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Thursday, April 20, 2017



Upgrade to OUTPERFORM with a higher target price (TP) to RM1.31 from RM1.23


 

Yesterday, HUAYANG announced that it will be acquiring another 20.1% stake in Magna Prima Bhd for a cash consideration of RM123.8m, effectively raising their stake to 30.9%, as part of their land banking strategy, of which we are mildly positive due to MAGNA’s strategic land banks in Klang Valley. No changes in FY17-18E earnings. Upgrade to OUTPERFORM with a higher Target Price of RM1.31 (from RM1.23) on a higher RNAV of RM3.05 with an unchanged discount factor of 57%.
News. 

Yesterday, HUAYANG announced that they will be acquiring another 20.1% stake in Magna Prima Bhd (MAGNA) for a cash consideration of RM123.8m - indicating RM1.85/share (same price as previous acquisition) effectively raising its stake to 30.9%. The acquisition will be funded through HUAYANG’s internally generated funds, and the exercise is expected to be completed by 2Q17 should there are no objections from its EGM.

Not a surprise. We are not surprised with HUAYANG’s move in raising its effective stake MAGNA to 30.9% as we have previously mentioned this in our previous report dated 26th January 2017. Following the acquisition on the additional 20.1% stake, we expect its 9M17 net gearing of 0.32x to increase to 0.66x which still falls within management’s comfort level. However, there will not be any mandatory general offer on MAGNA from HUAYANG as it is still below 33.0%.

Strategy forward… This allows HUAYANG to extend its reach in Klang Valley by tapping into the potential of MAGNA’s strategic land bank, which measures c.35 acre with a potential GDV of RM1.6b which is located in Shah Alam. That said, they are also able to come up with a collaborative agreement to engage similar resources, while future identified land bank would be jointly developed on 50:50 basis.

Outlook. HUAYANG’s move on MAGNA has further reinforced our view that there would not be any land banking activities in the near term and dividends to be kept at a minimal level as highlighted. However, we are mildly positive on the deal as it will give them the opportunity to replenish their land bank in Klang Valley by undertaking the development of MAGNA’s land bank that is located right at KLCC (2.6ac), Seksyen 15, Shah Alam (20ac), and we do not rule out any potential M&A play in the future.

Earnings unchanged. No changes to our FY17-18E earnings at this juncture as we are still in the process of ascertaining MAGNA’s future earnings. For illustrative purpose, assuming that MAGNA is able to replicate its net profit of RM44.8m in FY16, it could potentially contribute an additional 20% income to HUAYANG’s FY17E earnings. Its unbilled sales of RM215.6m only provide visibility for the next two quarters.

Upgrade to OUTPERFORM. Following the announcement, we are upgrading the stock to OP from our previous MP call with a higher Target Price of RM1.31 based on unchanged 57% discount (near trough valuation) to a higher RNAV of RM3.05 (from RM2.83) after factoring the additional 20.1% stake of MAGNA into our RNAV. Our new TP implies FY17-18E PERs of 6.7x-7.6x, which is still lower compared to its smallmid cap peers average of 8.5x-7.5x.

Risks to our call includes: (i) Weaker-than-expected sales, (ii) Higherthan-expected administrative costs, (iii) Negative real estate policies, (iv) Tighter lending environments, and (v) Lower-than-expected dividend pay-out.



Source: Kenanga Research - 20 April 2017

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