Corporate  |  JUNE 18, 2013 4:34AM

Land acquisition boosts Hua Yang’s valuation

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hua yang2Analysts at TA Securities have reacted positively to Hua Yang’s latest landbank acquisition in Sri Kembangan saying, “we are positive on this acquisition as it serves to replenish the group’s outstanding landbank in the Klang Valley.”

Hua Yang has entered into a conditional sales and purchase agreement with Amazing Borneo Sdn Bhd to acquire the 3.73 acre piece of leasehold land for a total cash consideration of RM56.9 million (or RM350 per square feet [psf]). According to TA, this is a fair price to pay for the land, as the average asking price for commercial land in that area is RM200-RM500 psf.

The developer has issued a gross development value (GDV) guidance of RM285 million, and said that it plans to develop the land into a mixed development. Based on this estimation, the land cost is approximately 20% of total development value. The development will feature two blocks of serviced apartments and two levels of retail units.

However TA’s analysts opine that this guidance is conservative based on the location of the land.

It highlights that a development located across from Hua Yang’s project, Heritage Services Apartment commands prices of RM440 – RM560 psf. Other high-rise developments in the surrounding area such as the East Lake Residence and The Sanderson are priced at RM448 – RM500 psf.

Based on Hua Yang’s internal estimates and assuming a plot ratio of 4x, the average selling price of this project works out to be around RM440 psf. This puts management guidance on the conservative side, say TA.

Overall, Hua Yang is on target to meet its fiscal year 2014 (FY14) GDV replenishment target of RM600 million, with this acquisition making up almost half of the company’s target.

As of March 2013, Hua Yang’s net gearing stands at 0.26x or at a net debt level of RM85.6 million. According to TA the latest land purchase will increase the company’s net gearing to 0.38x.

Assuming it is financed via 70% borrowings, then following this acquisition the company will have “a debt headroom of about RM50 million, assuming a comfortable net gearing level of 0.5x,” said the research house. Nonetheless it added, that Hua Yang might choose to tap into equity financing in FY14 to avoid overstretching its balance sheet.

The landbank is located in the Sri Kembangan area and is accessible by two major highways, the SILK highway and the BESRAYA highway. It is located around 300 meters from the Serdang KTM commuter station and is 120 meters to the Mines Shopping Mall.

Hua Yang’s management says that the anticipated launch of the project will be in mid 2015 (FY16), and TA estimates that billing should start from FY17 onwards. As such it is lowering its FY14-16 earnings forecasts marginally to take higher finance costs spent on the loan drawdown for the land purchase into account.

Assuming a gross margin of 25%, TA estimates that the discounted cashflow (DCF) value of the land will add around 8 sen per share to Hua Yang’s revalued net asset value (RNAV). As such the research house is revising its own target price to RM4.04 from RM3.96, while maintaining its ‘buy’ call on the company with a potential upside of 30.7%.

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