UEMS’ 9M18 core PATMI of RM51m were below expectations, mainly due to lower progress billings from its domestic projects and lower-than-expected JV contributions. The decline in revenue and earnings YoY were mainly due to the completion of projects in prior years while most of the new launches are still at the initial stages of development. 9M18 sales of RM900.5m are on track to meet target of RM1.2bn while unbilled sales remain healthy at 1.6x cover ratio. After lowering our earnings forecasts, TP was cut to RM0.79 (was RM0.90) based on unchanged 70% discount to estimated RNAV of RM2.63. Maintain HOLD.

Below expectations. 9M18 revenue of RM1.3bn translated into a core PATMI of RM51.0m, accounting for 29.2% and 18.8% of HLIB and consensus full year forecasts, respectively. The deviation was mainly due to the lower progress billings from its domestic projects and lower-than-expected JV contributions. We deem the results as below expectations even though 4Q18 will be substantially elevated by the recognition of its overseas projects worth more than RM755m.

QoQ. Lower revenue (-25.0%) was largely due to higher land sales recognized in 2Q18. Meanwhile, higher revenue from property development segment was recorded with maiden contribution from Australia. Core PATAMI came in at RM25.7m (loss making in 2Q18) after stripping off gains non-strategic land sales and impairment of inventories, a reversal from loss making 2Q18.

YoY. Revenue dropped (-49.2%) to RM430.1m due to high base effect from the land sales in Alderbridge and Iskandar Puteri in 3Q17. Property development however, registered higher revenue from inventory monetisation initiatives and the handover of its maiden Australia project. Core PATAMI dropped 75.6% in tandem with the drop in revenue, weaker margin as well as lower contributions from joint ventures. Note that 3Q17 numbers have been restated following the adoption of MFRS15.

YTD. Revenue declined (-17.1%) mainly due to the completion of projects in the prior year, while most of the new launches are still at the initial stages of development. However, core PATAMI decreased by lower magnitude 8.6% thanks to the project costs savings and lower operating expenses.

Sales are on track. New sales of RM236.7m achieved in 3Q18, bringing 9M18 sales to RM900.5m, is on track to meet full year target of RM1.2bn. Inventory monetisation initiatives contributed RM284.3m worth of sales and management expect these efforts to continue moving forward. Unbilled sales remain healthy at RM4.7bn (1.6x cover ratio) with 74% from overseas, providing earnings visibility moving forward.

Forecast. We lower our FY18/19/20 earnings by 8.4%/19.6%/29.8%, respectively after factoring lower recognitions of its local and JV projects.

Maintain HOLD with lower TP of RM0.79 (was RM0.90) based on unchanged 70% discount to estimated RNAV of RM2.63 after factoring the delays in JV projects. 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 Nov 2018