UEMS’s 1H18 core PATMI of RM25m (+21.5% YoY) was below expectations. The higher YoY results were due to higher interest income, project and operating cost savings initiatives after adjusted for gains from land sales. Stronger 2H18 is expected with lumpy overseas contributions. Unbilled sales were at 1.7x cover and new sales are on course to meet full year target. We lower our FY18 earnings by 12.6% but raise our FY19/20 earnings by 3.1%/4.0% after factoring in the latest guidance on the recognitions of oversea projects. Maintain HOLD rating at unchanged TP RNAV-based TP (70% discount) of RM0.90.

Below expectations. 1H18 revenue of RM861.1m translated into a core PATMI of RM25.2m, accounting for 12.6% and 10.4% of HLIB and consensus full year forecasts, respectively. The deviation was mainly due to the lower progress billings from its domestic projects and timing of recognition from its oversea projects. We deem the results as below expectations even though 2H18 will be substantially elevated by the recognition of its overseas projects worth more than RM1bn.

QoQ. Higher revenue (+99.3%) achieved was elevated by the land sale of RM364m offset by lower sales and progressive billings from newly commenced projects. After adjusted for non-strategic land sales and forex impact, 2Q18 reported a core LATMI of RM2.3m compared to a gain of RM27.6m in 1Q18, mainly due to higher marketing expenses related to its inventory monetisation campaign and projects in Australia.

YoY. The higher revenue (+97.1%) recorded in 2Q18 was mainly elevated by land sale, masking the lower progressive billings from newly commenced projects as various projects were completed last year. Core LATMI narrowed by 83.6% after adjusted for non-core items, helped by cost savings from development projects. Note that 2Q17 numbers have been restated after unwinding the contributions both Australia projects and land sale following the adoption of MFRS15.

YTD. The improvement in revenue (+21.1%) was primarily elevated by the land sale of RM382m while majority of its projects are at early development cycle. Core PATMI improved to RM25.2m (+21.5%) thanks to higher interest income, project cost savings coupled with lower operating expenses resulting from cost containment initiatives.

Outlook. Management expects recognition from both Aurora Melbourne Central and Conservatory worth some AUD400m by 2H18. Notably, net gearing is expected to gradually reduce from the current 0.57x following the expected completion of international projects and land monetisation initiatives.

Sales are on track. New sales of RM230m achieved in 2Q18, bringing 1H18 sales to RM663.8m, primarily contributed by Mayfair, Solaris Parq, and results from inventory monetisation efforts; on course to meet full year target of RM1.2bn. Besides, RM666m worth of launches are expected in 2H with the notable launches of Residensi Astrea (GDV: RM327m) is expected in 3Q. Unbilled sales remains healthy at RM4.9bn (local: 25%), providing the earnings visibility for the next two years.

Forecast. We lower our FY18 earnings by 12.6% but raise our FY19/20 earnings by 3.1%/4.0%, respectively after factoring in the latest guidance on the recognitions of its oversea projects.

Maintain HOLD with unchanged TP of RM0.90 based on unchanged 70% discount 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.

Source: Hong Leong Investment Bank Research - 29 Aug 2018