PETALING JAYA: Hua Yang Bhd’s acquisition of an additional 20.12% stake in Magna Prima Bhd would allow the mid-sized property developer to extend its reach in the Klang Valley by tapping into the potential of Magna Prima’s strategic land bank, say analysts.
Kenaga Research said it is mildly positive on the deal as it will give Hua Yang the opportunity to replenish its land bank in Klang Valley by undertaking the development of Magna Prima’s land bank that is located at KLCC and Sect 15, Shah Alam. It also does not rule out any potential M&A play in the future.
On Wednesday, Hua Yang announced that it will be acquiring a further 20.1% stake in Magna Prima for a cash consideration of RM123.8mil, effectively raising its stake to 30.9% as part of the company’s land banking strategy.
Magna Prima’s most prized asset is the 2.62 acres that used to house the Lai Meng School along Jalan Ampang, which is located close to the the iconic Petronas Twin Towers.
The price tag translated to RM1.85 per share, which was similar as its earlier acquisition when it bought a 10.8% stake in Magna Prima.
The research house noted that following the acquisition on the additional 20.1% stake, it expected Hua Yang’s nine months of FY2017 net gearing of 0.32 times (x) to increase to 0.66x, which still fell within management’s comfort level.
However, there will not be any mandatory general offer on Magna from Huan Yang as it is still below 33%.
The acquisition will be funded through Hua Yang’s internally generated funds and the exercise is expected to be completed by the second quarter of 2Q17 should there are no objections from its EGM.
Upon completion of the acquisition, Hua Yang will emerge as the single largest shareholder of Magna Prima.
Earnings wise, Kenaga Research said that there would be no changes to Hua Yang’s FY17-18 estimated earnings at this point as it is still in the process of ascertaining Magna’s future earnings.
“For illustrative purpose, assuming that Magna is able to replicate its net profit of RM44.8mil in FY16, it could potentially contribute an additional 20% income to Hua Yang’s FY17E earnings. Its unbilled sales of RM215.6mil only provide visibility for the next two quarters,” said the research, which has upgraded Hua Yang to an “outperform” with a target price of RM1.31.
Meanwhile, TA Research deemed the acquisition price as fair.
“Based on 2016 unaudited results, the price tag translates into 13.4x Magna Prima’s earnings and price to net asset value (P/NAV) of 1.0x (NAV of RM1.80/share as of 4Q16)
In comparison, the average small cap property stocks’ calendar year 2016 price earnings ratio and P/NAV are 10.9x and 0.8x respectively, based on our research universe. Nevertheless, we deem the acquisition price is fair.”
The research house noted that recent M&A deals in the property sector were concluded at a P/NAV of 1.1x. Excluding privatisation offers from the major shareholders, which usually value the company below its book, the average P/NAV of the past acquisitions was 1.4x, it added.
Shares of Hua Yang closed up one sen to RM1.07, while Magna Prima ended two sen higher at RM1.56.
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