Investment Highlights

• We maintain BUY recommendation on Glomac with a higher fair value (FV) of RM0.45/share (from RM0.38/share previously), based on a lower discount to RNAV of 45% (from 50% previously) (Exhibit 7), and neutral ESG rating of 3-star (Exhibit 8).

• The lower discount rate stems from improving sentiments in overall property market in Malaysia with the anticipation of revival of mega infrastructure projects and the potential relaxation of the conditions for Malaysia My Second Home (MM2H) program.

• The FV implies an FY24F PE of 9x, at parity to the current average of smaller cap property stocks.

• Glomac’s 1QFY24 core net profit (CNP) of RM4mil made up 11% of both our FY24F earnings and street’s. However, we deem this as within expectation as 1Q is Glomac’s seasonally weaker quarter. As a comparison, 1QFY21- 1QFY23 accounted for 5%-17% of FY21-FY23 core earnings. Hence, we have made no changes to our earnings forecasts for now.

• We believe that Glomac’s FY24F revenue and CNP will be largely supported by its unbilled sales of RM497mil (-6% QoQ), which represents a cover ratio of 1.4x FY24F revenue (Exhibits 3 & 5). We expect its unbilled sales will be replenished with FY24F planned launches totaling RM691mil.

• In 1QFY24, the group’s revenue dropped 8% YoY while CNP declined 22% YoY. This lower CNP was mainly due to the completion of several property development projects in FY23, coupled with slower new projects launched in FY23.

• Glomac secured new sales of RM101mil (+94% YoY) in 1QFY24, attaining 26% of its FY24F sales target of RM393mil (Exhibits 3 & 5). The major sales contributors were shop offices at Lakeside Boulevard II, 121 Residences and Plaza@Kelana Jaya.

• As compared to the previously guided FY24F launches, we noticed that management has increased FY24F planned launches by 45% to RM691mil, with the additional launches of semi-detached houses in Lakeside Residence.

• We believe Glomac can register commendable sales for the launches of new phases in Lakeside Residence and Saujana KLIA, driven by overwhelming demand for existing projects which have a take-up rate of >90% (Exhibit 5).

• Meanwhile, we are positive on the sales prospect for Loop City Puchong, which is adjacent to the group's existing Lakeside Residences project that has already fully sold its residential units.

• As at 31 July 2023, Glomac’s unsold inventory level was flattish QoQ at RM90mil. Over the past 4 years, Glomac’s inventory level of unsold units has been on a declining trend (Exhibit 6).

• Given minimal launches over the past 2 years, coupled with the positive cash flow generated from completed projects, Glomac’s net gearing ratio improved to 12% in 1QFY24 from 16% in 4QFY23. However, we estimate its net gearing ratio to expand to 0.28x in FY24F given the expected ramp up of launches totaling RM691mil in FY24F – 3.8x higher than RM184mil in FY23.

• In 1QFY24, the property investment division’s operating profit plunged 93% YoY despite a 27% YoY growth of revenue. This was mainly attributed to higher operating costs incurred for common areas of the group’s properties while tenants were still enjoying rental holidays during the early months of their tenancies.

• QoQ, the group’s 1QFY24 revenue fell 54% while CNP plummeted 71% primarily due to completion of certain development phases in 4QFY23 and 32% decline in sales QoQ. Notably, 4Q typically represents Glomac’s seasonally strongest quarter. For reference, 4QFY21-4QFY23 contributed nearly half of Glomac’s full year core earnings, ranging from 44%-45% of FY21-FY23 core earnings.

• Glomac currently has 2 townships in Johor, namely Sri Saujana in Kota Tinggi and Saujana Jaya in Kulai, which collectively contribute 10% of Glomac's remaining gross development value (GDV). Despite their location being 30km- 40km from Johor Bahru, we believe the affordability of the properties in these 2 townships can be an appealing factor for Johoreans. This is especially relevant as property prices in Johor Bahru have been on the rise in anticipation of improved connectivity after the completion of the Johor Bahru–Singapore Rapid Transit System in 2026.

• We like Glomac for its long-term outlook underpinned by its:
  (i) attractively priced products as evidenced by strong average take-up rate of 97% for existing projects;
  (ii) focus on township developments in Selangor, which has the largest population in Malaysia with strong housing demand; and
  (iii) FY24F earnings growth of 23%, backed by higher expected new launches (Exhibit 4).

• The stock currently trades at a compelling FY24F PE of 8x vs. a 4-year average of 13x, while dividend yields are decent at 4%.

Source: AmInvest Research - 29 Sept 2023