Result

• Earnings below expectation. A & M Realty Bhd (A&M) registered 2016 net profit of RM20.0m (-16.0% yoy), which is below our expectation after meeting 90% of our full year net profit forecast. The weaker-than-expected results were due to lower contribution by its property development with lower new sales coupled with completion of one of its key projects. In 4Q16, the Group posted a net profit of RM4.5m, down 52.6% yoy and 45.1% qoq.

Comment

• Lower full year results mainly dragged down by Property,… A&M’s key earnings contributor, its Property development division recorded weaker performance as revenue and operating profit dropped by 5.0% and 3.4% yoy respectively. This was mainly due to lower new sales and completion of final phase of Amverton Park project in Bukit Kemuning in 3Q16.

• …..Manufacturing and Hotel divisions. The Group’s Manufacturing segment also posted unsatisfactory results in 2016, with segmental topline and bottonline down by respective 7.5% and 15.4% yoy on the back of lackluster demand and rising material costs with the appreciation of USD and Yen against MYR. Meanwhile, the sluggish performance recorded by the Hotel & Leisure segment (2016 revenue:-20.4%; EBIT:–73.5%) was affected by lower room occupancy of Puteri Resort Melaka, which has been undergoing major refurbishment during the year.

• Exerting effort to boost sales. Moving forward, A&M targets to launch Amverton Links in Sg Jati, Klang (GDV of RM114m) with affordable pricing range of RM400-450k/unit, aiming first-time home buyers and continue to scale up its marketing effort in promoting its semi-dees in Amverton Hills (GDV of RM111m) with ASP of RM1.3m/unit. Meanwhile, the Group will re-launch its 61 units of ‘homesteads’ bungalow lots in 3Q17 in Amverton Cove, Carey Island to capture the high-end market segment.

Earnings Outlook/Revision

• We cut our net earnings estimate for 2017F by 7.0% to RM20.0m (flat yoy) after lowering contributions from property, hotel & leisure and manufacturing divisions, and introduce our 2018F earnings estimate of RM22.0m (+10.0% yoy).

Valuation & Recommendation

• We downgrade the stock to SELL from HOLD as share price has overshot our previous target price following the positive newsflow on the proposed massive port-industrial city project in Carey Island. Our revised target price of RM1.17 (previously RM1.04) is now based on 55% discount to our RNAV/share of RM2.61 from previous 60% discount to better reflect the recent development in Carey Island which will benefit A&M over a longer run.
   
• Positives priced in. While we reckon that the 20-year development plan would help to unlock the Group’s landbank value for its flagship project, Amverton Cove in Carey Island, the giant port city project requires a long gestation period with phase 1 to be completed in 6-7 years as reported. We believe current share price has factored in the positives, and hence investors should take this opportunity to lock in profit as we believe the Group will continue delivering unimpressive future earnings growth on the back of slow project execution and lackluster sales amid prevailing soft property market.

Source: JF Apex Securities Research - 24 Feb 2017