Stock price rose 9.6% since our first report 6 months ago. YTD, Ho Hup’s stock price has gone up by 9.6% since our initial On Our Radar report about 6 months ago (31st Dec 2013; “I’m Back”). Even at this current price, Ho Hup is trading at only 4.2x implied fwd-PER, cheaper than that of its peers’ average PER of 7.1x. We deem Ho Hup’s stock as undervalued judging from its bright growth prospect driven by its property division’s crown jewel project in Bukit Jalil i.e. Bukit Jalil City.

1Q14 earnings fell short of expectations due to timing of joint-development (JV) land project. Ho Hup’s 1Q14 net profit of RM11.3m accounts for only 10% of our FY14 earnings estimates. The shortfall was mainly because we have overestimated its property division’s revenue and profits. In our initial forecasts, we had expected its property division to recognise some portion from its 50-acre JV land in 1QFY14. Nonetheless, due to timing of approvals of new planning and design for the project, the project will only start to contribute 2Q14 onwards. However, the shortfall will definitely be made up in 2015. As such, we revised lower our FY14-FY15 net profit forecasts by 28%-18% to RM80.6m and RM126m respectively.

The JV land project (Bukit Jalil City) with higher GDV of RM4.0b – RM4.5b. Ho Hup’s joint development land project with Malton (NR) which comprised shop offices, service apartments, offices and hotel, Bukit Jalil City or shopping mall also known as “Pavilion 2” will be officially launched by end of 2014. The group is currently revising the planning and design which will result in higher GDV of RM4.0b - RM4.5b from RM2.1b previously. Assuming the project’s GDV is RM4.0b, based on the agreement that Ho Hup is entitled to 18% of GDV for the project, on average, we conservatively estimate the project will contribute about RM45m per annum in its net profit throughout the 10-year period of development.

Growing order book. As Ho Hup’s construction division has been rejuvenated and being rationalised, Ho Hup is back in business. Ho Hup has tendered an estimated RM3.6b projects locally and overseas.

Greater earnings visibility for now. Going forward, we see clarity in HOHUP’s earnings visibility as the group is on a clean slate to expand and focus on its property development businesses. A healthy balance sheet post the restructuring exercise (which will enable the company to undertake more land banking activities) coupled with visible earnings stream from the 60-acre development, puts HOHUP in a favourable position to build a portfolio of development projects for future growth. In addition, as the company is rationalising its construction and concrete manufacturing division operations, profitability of HOHUP is expected to strengthen further.

Maintain TRADING BUY with FV of RM1.55. We reiterate our TRADING BUY rating on the stock with fair value of RM1.55. This implies a fwd-PER15 of 4.8x, which is not demanding in contrast to its small-cap property peers’ PER average of 7.1x.

Source: Kenanga