HIL Industries Bhd’s proposed acquisition of a prime land in Kuala Lumpur for RM47 million could bring a considerable yield but HIL little bargaining powers could be troublesome, according to Kenanga Research.
In its Company Update note today (Nov 2), the research house said that the acquisition could boost its valuation for HIL’s property business (based on a 70% discount to RNAV) by about 22% and its SoP-derive TP by 10%.
It keeps its UNDERPERFORM call, with SoP-derive TP of RM0.87, with no adjustment based on 3-star ESG ratings. Its earnings forecast is also maintained pending the completion of the deal.
Kenanga said it believe HIL’s manufacturing division will continue to do well, underpinned by strong orders for auto parts with robust demand for new car models (Perodua Axia and Alza) and upcoming models (Perodua D66b).
However, it is mindful of HIL inherently having little bargaining power against its customers such as large auto makers.
“This puts it in a precarious situation on a rising cost environment. Also, from the standpoint of equity investors, they have
better proxy to the booming local auto market via significantly larger and more liquid auto makers/distributors.
“Meanwhile, we are cautious on the outlook for the property sector given the elevated mortgage rates while property lending by banks remains restricted.
“Consumers may also postpone property purchases amidst high inflation that eats into their disposable incomes,” it added.
HIL, the research house noted, is acquiring three acres prime land in Sg. Teba, Kuala Lumpur for RM47 million cash from Amverton Bhd with its shareholders are related parties, which has been earmarked for a residential project.
“At RM47 million, this translates to RM360 per sq ft (psf) for the Amverton land, which is the same valuation as independent valuer Weise
International Property Consultants Sdn Bhd, compared to asking price between RM380 psf and RM401 psf for the area.”
The proposed acquisition is expected to be completed by 1QCY24.
It added: “We believe HIL is getting a decent deal. Based on the surrounding development projects, we estimated gross development value (GDV) of between RM380 million and RM400 million.
“Based on gross profit margin of 32%, we estimate the GDP to be between RM121.6 million and RM128.0 million. Assuming completion in four years, the project will increase our valuation for its property business.”
Kenanga said post-acquisition, HIL will still be in a net cash position of RM37.8 million (including recent property project in Klang). The new
project will boost HIL’s total GDV to more than RM1.2b.
Its risks to call include stronger-than-expected demand and prices for auto parts, the easing in input costs, and a strong recovery in the property market.
