Investment Highlights

• We maintain BUY on Lagenda Properties (Lagenda) with a higher fair value (FV) of RM2.16/share (from RM1.98/share previously) after accounting for contribution from the new Kuala Muda project into our RNAV calculation. Our FV is based on an unchanged discount rate of 30% to our RNAV and a 3% premium to reflect its 4-star ESG rating .

• The FV implies a FY25F PE of 8x, at parity to the current average of smaller cap property stocks.

• Lagenda’s wholly-owned Blossom Eastland entered into a sale and purchase agreement (SPA) with Hock Lean Rubber Estate to purchase 3 plots of freehold land measuring 855 acres in Daerah Kuala Muda, Negeri Kedah for RM149mil cash.

• We assume the land acquisition cost of RM149mil to be mainly funded by cash (70%) with the remainder in borrowings (30%) based on its historical funding mix for land acquisitions. Following the completion of the acquisition by end-FY24/early-FY25, we expect the group’s FY25F net gearing ratio to increase to 0.12x from 0.01x.

• While maintaining FY24F earnings, we lower FY25F/FY26F core net profit by 1% to factor in finance cost from borrowings associated with the land acquisition.

• The estimated gross development value (GDV) of the Kedah land is RM2bil.

• The project is scheduled to debut in 4QFY26F and to be developed over a span of 7-8 years. We estimate a negligible contribution in FY26F with a gradual increase to 18% of Lagenda’s earnings from FY27F to FY33F.

• Valuation-wise, we deem the land to be reasonably priced at RM4 psf, especially compared to Lagenda’s acquisition of land in Sungai Petani and Gurun, which are further from Penang, priced at RM4.60 psf to RM4.80 psf.

• Meanwhile, the land price implies a land cost-to-GDV ratio of 7%, which is well below the industry’s average land cost- to-GDV ratio of 15%-20%.

• The lands are strategically located just 12 km from Sungai Petani town centre and 17 km from UiTM Pulau Pinang, Bertam campus. Additionally, they are 25 km from Lagenda’s Gurun project and 10 km from Lagenda's Sungai Petani township .

• Given its attractive acquisition price and the product’s affordability, we are positive on the acquisition which will help sustain Lagenda’s property development earnings over the medium term.

• We continue to like Lagenda due to the company’s niche in underserved landed affordable housing developments in second-tier states with a large population of B40 and M40 income groups.

• The stock currently trades at a compelling FY25F PE of 6x vs. the industry average of 12x while dividend yields are attractive at 5%.

Source: AmInvest Research - 23 May 2024