• Tambun Indah 1QFY17 net profit of RM24.0m came below our estimates making up 21% of full year estimates.

• Sales achieved for the quarter made up 20% of full year target of RM180m of which 90% came from its flagship project - the Pearl City in Seberang Perai.

• Tambun Indah continued its focus on selling affordable homes priced between RM400k-RM500k, all located in Seberang Perai.

• We downgrade to HOLD from BUY with TP of RM1.64 (previously RM1.94) based on blended valuation of PER and PBV of 6.0x and 1.5x respectively.

Sales show sign of improvement

• For 1Q17, we see sign of improvement with sales and units sold doubling in numbers (1Q17: Sales; RM36.2m, 70 units versus 4Q16: Sales RM17.8m, 36 units). However, we reckon this is still a far cry from a year ago of which both sales and units sold plunged by double digits as shown in Table 1 below. The slowdown is amid the slower sentiment which is facing developers across the Northern region. We are expecting group’s property sales for FY17 to reduce by c.21% (FY17E: RM180m versus FY16: RM229m).

Pearl City project is the only revenue generator

As of 31 Mar-17, group’s total undeveloped landbank and potential GDV stands at 405.9 acres and RM3.08bn respectively. Pearl City project alone makes up >90% in both landbank and GDV.

Stiff competition against bigger players

We understand that competition is getting stiffer especially with the recent arrival of SP Setia and Eco World. In the longer run, we still think Pearl City has a competitive advantage in terms of pricing due to its low land cost. Further out, we think the group may be able to raise its product pricing closer to the two bigger companies when the market sentiments improve. However, we expect higher operating cost to be incurred for the mid-term as the group rolls out more aggressive campaigns to drive sales.

Reduced earnings

We downgrade our call to HOLD from BUY with a new TP of RM1.64 (previous RM1.94) based on blended valuation of PER and PBV of 6.0x and 1.5x respectively. We reduced our earnings for FY17/18 by 15% and 12% respectively as we reduced our operating profit margins assumption by 5.2ppt (from 41.8% to 36.6%). The lower margins reduction is based on the assumption that higher operating cost to be incurred from marketing campaigns and slower than expected sales.

Source: BIMB Securities Research - 19 May 2017