We initiate coverage
on Hua Yang Berhad (“HYB”) with an OUTPERFORM and TP of RM2.10 based on 40%
discount to our RNAV of RM3.52, which provides a total return of 44%. HYB is
the only developer under our coverage which has the largest exposure to affordable
housing segment (<RM600k/unit). This is
critical for areas like Klang Valley, where lower income earners have
been priced-out. Their main buyers are first home owners. We also like their ability to source landbank
at competitive costs and maintain its pricing strategy within the ‘affordable’
range while preserving decent gross margins of 35%. HYB is one of the biggest
beneficiaries of; 1) resilient organic demand which is a growing pie given our large young population; 2)
government incentives (e.g. My First Home Scheme). Hence, HYB is the only
developer under our coverage whose valuations have re-rated over the last 12
months. We expect revenue and net profit to register 3-year CAGR (FY13-15E) of
31.2% and 25.8%, respectively. HYB should fare well under current market
conditions given its attractive FY13-15E net dividend yield of 7.0%-8.6% vs.
small-mid cap developers average of 1.0%-7.4% or sizeable M-REIT yields of
4.2%-5.0%. We are confident of their payout abilities given the defensive
nature of their market segment.
Leader of affordable
housing. HYB has established a solid reputation of providing affordable
housing mainly in Klang valley, Perak and Johor Bahru. Its Klang valley
developments are mainly catered to affordable niche housings priced below
RM600k/unit to target its preferred customer base of first home owners. Unlike
most of the developers under our coverage, affordable housing only makes up
<50% of their respective total GDV. Hence its demand profile is extremely
resilient against the typical property cycles.
We believe the
re-rating will continue, since the theme of affordable housing will likely last
a while. HYB is the only developer under our coverage whose PBV and PER
valuations have re-rated over the last 12 months which is a big departure from
larger peers. We attribute this phenomenon to its defensive business model
which strengthens its dividend payout abilities. This is particularly so when
there are a lot of economic uncertainties while GE is just around the corner.
We expect the re-rating momentum to continue as long as affordable housing
remains in “vogue”.
Decent dividend
yield. The group has been consistently distributing dividends in the past 5
years with average net payout ratio of 24% and of late, 34%. Management is
comfortable with 25% payout p.a., which translates to FY13-15E NDPS of 10.9sen,
11.2sen and 13.3sen; implied net dividend yields of 7.0%-8.6% are attractive
against small-mid cap developers 1.0%-7.4%.
Estimating FY13-15E
earnings of RM72m, RM89m and RM106m, driven by 1) FY13-15E property sales
of RM452m, RM613m and RM753m; 2) unbilled sales of RM506m which provides about
1 year visibility. Balance sheet wise, we are comfortable with their FY13-14E
net gearing of 0.4x-0.2x which will allow them to continue their 2-year forward
landbanking strategy of up to RM600m worth of GDV. Risks to our estimates are
weak property demand, failure to replenish land and project financing issues.
Initiate coverage on
HYB with OUTPERFORM and TP of RM2.10, which
provides a total return of 44%. Our TP is based on 40% discount to our
DCF-driven RNAV of RM3.52 (10% WACC), which implies 0.9x FY14E PBV. We are
comfortable with our valuations as our
RNAV discount rate is higher than our average applied 32% to reflect
the smaller market capitalisation.
Source: Kenanga
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