Key takeaways from our recent conference call with management include:

4QFY24 earnings to rebound

Glomac's net profit for 9MFY24 plummeted by 52% YoY to RM8.4mn, missing expectations due to narrower property development margins. However, management anticipates earnings to strengthen in 4QFY24, driven by margin normalisation following the completion of low-margin development and accelerated recognition of progress billings for the nearly completed 121 Residences. Notably, 3QFY24 net profit surged nearly 8 times QoQ, with the EBIT margin improving from 9.7% in 2QFY24 to 12.5% post-completion of lowmargin development.

The Official Launch of the Loop City Puchong Is to be Delayed to FY25

The official launch of Loop City in Puchong is expected to be postponed to FY25. The initial phase is projected to generate a GDV of RM338mn, featuring 980 SoHo and serviced apartment units priced at an average of RM320,000 each. Despite completing the sales gallery in Nov-23, the response has been slightly below expectations, with approximately 150 units (or 15% booking rate) reserved. This is below the typical 60% take-up rate for high-rise property launches, which management attributes to high competition in the area. Ongoing marketing campaigns are underway to enhance sales, with the launch scheduled upon reaching the 60% booking rate target.

Reduced FY24 Sales Target From RM400mn to RM300mn

Due to the delayed launch of Loop City Puchong, achieving the RM400mn sales target seems challenging. However, management expects FY24 sales to at least equal FY23's RM302mn. Despite 9MFY24 new property sales reaching only RM142mn, management remains hopeful for stronger 4Q sales, supported by recent soft launches. Allamanda terrace houses at Saujana KLIA and Keys semiDs at Lakeside Residences, with a total estimated GDV of RM269mn, are showing promising take-up rates of 43% and 30%, respectively. Other ongoing and completed projects are also expected to contribute to 4Q sales.

A Healthy Balance Sheet Supports Land Banking

Management intends to actively pursue opportunities to expand its land bank. In terms of geographical preference, management favours expanding their presence in the Klang Valley region. Regarding product preferences, the focus is on strategically located land parcels that are suitable for both quick turnaround high-rise projects and bread-and-butter landed township developments. The group’s latest net gearing ratio of 0.08x (vs. the sector average of 0.4x) implies ample capacity to gear up to capitalise on land banking opportunities.

Forecast

In light of the underwhelming 9M earnings, we have revised our margin assumptions for the ongoing projects of the group. Furthermore, we have opted to adjust our sales projections for FY24/25/26 to RM300mn/RM400mn/RM450mn, a reduction from the previous forecasts of RM430mn/RM470mn/RM500mn, in light of the delayed launch of Loop City. Consequently, our earnings estimates for FY24/FY25/FY26 have been revised downwards by 15%/12%/13% to RM13mn/RM21mn/RM29mn respectively.

Valuation

Factoring in the earnings revision and rolling forward our valuation base year to CY25, we arrive at a new TP of RM0.47/share (previously RM0.46/share), based on a target P/Bk multiple of 0.3x. The current valuation is undemanding, with the stock trading at a CY25 P/B of 0.2x, notably lower than the sector average of 0.7x. Additionally, we believe the potential downside to share price is limited, supported by a robust free cash flow of 15 sen per share. Maintain Buy call on Glomac.

Source: TA Research - 29 Mar 2024