HIL is acquiring three acres of prime land in Kuala Lumpur from related parties for RM47m cash. The land has been earmarked for a residential project with an estimated GDV of RM380m-RM400m, which could boost our valuation for its property business (based on a 70% discount to RNAV) by about 22% and its SoP-derive TP by 10%. For now, we are keeping our forecasts, our TP of RM0.87 and UNDERPERFORM call.

A new property project in Kuala Lumpur. HIL is acquiring three acres of land in Sg. Teba, Mukim Batu, Kuala Lumpur for RM47m cash from Amverton Bhd with its shareholders are related parties comprising Tan Sri Dato’ Ir. Ng Boon Thong (Executive Chairman and a major shareholder of HIL), Dato’ Milton Norman Ng Kwee Leong (Managing Director and a major shareholder of HIL), Steven Junior and Malcom Jeremy Ng (Executive Director and a major shareholder of HIL). The proposed acquisition is expected to be completed by 1QCY24.

The land has been earmarked for a residential project, currently at the preliminary stage of in-depth feasibility studies. The group is positive of the prospects of the Amverton Land as its strategically located with accessibility via various major highways and within the vicinity of Garden International School, Plaza Mont Kiara, 163 Retail Park, Hartamas Shopping Centre and Sri Hartamas Commercial Area.

Valuation. At RM47m, this translates to RM360 per sq ft (psf) for the Amverton land, which is the same valuation as independent valuer Weise International Property Consultants Sdn Bhd. A quick online check shows that asking prices for comparable land surrounding the area range between RM380 psf and RM401 psf. We believe HIL is getting a decent deal.

Impact on earnings, gearing and TP. Based on the surrounding development projects, we estimated GDV in the range of RM380mRM400m. Based on gross profit margin of 32%, we estimate the GDP to be in the range of RM121.6m-RM128.0m. Assuming completion in four years, the project will increase our valuation for its property business (based on a 70% discount to RNAV) by about 22% and its SoP-derive TP by 10% to RM0.96 (from RM0.87). Post-acquisition, HIL will still be in a net cash position of RM37.8m (including recent property project in Klang). The new project will boost HIL’s total GDV to more than RM1.2b.

Forecasts. Maintained, pending the completion of the deal.

We also maintain our SoP-derived TP of RM0.87. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see page 4).

Outlook. We believe HIL’s manufacturing division will continue to do well, underpinned by strong orders for auto parts with robust demand for new car models, i.e. Perodua Axia and Alza, upcoming models i.e. Perodua D66b and possibly with the addition of Proton X90 (which may have an even higher localisation rate). Its auto part order backlogs currently range from two to six months, depending on customers. However, we are mindful of HIL inherently having little bargaining power against its customers, i.e. large auto makers. This puts it in a precarious situation on a rising cost environment. Also, from the standpoint of equity investors, they have better proxy to the booming local auto market via significantly larger and more liquid auto makers/distributors. Meanwhile, we are cautious on the outlook for the property sector given the elevated mortgage rates while property lending by banks remains restricted. Consumers may also postpone property purchases amidst high inflation that eats into their disposable incomes. Maintain UNDERPERFORM.

Risks to our call include: (i) stronger-than-expected demand and prices for auto parts, (ii) the easing in input costs, and (iii) a strong recovery in the property market.

Source: Kenanga Research - 2 Nov 2023