1Q19 revenue of RM846.9m translated into a core PATMI of RM85m (-16.3% QoQ, +38.2% YoY), accounting for 24.6% and 18.8% of HLIB and consensus full year forecasts, respectively. 1Q19 achieved sales of RM718m and GDV launch of RM349m. Management has chosen to maintain its sales target for now, with the possibility of revising it after 2Q19. Nonetheless, forward earnings visibility continues to be supported by the total unbilled sales of RM11bn, representing a strong cover ratio of 3.3x. We adjust our FY19/20 earnings forecast by +1.2%/- 46% as we delay the recognition of the Battersea commercial components to FY25 and make housekeeping adjustments. We maintain our BUY recommendation with a lower TP of RM2.65 based on a higher discount of 55% (from 50%) to RNAV of RM5.88.

Within expectations. 1Q19 revenue of RM846.9m translated into a core PATMI of RM85m (-16.3% QoQ, +38.2% YoY), was within HLIB but below consensus estimates accounting for 24.6% and 18.8% of full year forecasts, respectively. No dividends were declared.

QoQ. 1Q19 revenue declined 15.1% to RM846.9m (from RM1019.1m) largely due to aggressive inventory monetisation carried out in 4Q18 to reach its yearly sales target. Core PATAMI fell 16.3% to RM85m (from RM101.5m) in tandem with revenue.

YoY. Revenue increased 31.9% from RM655.5m largely due to improved progressive revenue recognition from strong take-up rates in the previous quarter from the mature townships in the Central and Southern region. Core PATAMI rose 38.2% in tandem with revenue coupled with improved operating margins.

Battersea commercial components. Recall that in 17 Dec 2018, the SP Setia-Sime Prop-EPF JV announced its proposed disposal of the commercial components of the Battersea Power Station for a base consideration of GBP1.58bn (i.e. cost component) with an adjustment component of GBP187m (i.e. profit component) at the end of 5 years after completion (2025). After further clarification from management, we note that the profit recognition of this project (GBP187m) will only take place in 2025, as opposed to our previous assumption of 2020.

New sales of RM718m (FY19 target RM5.65bn) was achieved in 1Q19 (6% from international). Sales from the domestic market constitutes of: (i) Central Region: RM474.8m; Northern & Southern Region: RM202.3m. Management has chosen to maintain its sales target for now, with the possibility of revising it after 2Q19. GDV launch of RM349m was achieved in 1Q19 (FY19 target RM6.8bn). We believe that the sales and GDV launch targets may not be achieved amidst the wait-and-see sentiment which continues to drag the market. Hence, our internal FY19 sales assumption of RM4bn represents a more conservative target compared to management’s. Nonetheless, forward earnings visibility continues to be supported by the total unbilled sales of RM11bn, representing a strong cover ratio of 3.3x.

Forecast. We adjust our FY19/20 earnings forecast by +1.2%/-46% as we delay the recognition of the Battersea commercial components to FY25 (c.RM394m PBT) and make housekeeping adjustments. We introduce our FY21 earnings numbers. Maintain BUY rating with a lower TP of RM2.65 (from RM3.03) as we increase our discount to RNAV to 55% (from 50%) of RM5.88 to reflect the lingering weak property market sentiment. Earnings trajectory is expected to improve moving forward along with better progression for newer projects. At current valuations (63% discount to RNAV and 0.7x PB), it is attractive for investors to collect on the backdrop of better earnings trajectory and growth expectations in FY20.

Source: Hong Leong Investment Bank Research - 10 May 2019