OCBC Investment Research lowers Yanlord Land's TP to 97 cents; Moody's changes outlook to negative

Yanlord's FY2022 results "disappointed and missed" the OCBC team's expectations. The lack of a dividend also came as a "surprise".

Analysts have downgraded their take on Yanlord Land Group Z25 after the group’s earnings for the FY2022 ended Dec 31, 2022, fell by 42% y-o-y to RMB1.53 billion ($298.0 million).

The results “disappointed and missed [the] expectations” of the team at OCBC Investment Research (OIR), which kept its “hold” call on the stock.

During the FY2022, Yanlord’s revenue and gross profit also fell by 18% and 13% y-o-y to RMB28.7 billion and RMB7.8 billion respectively.

“This was due to a dip in gross floor area (GFA) delivered as a result of Covid-19 related lockdowns, but partially offset by higher average selling prices recognised,” the team writes in its report dated March 10.

However, the real surprise came from the lack of a dividend for the FY2022, compared to the 6.8 cents paid out in the FY2021, adds the team. In its results announcement, Yanlord had attributed its decision to conserve cash as they expect to repay debt in the FY2023 and FY2024.

In addition, Yanlord’s management had provided a weak guidance for its contracted sales target for the FY2023 despite its gross contracted sales rising 14% y-o-y to RMB68.1 billion in FY2022 and outperforming its industry peers.

On this, the team has cut its FY2023 core patmi forecast by 23.8%, which leads to a lowered fair value estimate or target price of 97 cents from $1.28 previously. The new fair value estimate is still pegged to a P/E target multiple of 4.5x, says the team.

Moody’s Investors Service has also lowered its rating outlooks on Yanlord Land Group Limited (Yanlord) and Yanlord Land (HK) Co., Limited to “negative” from “stable” previously. Yanlord Land (HK) Co. Limited is a wholly-owned subsidiary of Yanlord.

"The negative outlook reflects our expectation that Yanlord's contracted sales will decline and its credit metrics will worsen over the next 12-18 months," says Cedric Lai, a Moody's vice president and senior analyst.

"The affirmation of the ratings reflects our expectation that Yanlord will maintain good liquidity and a disciplined approach toward business expansion and financial management," he adds.

In its report on March 10, Moody’s estimates that Yanlord’s contracted sales will decline by around 20% to 25% y-o-y in FY2023, underperforming the national market.

“The weakening sales performance reflects the company's moderate business scale and significant slowdown in land replenishment over the past 12-18 months. The sales decline will weaken the company's operating cash flow and credit metrics over the next 12-18 months,” reads the report.

Further to its report, Moody’s is projecting Yanlord’s credit metrics to weaken with its ev/ebitda deteriorating to around 6.8x over the next 12 to 18 months, compared to FY2022’s 6.4x. Yanlord’s ebit/interest coverage is also expected to decline to around 2.6x over the same period from FY2022’s 2.8x.

“These forecasts, which are weak for the company's ‘Ba2’ CFR, incorporate Moody's expectation that the company will face a decline in its profit margin to around 22% from 27% in FY2022 during the same period,” reads the report.

“However, Moody's expects Yanlord's liquidity to remain good, given that the company has maintained good access to both onshore and offshore financing. Its unrestricted cash of RMB20.7 billion as of the end of FY2022 and projected operating cash flow will be sufficient to cover its maturing debt over the next 12-18 months, although the expected use of internal resources to repay maturing debt will likely reduce its liquidity buffer over time,” adds the report.

That said, Moody’s expects the group’s rental income/interest coverage to improve slightly to around 45% in the next 12 to 18 months from FY2022’s 43%. This will be supported by steady rental income growth in China and Singapore, notes the firm.

Moody’s has kept its “Ba2” corporate family rating (CFR) for Yanlord and its “Ba3” rating for the senior unsecured rating on the bonds issued by Yanlord Land (HK) Co., Limited. The bonds are guaranteed by Yanlord. The “Ba2” CFR reflects Yanlord’s “established brand name and high-quality products” although this is constrained by the group’s “volatile operating performance, geographic concentration and moderate debt leverage”.

In its report, Moody’s notes that a ratings upgrade is “unlikely” in the near term given the group’s negative outlook.

“However, Moody's could revise Yanlord's rating outlook to stable if the company improves its sales and credit metrics, strengthens its access to long-term funding, and maintains sufficient liquidity,” reads the report. “Credit metrics that could indicate a stable rating outlook include ebit/interest coverage above 3.0x - 3.5x and debt/ebitda below 6.0x - 6.5x on a sustained basis.”

“Moody's could downgrade Yanlord's ratings if the company's sales, credit metrics and its liquidity weakens, or if the company pursues aggressive expansion. Credit metrics indicating a downgrade include ebit/interest coverage falling below 2.5x or debt/ebitda above 6.8x - 7.0x, both on a sustained basis,” adds the report.

Shares in Yanlord closed 3.5 cents lower or 3.74% down at 90 cents on March 10.

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