Hunza Properties - BUY - 26 Aug 2008

Hunza Properties - Softer earnings ahead (Company Update)



Price: RM1.40

Target Price: RM3.59

Recommendation: BUY



We attended Hunza Properties' (Hunza) post FY08 results briefing yesterday and took away the following key points;

· Reigning in construction cost with own capabilities. Hunza intends to revive its 100%-owned construction arm, Masuka Bina Sdn Bhd, to improve time and cost management in constructing its projects. The construction arm will be undertaking the entire Gurney Paragon project and is expected to yield 6%-10% savings.

· Gurney Paragon (GP) mall cost increases by 25% to RM500m from the initially guided RM400m, a year ago, due to rising raw material costs. However, Hunza believes that its initial gross development cost can be achieved if material prices continue to trend downwards and through further savings from utilizing its own construction arm. However, we are forecasting a more conservative mall's cost of RM450m over a period of 18 months, commencing in 2HFY09.

· Rights issue looking less likely. Hunza may forgo its proposal, although it has extended the right issuance date to Oct 08, given its depressed share price of RM1.40. Therefore, it will obtain further funding, particularly for the construction of GP mall, via borrowings. Based on its internal gearing limit of 50%, Hunza can afford to borrow another RM150m-RM160m.

· Stretched-out sales for GP and Infiniti reduces our FY09E and FY10E recurring net profit by 16% and 19% to RM52m (+10% YoY) and RM62m (+20% YoY), respectively. However, we are3 raising our FY11E recurring net profit by 73% to RM71m (+13% YoY) taking into account of spill over sales from GP and Infiniti, as well as, new launches namely, the RM250m Alila II and RM300m Segambut project in 2HFY10 to FY11.

· We maintain our BUY call with a target price of RM3.59, based on our sum of parts RNAV on a fully diluted basis. FY08E and FY09E PERs are compelling at 4x and 3x, respectively, while dividend is extremely attractive for a property stock with FY09E net dividend yield of 6.6% (gross yield of 8.8%).