1Q20 core PATMI of RM28.5m (-64.8% QoQ, -66.5% YoY), were below our and consensus estimates largely due to a higher than expected effective tax rate. Core PATMI fell QoQ/YoY by -64.8%/-66.5% to RM28.5m partly due to the halt in construction activities from the MCO implementation coupled with a higher effective tax rate (-46%) stemming from non-deductible expenses. As the group expects economic activities to take a breather, sales target for FY20 has been revised to RM3.8bn (from RM4.55bn), which represents a drop of c.-16% YoY. 1Q20 recorded sales of RM470m while unbilled sales stood at RM9.8bn, representing a cover ratio of 2.7x. We cut our FY20/21 earnings forecasts by - 37.9%/-4.5% and introduce our FY21 earnings forecast at RM591.4m. Maintain HOLD rating with a lower TP of RM0.75 (from RM0.85) with an 80% discount to RNAV of RM3.77. FY20 is expected to be a bottom year as FY21/22 will be supported by large foreign recognitions from the UK and Australian projects.

Below expectations. 1Q20 recorded core PATMI of RM28.5m (-64.8% QoQ, -66.5% YoY), which was below our and consensus estimates accounting for only 11% and 8.6% of full year forecasts, respectively. The results were below expectations largely due to a higher than expected effective tax rate.

Dividend. None Declared.

QoQ/YoY. 1Q20 core PATMI fell -64.8%/-66.5% to RM28.5m partly due to the halt in construction activities from the MCO implementation coupled with a higher effective tax rate (-46%) stemming from non-deductible expenses.

Sales and launches. As the group expects economic activities to take a breather, sales target for FY20 has been revised to RM3.8bn (from RM4.55bn), which represents a drop of c.-16% YoY. 1Q20 recorded sales of RM470m (77% local and 23% international), which represents 12% of the updated full year sales target. In addition, RM723m worth of bookings were secured in 1Q20 and over RM200m were secured during the MCO period. Nonetheless, the MCO has impacted the overall process of converting bookings into sales and we expect sales volumes to remain subdued in the near-term. Unbilled sales stood at RM9.8bn, representing a cover ratio of 2.7x. With regards to launches, RM478m worth of projects were launched, all within the Klang Valley region which comprises of a variety of landed properties. We expect the launching of new projects to pushback closer towards 4QFY20 as a window period will likely be required to ensure a better take-up.

Outlook. As the ongoing Covid-19 outbreak and fragile political climate will likely impact the overall property market in the near-term, we see potential risks towards its sales target given the high base figures vis-à-vis other property counters. We gather that some construction sites which have met the eligible requirements and gotten approval, have resumed construction work albeit at a slower pace. Management will also continue efforts to clear its RM1.3bn worth of inventories to support earnings in this challenging environment.

Forecast. We cut our FY20/21 earnings forecasts by -37.9%/-4.5% after imputing a higher effective tax rate, slower progressive billings and weaker sales in FY20. We also introduce our FY21 earnings forecast at RM591.4m. Maintain HOLD rating with a lower TP of RM0.75 (from RM0.85) with an unchanged 80% discount to RNAV of RM3.77 as we impute the earnings changes and roll forward our valuation. FY20 is expected to be a bottom year as FY21/22 will be supported by large foreign recognitions from the UK and Australian projects.

Source: Hong Leong Investment Bank Research - 15 May 2020