KENANGA : Hunza Properties - BUY - 21 Apr 2008

Hunza Properties – Painful in the short term (Company Update)



Price: RM1.88

Target Price: RM3.59

Recommendation: BUY



· Slow-down in overall property sales. Besides vague global economic outlook, foreigners have been more deterred from buying Malaysian properties given the uncertainties churned by recent political outcomes. Therefore, Hunza Properties (Hunza) 2H08 earnings starts to feel the pinch as its on-going high-end projects have high-compositions of foreign buyers with an average of some 50% (Fig1).

· Slow-down most noticeable in Penang. Typically, the long Chinese New Year celebrations attributes to a QoQ decline in 3Q bottomlines (Fig2). Adding the effects of the “election fever” period could easily shave-off 3 to 4 weeks of Hunza’s 3Q08 property sales (especially in Penang, given its new state government). If uncertainties are not ironed out, such dampeners could continue in 4Q08 earnings onwards. Alila, Infiniti and Mutiara Seputeh have already recorded 3%, 50% and 68% QoQ decline, respectively for 3Q08 (Fig3).

· Short-term pain apparent… Penang’s new state government is going through a “teething” process and may need a minimum of 6 months to familiarize and make necessary changes in state operations. Until then, we expect bottle-necks in terms of new and unapproved property projects in Penang, such as Hunza’s Alila 2.

· …but positive outlook in the medium to long term as the new Penang state government is pushing for more transparency and competitiveness, which is in line with the state’s goal to attract more FDI’s in Penang. If successful, developers’ like Hunza, will enjoy spill-over effects from more FDI and more efficient processes.

· Downgrading FY08E and FY09E net profit by 24% and 21% to RM48m and RM62m, respectively. Based on mentioned reasons, we have slowed-down take-up rates for each project, and hence, profit recognition. Furthermore, we expect a narrowing of Hunza’s target market breadth as it increased prices of Infiniti and GPC by 15% to RM480psf and 45% to RM580psf, respectively. Nevertheless, this implies higher value extraction and more buffers against high raw material prices. FY08E dividend yield remains attractive at 5.7%.

· Downward revision in target price of RM3.59 from our previous RM4.37, based on our sum of parts RNAV on a fully diluted basis. We have significantly slowed down take-up rates and applied a higher WACC of 11.4% (7.3% previously) when valuing on-going projects. Maintain BUY.







KENANGA INVESTMENT BANK BERHAD (15678-H)