• We initiate coverage on Titijaya Land Berhad (Titijaya) with a target price of RM2.06, based on 35% discount to its fully-diluted RNAV/share of RM3.17. Our fair value for Titijaya renders a 31% upside to its current share price. Titijaya is a niche developer which focuses on development of lucrative landbank pockets in matured areas. The Group is a financially sound company, enjoying an impressive 5-year compounded annual growth rate (CAGR) of 25% for its net earnings from FY2011 to FY2016.

• Innovative business model. The Group adopts a unique business model in landbanking by focusing on synergistic alliances with reputable government agencies and private developers or landowners in respect of joint venture and land swap as opposed to conventional landbanking. This allows the Group to have zero or minimal holding costs of land and hence strengthens its balance sheet. Also, this enables the Group to save on the sizeable upfront land costs and free up its cash flow for other strategic acquisitions and investment.

• More strategic tie-ups in the making on the back of monetisation of prime land by government agencies. The Group foresees finalising its earlier plans of land swap deals and development of two property projects strategically located in KL city centre by FY18 or CY6/18. Should the deals materialise, Ttitijaya will require to help the Ministry of Education to construct six school buildings in exchange for a 3.7-acre land in Bukit Bintang as well as the development of a 4.8-acre land in Jalan Stonor which originally belonged to Lembaga Getah Malaysia. Furthermore, we believe the Group is in the midst of concluding more strategic tie-ups in the likes of transit oriented developments (TOD) in the vicinities of mass rapid transit (MRT) stations.

• Flexibility in projects roll out and swift change of product offerings. As compared to township developers, we opine that Titijaya is able to fine-tune its product offerings swiftly to align with prevailing market condition, demand trend and buyers’ affordability. Furthermore, the Group could ride on its fast turnaround strategy in developing small parcel of landbanks to have greater flexibility on timing of projects launches. This is critical for Titijaya to ride out the current property downcycle.

• Exemplary margins. The Group has managed to chalk up impressive operating margin of 23-40% during the period from FY2011 to FY2016. Apart from the reason of industrial properties/land sales which command higher margin, itsrelatively low land costs also play a crucial role. Titijaya’s land cost of below 12% to GDV for most of its projects (78% of the projects GDV and 64% in terms of number of projects) and average land cost of 7%, which is well below the 15-20% in the industry. Moving forward, we reckon that the operating margin of the Group will stabilise around 30- 31% for FY17-19F with more land acquisitions in the pipeline coupled with launching of more affordable housing. Still, we deem the operating margin as commendable against sector range of 15-35%.
   
• Sustainable growth underpinned by sizeable GDV and unbilled sales. Titijaya boasts a GDV of RM14.2b in its on-going and future property projects which will keep the company busy till 2027. The Group’s immediate earnings will be underpinned by RM471m unbilled sales (as of 3QFY17), sustaining its topline visibility for more than a year or equivalent to 1.2x FY16 topline. During 9MFY17, the Group achieved RM180m new sales and is on track to meet its sales target of RM300m for FY17.
   
• Gearing up more launches of projects with GDV of RM1.8b in the pipeline, targeting mass market segment. In CY2017, Titijaya will re-embark aggressive launches of more property projects to capitalise on current gradual recovery of property market after deferring new projects launches in CY2015/16. The Group will focus on its five upcoming projects, with four to be launched in the Klang Valley (i.e. 3rdNvenue @ Jln Ampang Phase 1 with GDV of RM493m; Damansara West Phase 1 with GDV of RM361m; Riveria @ KL Sentral Phase 1 with GDV of RM317m; and Park Residensi @ Cheras with GDV of RM75m) and one (The Shore with GDV of RM575m) in Kota Kinabalu. We understand that 70% of the new launches will be priced below RM600k/unit in order to cater for affordable housing which is more prevalent, while the remaining of 30% will be priced above RM700k/unit.

• Geographical diversity. Over the years since its listing in 2013, the Group has strived to diversify its geographical exposure from a Klang Valley-based developer to a renowned nationwide developer. The Group has successfully ventured into Penang with an estimated RM2.6b GDV project strategically located at Batu Maung, which is nearby the 2nd Penang Bridge, and Sabah, a JV project with stateowned enterprise China Railway Engineering Corporation (CREC) in Kota Kinabalu.

Earnings Outlook

• Earnings to recover from FY18F onwards. We envisage the Group’s net earnings to resume its growth trajectory from FY18F onwards after witnessing a decline of 15.6% to RM68.3m in FY16 and shall remain flat, +4.5% yoy in FY17F. To recap, the Group has enjoyed strong net profit growth in the past few financial years, i.e. FY12: +51.6% yoy; FY13: +63.0% yoy; FY14: +28.2% yoy; FY15: +13.5% yoy. Moving forward, we expect Titijaya’s bottomline to grow by respective +4.5% yoy to RM71.4m, +10.6% yoy to RM78.9m and +14.6% yoy to RM90.4m for FY17F, FY18F and FY19F on the back of rising topline and steady margins. Our new sales assumptions for FY17/18/19F are RM300m/RM500m/RM600m.

Valuation/Recommendation

• We initiate coverage on Titijaya with a target price of RM2.06, based on 35% discount to its fullydiluted RNAV/share of RM3.17. Our fair value also implies 20x FY18F fully-diluted PE. We believe the worst is over for the Group and advise investors to accumulate the stock as the Group is able to fast track its projects execution to ride on the property recovery, backed by its innovative business model, landbanking strategy and marketing efforts in targeting mass market segment.

Source: JF Apex Securities Research - 28 Jul 2017