• 1Q19 core earnings fell 26.9% qoq and 1.1 %yoy due to lower construction margin and weak property segment. This brings core earnings to trail our expectations at 20%.

• We cut our FY19F/FY20F forecast by 5%/12% on delays of property launch with construction segment remaining its key earnings driver in view of RM3.1bn outstanding orderbook.

• Downgrade to HOLD with lower RM1.35 TP. However, we remain positive on the stock given its net cash position, 3-years earnings visibility and steady job flow from its diverse client pool.

Earnings dipped

1Q19 core earnings fell 26.9% qoq and 1.1% yoy due to lower construction margin and weak property segment (Table 2). Higher overhead cost impacted construction margin while, the reduced earnings on property segment was due to nearly full recognition of its sole property development project, Vista Residences. Recall that the development completed in 4Q18 and it expected to recognised the remaining RM17m unbilled sales in 2Q19. Overall, core earnings trailed estimates at 20%.

Reduce forecast on delays property launch

We cut our forecast for FY19F/FY20F by 5%/12% mainly due to delays in property launch (Table 3). Yakin Land and Monterez golf club are the only remaining landbank available for property developments which have been postponed until 2020 (instead of our earlier expectations in 2H19) amidst persistent sluggish property market.

Construction segment as main revenue driver

In view of delays in property launch, the construction segment will be its main earnings driver in view of RM3.1bn outstanding orderbook, which could sustain for the next 3 years. On higher overhead cost, we believe it is transient and expect its superior margin could be sustained in FY19 due to core expertise in high-rise construction and strong cash position for working capital.

Downgrade HOLD with TP of RM1.35

We downgrade our call to HOLD and reduce our SOP-derived TP to RM1.35 (from RM1.40) after we peg 11x to its FY19F EPS (Table 4). Still, we continue to like the stock given its strong net cash position, 3-year earnings visibility and steady job flow from its diverse client pool. Accumulate on dips.

Source: BIMB Securities Research - 31 May 2019