UEMS’s 1Q18 core PATMI of RM32m (-8.5% YoY) was within expectations. The higher QoQ results were mainly due to contribution from strategic land sales and lower SG&A. Lower YoY results was attributable to lower progressive billings from newly commenced projects. Stronger 2H18 is expected given the recognition of its overseas projects. Unbilled sales was at RM4.8bn (1.7x cover) and strong new sales of RM434m is on course to meet full year target of RM1.2bn. Maintain HOLD with lower TP of RM0.90 (was RM1.20) as we factor higher discount of 70% (from 60%) to our RNAV-derived valuation.

Within expectations. 1Q18 revenue of RM287.7m translated into a core PATMI of RM31.9m, accounting for 15.9% and 13.3% of HLIB and consensus full year forecasts, respectively. We deem the results to be in line as 2H18 will be substantially elevated by the recognition of its overseas projects.

QoQ. 1Q18 revenue declined by 6.6% mainly caused by lower progressive billings as newly launched projects such as Solaris Parq, Serimbun and Kiara Kasih are all at its initial stage of development. Core PATMI stood at RM31.9m compared to a loss of RM46.4m in 4Q17, boosted by profit from strategic land sale and lower SG&A given the high base pertaining to new launches. Note that 4Q17 numbers have been restated after unwinding the profit contribution of RM87m from both Australia projects and land sale following the adoption of MFRS15.

YoY. Revenue contracted by 31.5% mainly caused by lower sales and progressive billings from newly commenced projects while various projects such as Teega, Arcoris and Residensi 22 were completed last year. Core PATMI was down by 8.5% after adjusting for forex gain/loss despite the contribution of strategic land sale and higher contribution from associates and JVs.

Outlook. Management expects recognition from both Aurora Melbourne Central and Conservatory worth some AUD407m by 2H18. Notably, net gearing is expected to gradually reduce from the current 0.51x following the expected completion of international projects and land monetisation initiatives.

Strong sales. New sales of RM434m achieved in 1Q18 was primarily contributed by Mayfair and Solaris Parq, on course to meet full year target of RM1.2bn. Unbilled sales remains healthy at RM4.8bn (local: 26%), providing the earnings visibility for the next two years.

Forecast. Unchanged as the results were inline.

Maintain HOLD with lower TP of RM0.90 (from RM1.20) as we factor in higher discount (70% from 60% previously) to estimated RNAV of RM2.99. We see lack of near term catalyst given the subdued sentiment for property outlook in Johor as well as potential bumpy earnings moving forward given the adoption of MFRS15 in the recognition of their overseas projects. Furthermore, post GE14, we foresee delays in developing/monetising their land in Johor given the new federal administration’s stance on reviewing mega projects, including the HSR which was supposed to be a game changer.

Source: Hong Leong Investment Bank Research - 23 May 2018