Hua Yang Bhd (April 9, RM1.45)
Upgrade to buy from hold with a target price of RM1.68: Hua Yang has entered into a conditional sale and purchase agreement to acquire 156 lots of freehold land in Ipoh measuring 8.5ha, for RM15.2 million or RM16.60 per sq ft. The purchase consideration will be satisfied via internally generated funds and borrowings. Located approximately 6km from Ipoh town, the land is next to Hua Yang's completed development — Anjung Megah Bercham.
The land is earmarked for a gated and guarded residential development. Hua Yang intends to put up 134 cluster semi-detached units, eight link houses, and four bungalows. No similar land deals have been transacted in the area recently for comparison. However, if we compare the total land cost of RM15.2 million against the total estimated gross development value (GDV) of RM84 million, the land cost will account for 18.1% of total estimated GDV.
In our previous report, we highlighted that landbanking was imminent for Hua Yang as its existing landbank was depleting fast as it had brought forward some of the launches within One [email protected] Kembangan last year to meet the overwhelming demand. As such, we are positive on this land acquisition as it is timely to replenish the group's total landbank to sustain future earnings growth.
Based on the group's net gearing ratio of 0.33 times as at December 2011, the land purchase will result in net gearing rising to 0.38 times, assuming the purchase consideration will be financed via 80% borrowings. Moreover, the group had a healthy operating cash flow of RM39.6 million as at December 2011. Hence, we do not expect the land acquisition to reduce the group's ability to pay out dividends in the future.
There is no change to our FY12 to FY13 earnings projections. However, we raise our FY14 earnings by 3.7% as we expect progress billing from this project to begin during the year.
We maintain our target price at RM1.68 a share based on unchanged price-earnings ratio of four times CY12 earnings per share. Given the potential upside of 15.9%, we upgrade Hua Yang to "buy" from "hold". — TA Securities, April 9
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