Is Lagenda Properties Berhad (KLSE:LAGENDA) Poised for Sustainable Growth Despite High ROE and Flat Earnings?

Lagenda Properties Berhad (KLSE:LAGENDA) has long captivated investors with its robust return on equity (ROE), which stood at 14% for the trailing twelve months and is projected to rise to 17% over the next three years. Yet, this metric starkly contrasts with the company's historical earnings performance, which has averaged a -1.5% annual decline from 2019 to 2024, lagging far behind the Real Estate industry's 19.7% growth. This divergence raises a critical question: Is Lagenda's high ROE a harbinger of sustainable growth, or does it mask inefficiencies in capital allocation and reinvestment?

High ROE vs. Weak Earnings Growth: A Tale of Two Metrics

Lagenda's ROE, a measure of profitability relative to shareholders' equity, has consistently outperformed its earnings growth trajectory. For FY 2024, the company reported a 25% year-on-year net income increase to RM184.6 million, yet this growth missed analyst expectations, and quarterly earnings per share (EPS) dipped from RM0.056 in 3Q 2024 to RM0.053 in 3Q 2025. This inconsistency suggests that while Lagenda generates strong returns on equity, its ability to translate this into consistent earnings expansion remains uneven.

The disconnect may stem from reinvestment efficiency.

Lagenda's return on invested capital (ROIC) of 7.85% and asset turnover ratio of 0.37 indicate moderate effectiveness in deploying capital. While these metrics are respectable, they fall short of the industry's growth rates, implying that retained earnings-73% of profits are reinvested-are not being allocated with sufficient precision to drive earnings acceleration.

Payout Ratios and Capital Allocation: A Mixed Picture

Lagenda's payout ratio of 27% underscores its commitment to reinvesting profits, aligning with analyst forecasts of 26% annual earnings growth over the next three years. However, the company's capital allocation strategies reveal mixed signals. For instance, while Q1 2025 saw a 6.8% year-on-year revenue increase to RM264.4 million, net profit declined by 1.4% due to rising administrative costs from expansion into new states. This highlights a tension between growth initiatives and profitability.

Moreover, Lagenda's free cash flow has been negative (-RM307.49 million in the last 12 months), and operating cash flow also turned negative (-RM297.57 million). These figures suggest that the company is prioritizing capital expenditures over immediate cash generation, a strategy that could either fuel long-term growth or strain liquidity if not managed carefully.

Analyst Forecasts: Optimism vs. Valuation Realities

Analysts remain cautiously optimistic. Projections of 26% annual earnings growth and a 25.3% revenue increase far exceed the industry's 6.7% forecast, reflecting confidence in Lagenda's strategic initiatives, such as its joint venture with Seed Homes Lagenda in 2024. However, the Dividend Discount Model (DDM) suggests the stock is 34% overvalued at its current price of RM1.21, with an intrinsic value of RM0.91. This discrepancy between market optimism and valuation fundamentals raises concerns about whether the stock's premium is justified by tangible reinvestment efficiency or speculative momentum.

Conclusion: A Turnaround in the Making?

Lagenda Properties Berhad's high ROE and recent earnings rebound in FY 2024 signal potential for growth, but historical flat earnings and mixed reinvestment metrics caution against overconfidence. The company's ability to sustain its projected 26% earnings growth will hinge on two factors: improving capital allocation effectiveness-particularly in reducing negative cash flows-and ensuring that expansion-related costs do not erode profitability.

For now, Lagenda appears to be in a transitional phase. Its strong ROE and strategic partnerships offer a foundation for long-term value creation, but investors must remain vigilant about the risks of overvaluation and inconsistent reinvestment efficiency. As the company navigates its expansion into new markets, the coming quarters will be critical in determining whether its high ROE translates into sustainable earnings growth or remains a statistical anomaly.