Investment Highlights

• We maintain BUY recommendation on Glomac with a lower fair value (FV) of RM0.42/share (from RM0.45/share previously), based on an unchanged discount of 45% to RNAV (Exhibit 7) and neutral ESG rating of 3-star (Exhibit 8). The FV implies FY25F PE of 10x, slightly higher than the current average of smaller cap property stocks.

• The lower FV stems from the lowering of FY24F/FY25F/FY26F core net profit (CNP) by 51%/24%/16% after accounting for lower-than-expected core net profit (CNP) margin owing to higher construction cost. Meanwhile, the delay of official launches of Loop City Puchong to 3QFY24 from 2QFY24 could lead to lower progress billing in subsequent years.

• Glomac’s 1HFY24 CNP of RM5mil came in below expectation, making up only 15% of our earlier FY24F earnings and 13% of street’s.

• The variance to our forecast was mainly due to lower-than-expected CNP margin as a result of increased construction cost and finance expense, coupled with a higher mix of low margin project.

• In 1HFY24, the group’s revenue dropped 20% YoY while CNP plunged 73% YoY. This was mainly attributed to the completion of several property development projects in FY23, coupled with slower new projects launched in FY23.

• Meanwhile, 1HFY24 CNP margin fell significantly to 4% from 12% in 1HFY23. This was mainly due to higher contributions from lower margin projects such as Seri Kenanga Rumah Selangorku at Saujana Perdana. Meanwhile, Glomac’s CNP margin was impacted by higher construction costs and finance expenses.

• Glomac secured new sales of RM138mil (+30% YoY) in 1HFY24, attaining only 35% 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.

• Nevertheless, we believe Glomac FY24F sales target will be supported by upcoming launches of Loop City Puchong and new phase of Lakeside Residences with a combined GDV of RM626mil (Exhibit 4).

• We believe Glomac is able to register commendable sales for the launches of new phases in Lakeside Residence, driven by overwhelming demand for existing projects which has already fully sold out (Exhibit 5).

• Meanwhile, we are positive on sales prospects for Loop City Puchong, which is adjacent to the group's existing Lakeside Residences project. Presently, Glomac has garnered over 400 registrations of interest for the initial phase of 980 units set to be launched.

• As at 30 September 2023, Glomac’s unsold inventory fell 3% QoQ at RM87mil. Over the past 4 years, Glomac’s inventory of unsold units has been on a declining trend (Exhibit 6).

• Given minimal launches over the past 2 years, coupled with positive cash flow generated from completed projects, Glomac’s net gearing ratio improved to 0.1x in 2QFY24 from 0.12x in 1QFY24. However, we estimate its net gearing ratio to expand to 0.2x in FY24F given the expected ramp up of launches totaling RM626mil in FY24F – 3.4x higher than RM184mil in FY23.

• In 1HFY24, the property investment division’s operating loss was RM144K (vs. an operating profit of RM291K) despite a 19% YoY growth of revenue. This was mainly attributed to higher operating cost 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 2QFY24 revenue fell 7% while CNP plummeted 88%, primarily due to higher finance cost together with 63% decline in sales given slower new projects launched in FY23.

• Nevertheless, we believe that Glomac’s FY24F revenue and CNP will be largely supported by its unbilled sales of RM451mil (-9% QoQ), which represents a cover ratio of 1.5x FY24F revenue (Exhibits 3 & 5). We expect its unbilled sales will be replenished with FY24F planned launches totaling RM626mil. Meanwhile, we anticipate a recovery in CNP margin moving forward, driven by a higher mix of high margin products from upcoming launches.

• We like Glomac for its long-term outlook underpinned by its: (i) Attractively-priced products as evidenced by strong average take-up rates of 99% for existing projects; (ii) Focus on township developments in Selangor, which has the largest population in Malaysia with robust housing demand.

• The stock currently trades at a compelling FY25F PE of 9x vs. a 4-year average of 13x, while dividend yields are decent at 4%.

Source: AmInvest Research - 30 Nov 2023