stake in MAGNA.

Below expectation. FY19 recorded Core Net Losses (CNL) of RM12.6m, which missed our estimated Core Net Profit (CNP) of RM11.0m. Despite recording stronger-than-expected operating profit, the negative deviation was mainly attributable to the losses made by its 30.95% associate MAGNA. For FY19, the group recorded property sales of RM287m which came within our FY19E sales target of RM300m, but below management’s target of RM400m. No dividend declared as expected.

Results’ highlight. Despite stronger top-line numbers (+22%) YoY from better billings from its on-going projects and sales from completed units (inventories fell by 45%), FY19 recorded CNL of RM12.6m vs FY18 CNP of RM5.3m, mainly due to share of loss from its associate MAGNA. The losses made by MAGNA were attributable to: (i) reversal of sales of service apartments at Jalan Kuching, (ii) fair value loss adjustment on the Lai Meng land, and (iii) provision of deferred tax asset. QoQ, 4Q19 recorded CNL of RM21.3m vs 3Q19 CNP of RM5.8m mainly due to: (i) higher net interest expense (+186%), and (ii) losses made by its associate MAGNA due to the above-mentioned reasons.

Outlook. Despite the challenging operating landscape in the property sector, we believe HUAYANG is on the right track given their continuous effort in clearing inventories as shown by the 45% drop (from FY18 to FY19) in inventories from completed projects. Moreover, we are also comforted by the group’s commitment to lower net gearing from 0.72x in FY18 to 0.68x currently with the disposal of 30% stake in Kajang Heights Land for RM21.0m. We expect to see more efforts to reduce gearing with FY20-21 net gearing estimated to taper to 0.66- 0.65x. Unbilled sales currently stand at RM204.9m, providing slightly less than one year of earnings’ visibility.

Cut FY20E earnings by 39%. Post results, we cut our FY20E earnings by 39% after we lowered associate MAGNA’s contribution. We also introduce FY21E CNP of RM7.2m with sales target of RM251.6m. Our FY20E sales target of RM251.7m is lower than the management's guided sales target of RM400m because we prefer to remain conservative as HUAYANG had been unable to meet its own sales target for five consecutive financial years.

Maintain MARKET PERFORM with lower Target Price of RM0.335. We lower our target price to RM0.335 (from RM0.410) after lowering our valuation for its stake in MAGNA, which saw RNAV per share lowered from RM2.74 to RM2.23. To recap, we previously lowered our TP for MAGNA (report dated 17th May 2019) in view of the challenging property market and its earnings volatility. We ascribe an unchanged RNAV discount of 85%, which is at its historical trough level, as there is no strong catalyst ahead while earnings/sales had been volatile. At current Target Price, our valuation implies Fwd FY20-21E PBV of 0.2- 0.2x, which is still at its historical trough levels.

Source: Kenanga Research - 30 May 2019