Lagenda’s 9M22 core PATAMI of RM126m (-12.4% YoY) was below our expectation, making up only 58.6% of our full year forecast. The nega tive deviation was due to lower than expected progress billing arising from labour shortage. The group will likely see another weak quarter ahead due to (i) labour shortage; (ii) depleting completed inventories to support sales; and (iii) temporary revenue-cost mismatch arising from higher hiring cost for new township launches. Having said that, the labour shortage condition is gradually improving and thus, the group should record a better FY23. We cease coverage on Lagenda due to reallocation of internal resources. Our previous Buy recommendation and TP of RM1.61 on Lagenda should no longer be used as a reference going forward.

Below expectations. Lagenda recorded 3Q22 core PATAMI of RM28.4m (-44% QoQ; -37.5% YoY), bringing 9M22’s sum to RM126m (-12.4% YoY). The results were below our (58.6%) and consensus (56.4%) expectations. The negative deviation was due to lower than expected progress billing mainly due to labour shortage. 9M22 core PATAMI was arrived at after excluding net EIs of RM7.3m from (i) gain from acquisition of the remaining 50% stake from Maju Perak at price below its FV amounting to RM7.6m; and (ii) loss on remeasurement of lease liabilities amounting to -RM375k.

Dividend. None (3Q21: none). 9M22: 3 sen (9M21: 3 sen).

QoQ. Revenue declined by -30.1% due to lower sales from completed inventories. Consequently, core PATAMI declined by -44%.

YoY. Despite construction activities normalizing com pared to SPLY which was negatively impacted by lockdown restrictions, revenue still declined marginally by - 2.4%. This is due to lower progress billings arising from (i) fewer ongoing projects as 4 projects completed in preceding year’s quarter were only replenished with 3 projects; (ii) most projects are still in early stages; and (iii) labour shortage. Despite a marginal decline in revenue, core PATAMI declined by -37.5% due to (i) lower GP margin of 34.5% vs. 39.6% SPLY as there were more project completions in SPLY which resulted in cost savings; (ii) higher admin expenses (+50.6%) due to increase in hiring cost in preparation for new township launches; and (iii) higher marketing expenses (+81.3%).

YTD. Revenue increased by +8.1% due to increase in sales of completed units. Despite top line increase, core PATAMI declined by -12.4% due to (i) higher admin expenses (+53.2%); and (ii) higher marketing expenses (+52.5%).

Sales and launches. 3Q22 sales was RM197m (-7% QoQ; -2% YoY), bringing 9M22 sales to RM553.4m (+11.6% YoY) representing 60.8% of the group’s full year sales target of RM910m. The group did not launch any products in 3Q22. 9M22 launches were RM700m, making up 70% of its FY22 launch target of RM1bn. The group plans to launch c.RM600m of products in 4Q22, including the new township Darulaman Lagenda in Sungai Petani, which was launched in Oct 2022 as well as from its existing townships in Perak. Unbilled sales as at 3Q22 stood at RM653.6m (+3.1% QoQ), representing 0.78x cover of its FY21 revenue.

Outlook. Lagenda recorded a weak quarter due to (i) labour shortage impacting progress billings; (ii) depleting completed inventories (RM21m as at 3Q22) to support sales and cushion the impact of lower progress billings. In addition, there was also a temporary mismatch in revenue and cost as the group scaled up hiring since 2Q22 in preparation for new township launch but the new Sungai Petani township was only launched in Oct 2022. We expect another weak quarter ahead due to the reasons mentioned above. The new township will also likely see lower margin contribution in the initial phases of launches. This will however be partially mitigated with launches from its mature Perak township. Looking ahead in FY23, the group should see earnings rebounding due to (i) labour shortage situation gradually improving since 4Q22; and (ii) absence of Prosperity Tax.

Forecast. Unchanged.

Cease coverage. We cease coverage on Lagenda due to reallocation of internal resources. Our previous Buy recommendation and TP of RM1.61 on Lagenda should no longer be used as a reference going forward.

Source: Hong Leong Investment Bank Research - 22 Nov 2022