FY18 core PATAMI of RM77m was below ours and consensus expectations. The deviation was largely due to the aggressive inventory monetisation of domestic property in 4QFY18 (c.RM100m of operating losses). FY18 sales of RM1.4bn exceeded full year target of RM1.2bn. We tweak our earnings forecasts for FY19: +14.5% and FY20: -7.5% as we update the recognition of international projects for FY19 and lower margins from upcoming domestic launches. Maintain HOLD with an unchanged TP of RM0.79 based on a 70% discount to SOP.

Below expectations. FY18 revenue of RM2bn translated into a core PATMI of RM102.8m, accounting for 48% and 31% of HLIB and consensus full year forecasts, respectively. While there was significant recognition of international projects during the 4QFY18 as expected, this was largely offset by the aggressive inventory monetisation of the domestic property (c.RM100m of operating losses) in which the latter contributed to the deviation. Note that FY17 numbers have been restated to account for the adoption of MFRS15.

QoQ. Revenue rose 75% to RM752.8m (from RM430.1m) largely due to the partial settlement of international projects (i.e. Conservatory and Aurora) which contributed RM466m in the quarter (3QFY18: RM196m). However, core PATAMI increased by only 1.3% to RM26.1m (from RM25.7) as the 4QFY18 domestic property segment made an operating loss of c.RM100m from aggressive inventory monetisation (i.e. selling at a significant discount).

YoY. Revenue increased 148.2% from RM303.3m due to the partial settlement of international projects (i.e. Conservatory and Aurora) despite lower contributions from the domestic projects. Core PATAMI returned to profitability from a loss of RM32.9m in the preceding year (largely due to higher marketing expenses in the quarter).

YTD. Revenue increased 9.9% due to the partial settlement of international projects (i.e. Conservatory and Aurora). Core PATAMI increased 237.5% due to cost saving measures in FY18 coupled with a low base effect in FY17 (from high operating expenses and aggressive inventory monetisation throughout the year).

Sales exceeded target. New sales of RM533m achieved in 4Q18, bringing FY18 sales to RM1.4bn, exceeding its full year target of RM1.2bn. FY18 inventory monetisation initiatives contributed RM433m worth of sales and management expects these efforts to continue. Unbilled sales remain healthy at RM4.4bn (2.3x cover ratio) with 68% from overseas, providing earnings visibility moving forward.

Outlook. For FY19, UEMS is targeting for a flat sales target of RM1.2bn, while GDV launches are targeted at RM1.2bn (+33% YoY). 30% of GDV launches are located in the Southern Region while the remaining 70% in the Central Region; bulk of the launches are priced between RM500k to RM1m and command a slightly lower margin vis-à-vis historical product mix.

Forecast. Despite the results being below expectations, we take this opportunity to tweak our earnings forecasts for FY19: +14.5% and FY20: -7.5% as we update the recognition of international projects for FY19 coupled with lower margins from upcoming domestic launches. Maintain HOLD with an unchanged TP of RM0.79 based on a 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 - 27 Feb 2019