Quarterly Results

• Back into the black – HCK posted 3Q18 PATAMI of RM1.9m against net loss of RM674k in 3Q17 as higher revenue and lower cost of sales cushioned higher interest expense.

• Higher revenue - Quarterly revenue grew 18% YoY to RM7.2m due to higher take-up rate of the Edusphere @ Cyberjaya development.

• Improved QoQ – HCK posted a net profit of of RM1.9m against a net loss of RM1.8m in 2Q18 as quarterly revenue jumped 70% QoQ.

• Higher property income – Revenue from Property division increased 25% YoY and 79% QoQ to RM6.7m. The property division posted an operating profit of RM4.4m.

• F&B back into the red – Sales from its Jamaica Blue coffee chain dropped 27% YoY but gained 2% QoQ to RM641k. In 3Q18, the division posted an operating loss of RM123k.

• Potential acquisition - According to a news report, HCK is said to be in negotiations to take over the delayed Empire Remix development in USJ1, Subang Jaya from Mammoth Empire Holdings (MEH) for RM350m. Cash-strapped MEH is the developer of The Duo and The Cubiz, which HCK bought en bloc. If the deal goes through, gearing level could rise from 0.79x to finance the purchase.

• Project delay? - The Duo serviced suites (with a GDV of RM285m) is expected to bump HCK’s earnings next year when the units are delivered. However, the project could be delayed due to MEH’s financial position.

Valuation & Recommendation

• Within expectation – 9M18 revenue exceeded our full year forecast of RM20.6m while 9 months’ net profit of RM361k made up 45% of our FY18 estimate of RM800k. Immediate earnings growth will be supported by higher take up of the Edusphere @ Cyberjaya.

• Maintaining earnings forecast – We are keeping our EPS estimates for FY18 and FY19 pending updates on The Duo’s status.

• Maintain SELL call with an unchanged target price of RM1.06 based a discount of 40% on its realizable net asset value (RNAV)/share of RM1.78.

Source: JF Apex Securities Research - 27 Nov 2018