UEMS reported 9MFY20 core LATMI of -RM91.7m (from RM120.1m YoY) which came in below ours and consensus full year profit forecasts. New sales of RM223m was achieved in 3QFY20, bringing 9MFY20 to RM373.9m which represents 37% of FY20 sales target of RM1bn. 9MFY20 launches stood at RM250m with RM695m worth of launches taking place in 4QFY20 largely coming from a high-rise development in Mont Kiara (RM545m GDV). We now forecast FY20 to record a core LATMI of -RM11m (from a core PATMI of RM35.8m) and lower our FY21/22 forecasts by -39.2%/-26%. Maintain HOLD with a lower TP of RM0.39 (from RM0.42).

Below expectations. UEMS reported 3QFY20 core LATMI of -RM28.2m (QoQ: - RM59.9m, YoY: RM27.1m), bringing 9MFY20 core LATMI to -RM91.7m (from RM120.1m YoY). The results came in below ours and consensus full year expectations (RM35.8m and RM50.5m, respectively) largely due higher than expected operating costs incurred from its Property Development segment. 9MFY20 core LATMI sum has been arrived after excluding -RM55.4m of EIs (mainly -RM39m from inventory write down and -RM15m of forex loss). No dividends were declared.

QoQ. Core LATMI narrowed to -RM28.2m from -RM59.9m largely due to the lack of revenue sources during the MCO period back in 2QFY20. Nonetheless, 3QFY20 continued to record losses largely due to the economic impact of Covid-19 coupled with unavoidable operating costs.

YoY/YTD. UEMS recorded a core LATMI of -RM28.2m/-RM91.7m from a core PATMI of RM27.1/RM120.1m on the back of impacted operations by the ongoing pandemic.

New sales of RM223m was achieved in 3QFY20, bringing 9MFY20 to RM373.9m which represents 37% of FY20 sales target of RM1bn. We see potential hiccups in the company achieving its sales target given that bulk of the remaining launches takes place in Nov/Dec and sales recognition will likely be recorded in FY21 instead. 9MFY20 launches stood at RM250m with RM695m worth of launches taking place in 4QFY20 largely coming from a high-rise development in Mont Kiara (RM545m GDV).

Outlook. Unbilled sales on the local front stood at RM1.2bn, representing a cover ratio of 1.5x towards the local property development revenue. Nonetheless, we remain cautious on the margins generated by UEMS given the ongoing discounts given for its unsold units coupled with the ongoing losses from its Property Investment division. Meanwhile on the international front, UEMS is expected to recognise a lumpy gain from its handover of en-bloc service apartment in 4QFY20 (GDV worth AUD125m). With regards to the proposed merger with ECW, UEMS will revert with its decision by 2 Jan 2021.

Forecast. We now forecast FY20 to record a core LATMI of -RM9.4m (from a core PATMI of RM35.8m) and lower our FY21/22 forecasts by -49.2%/-37.5% to reflect lower margins from its Property Development coupled with delays in handover of some remaining Australian units.

Maintain HOLD with a lower TP of RM0.39 (from RM0.42) based on an unchanged discount at 80% to our estimated RNAV of RM1.97 after imputing changes in our earnings forecast. We see a lack of near-term catalyst given the subdued sentiment for property outlook in Johor coupled with weak sales and launch activities by the company during this pandemic.

Source: Hong Leong Investment Bank Research - 25 Nov 2020