Quarterly Results

• Into the red – HCK posted 2Q18 net loss of RM1.8m against a net profit of RM564k in 2Q17 following lower revenue and higher marketing costs to promote the edusphere@Cyberjaya serviced apartments.

• Lower revenue - Quarterly revenue dropped 45% YoY to RM4.2m after completion and delivery of property development projects.

• Lower QoQ – HCK posted a net loss of RM1.8m against a net profit of RM224k in 1Q18 as quarterly revenue plunged 55% QoQ.

• Reduced property income – Revenue from Property division decreased 48% YoY and 58% QoQ to RM3.7m. As such, the property division posted an operating loss of RM522k.

• F&B posted maiden profit – Sales from its Jamaica Blue coffee chain dropped 7% YoY and 23% QoQ to RM461k but it managed to post its maiden operating profit of RM178k.

• Challenges ahead - We expect income from HCK’s property division to remain flat in view of current lackluster sentiment among homebuyers. However, the F&B business is expected to improve with 5 outlets and better consumer sentiment.

• 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.

Valuation & Recommendation

• Below expectation – 1H18 revenue accounts for only 15% of our full year forecast of RM90.3m while 6 months’ net loss of RM1.6m is far from our FY18 estimate of RM3.5m.

• Reducing earnings forecast – As such, we are lowering our EPS estimates for FY18 and FY19 by 77% and 19% as well as revenue forecasts by 77% and 18% respectively due to lower than-expected recognition from the edusphere@Cyberjaya project.

• Downgrade to SELL from HOLD call with a lower target price of RM1.06 (previously RM1.24) based on a higher discount of 40% (from 30%) on its realizable net asset value (RNAV)/share of RM1.78 in view of the stock’s low earnings visibility and trading liquidity.

Source: JF Apex Securities Research - 30 Aug 2018