KUALA LUMPUR (April 8): Hong Leong Investment Bank (HLIB) has initiated coverage of Lagenda Properties Bhd at RM1.65 with a "buy" call and a fair value (FV) of RM2.01 per share.

Its analyst Nazira Abdullah in a note today said the valuation is based on the company's three-year projections of compound annual growth rate earnings of 22.7%.

She said the FV of RM2.01 includes a 20% discount to real net asset value of RM2.52, implying an upside potential of 21.8%, adding that it implies a forward price/earnings (P/E) of 8x, lower than the industrial average of about 10x.

"We like Lagenda for its exposure to the underserved affordable housing segment, stable clientele base (public sector workers with government financing access), low land cost, high booking conversion rate and superior margins," she said.

According to her, Lagenda Properties fulfils the strong demand for the underserved affordable housing segment (3Q20 residential transactions showed 62.2% were priced less than RM300,000).

She added Lagenda's clientele consists of the public sector, who are able to get Lembaga Pembiayaan Perumahan Sektor Awam financing (100% financing up to RM200,000 with minimum monthly income of RM1,700), ensuing a high booking conversion rate (more than 90%) for Lagenda's properties.

Nazira said with low retrenchment probability within the public sector, they believe Lagenda's products are more resilient to economic downturns.

She highlighted Lagenda's products are able to derive a 20-30% profit-after-tax (PAT) margin in comparison to 5-15% for other peers in the affordable market range, and that this high margin is sustainable (20.2% of PAT margin achieved in FY20) driven by Lagenda's ability to acquire sizeable land at cost of about RM2-3 psf, which is only 5-6% of gross development value (GDV).

She also noted the group has two flagship developments, Bandar Baru Setia Awan Perdana in Sitiawan and Lagenda Teluk Intan in Teluk Intan, Perak. The company has a total land bank of over 2,274 acres with a total remaining GDV of RM4.1 billion to be developed over the next five years.

She said the group has estimate FY21-FY23 to register profits of RM219.3 million (+55.7% year-on-year [y-o-y]), RM264.6 million (+20.6 y-o-y) and RM319.6 million (+20.8% y-o-y), supported by new sales of about RM1 billion per year and unbilled sales of RM502 million (which should provide earnings visibility for at least two to three quarters).

Current bookings remain encouraging with RM280.6 million registered as of mid-March 2021. Lagenda aims to launch one township annually with capacity to build 6,000-8,000 units of houses. Each township should translate into RM1-1.5 billion GDV each year.

"The company has outlined a dividend policy of 25-35% payout and still aiming for strong double digit growth for the next few years. As such, we are assuming 30% payout ratio, which translates into FY21-23 dividend yields of 3.5%, 4.2% and 5.1%," she said.

At 11.24am, Lagenda was trading at RM1.65 with 1.24 million shares done.