Hua Yang cancels SPA with Nation

Hua Yang Bhd (June 15, RM1.96)

Maintain outperform with a target price of RM2.20: Last Friday, Hua Yang Bhd announced that it had terminated its sale and purchase agreement (SPA) with Nation Holdings Sdn Bhd to acquire a parcel of leasehold land measuring 8.09 acres (3.27ha) in Selayang for a total consideration of RM120 million or RM340.50 per sq ft, as Nation Holdings was unable to fulfil one of the conditions precedent within the timeline of four months and 10 days.

We were surprised by the termination of the proposed land acquisition, as this was part of Hua Yang’s landbank replenishment target in the Klang Valley. To recap, Hua Yang entered into the SPA with Nation on Jan 30, 2015, and the land had a potential gross development value (GDV) of RM800 million.

However, we are not entirely negative on Hua Yang terminating the land deal as Nation was unable to fulfil the conditions precedent in the SPA (which entail important feasibility factors to be met, for example, development order approval with a plot ratio of five, coupled with access to the Kuala Lumpur Middle Ring Road, which would affect Hua Yang’s development plans for the land.

On a positive note, the termination will open up more opportunities for Hua Yang to look for better land deals in the Klang Valley under current market conditions, as purchasers will have better negotiation power.

Nonetheless, we are still expecting its net gearing to stay at a level of 0.6 times in financial year 2016 (FY16), as Hua Yang looks to secure another piece of land similar in size to the Selayang land. Following the termination of its Selayang land deal, we expect more landbanking news flow from Hua Yang in the near- to mid-term to meet our land bank replenishment assumptions of RM1.67 billion in 2015. While the property market remains subdued, we believe Hua Yang will still be able to maintain its performance as it is well supported by its healthy unbilled sales of RM702 million.

The termination of the land deal may cause some temporary knee-jerk reactions to its share price. Fundamentally, we reiterate our “outperform” call with an unchanged target price of RM2.20 as we still like Hua Yang for its competitive edge in the affordable housing segment.

Our target price of RM2.20 is based on a 38.0% discount to its realisable net asset value of RM3.52, which is inclusive of RM1.67 billion worth of GDV replenishment assumptions (of which RM1.3 billion remain after the termination of its Selayang land deal).

To date, Hua Yang has managed to replenish GDV by only RM314 million. Its valuation of 4.7 times estimated FY16 price-earnings ratio and net dividend yield of 6.7% remain fairly decent compared with its mid cap peers’ 10 times and 4.0% times respectively. — Kenanga Research

This article first appeared in The Edge Financial Daily, on June 16, 2015.