Quarterly Results

• Narrowed losses – HCK posted a net loss of RM708k in 3Q17 due to higher operating expenses (+19% to RM4.8m) and interest expense of RM948k. The losses narrowed from RM3.75m a year ago.

• Higher revenue – Despite the loss, quarterly revenue jumped 167% YoY to RM6.1m mainly due to improved property sales. Overall, 9M17 net losses narrowed 66% YoY to RM1.2m while revenue grew 61% to RM19.8m.

• Slower QoQ – On a QoQ basis, its 3Q17 turned into net loss against a net profit of RM564k in the preceding quarter, while revenue declined 21% QoQ from RM7.7m due to lower project billings.

• Property driving growth – Revenue from Property division increased 226% YoY but declined 25% QoQ to RM5.4m, making up the lion share of revenue. Similarly, operating profit from this division rose from a loss of RM3.05m in 3Q16 but dropped 68% QoQ to RM683k.

• F&B loss narrowed – Sales from its Jamaica Blue coffee chain grew 1% YoY and 30% QoQ to RM641k while operating losses narrowed by 95% YoY and 97% QoQ to RM24k.

• Flat year - We expect flat earnings in 2017 as its property development will only kick off next year. The F&B business is expected to improve in 4Q17 with 4 new franchisees commencing operations.

• Going forward, 2018 earnings will come from the development of Phase 2 of EduSphere, Cyberjaya which will be launched in end-2017 with a gross development value (GDV) of RM245m.

• In 2019, bumper earnings are expected to be booked with lump sum recognition of sales from The Duo serviced suites upon delivery of the units. The Duo’s entire project GDV is RM285m and currently 64% or equivalent to GDV of RM180m has been sold.

• As such, revenue is expected grow exponentially by 225% YoY and 315% YoY to RM90.8m and RM376.6m in 2018F and 2019F respectively. Similarly, net profit is expected to increase 310% YoY and 302% YoY to RM3.5m and RM14.1m in 2018F and 2019F respectively.

• Gearing and interest cost are expected to increase due to borrowings to fund upcoming property trading, investments and development projects. However, gearing then will be reduced upon delivery of The Duo project.

Earnings Outlook & Revision

• Forecasts lowered – 9M17 revenue achieved 67% of our full year forecast while its net loss of RM1.2m is lower than our full year estimate of RM1.2m net profit. As such, we are slashing our sales estimate for 2017 by 5% to RM27.8m and forecasting a net loss of RM1.7m.

Valuation & Recommendation

• Maintain HOLD call with an unchanged target price of RM1.24 based 30% on its realizable net asset value (RNAV)/share of RM1.78.

Source: JF Apex Securities Research - 29 Nov 2017