Quarterly Results

• Back into the black – HCK posted 1Q18 net profit of RM224k against a net loss of RM1.1m in 1Q17 following improved revenue.

• Higher revenue - Quarterly revenue jumped 59% YoY to RM9.5m mainly due to improved progress billings from its ongoing property development projects.

• Lower QoQ – On a QoQ basis, 1Q18 net profit dropped 97% QoQ due to absence of fair value gain of RM16.7m posted in 4Q17 and higher interest cost. Quarterly revenue was flat with a decline of 6% QoQ.

• Property driving growth – Revenue from Property division increased 65% YoY but declined 4% QoQ to RM8.9m, making up the lion share of revenue. Similarly, operating profit from this division rose 756% YoY and 217% QoQ to RM2.2m.

• F&B remained in the red – Sales from its Jamaica Blue coffee chain grew 3% YoY but declined 15% QoQ to RM600k while operating losses widened 27% YoY and 643% QoQ to RM450k.

• Better results ahead - We expect earnings from property development to pick up this year after the launch of serviced apartments at EduSphere, Cyberjaya in end-Dec with a gross development value (GDV) of RM245m. Similarly, the F&B business is expected to improve in 2018 with 4 new franchisees up and running.

• In 2019, bumper earnings are expected to be booked with lump sum recognition of sales from The Duo serviced suites (GDV of RM285m) upon delivery of the units.
• Gearing and interest cost are expected to remain high due to borrowings to fund upcoming property trading, investments and development projects. However, gearing then will be reduced upon delivery of The Duo project.

Valuation & Recommendation

• In line – 1Q18 revenue accounts for only 11% of our full year forecast of RM90.3m while its net profit RM0.22m makes up 6% of our FY18 estimate of RM3.5m. We are keeping our estimates for FY18F and FY19F in anticipation of improved earnings from its property division.

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

Source: JF Apex Securities Research - 1 Jun 2018