Result

• Earnings below expectations. LBS Bina Group (LBS) recorded 3Q18 net earnings of RM24.1m, up 11.1% yoy and 15.9% qoq. Overall, 9M18 net profit of RM68.0 (-0.9% yoy) accounts for 62% of our full year earnings estimate and consensus. The result is below our expectation mainly due to high-than-expected minority interest (MI) and tax expenses amid 9M18 revenue and PBT meet 74% and 71% of our forecast.

Comment

• Better yoy and qoq. The higher yoy results in 3Q18 (PATAMI: +11.1% yoy) was attributable to lower effective tax rate during the quarter, 36.5% vs 38.9% in 3Q17 coupled with lower MI incurred (due to widened loss in the motor racing circuit in Zhuhai compared with a year ago, we believe) amid PBT increasing merely 2.8% yoy. Meanwhile, the Group’s better qoq performance was mainly due to higher work-in-progress by its existing projects as topline increased 34.6% qoq and further benefited from cost savings on certain completed projects during the quarter.

• Robust sales amid property headwinds. LBS successfully chalked up RM1.5b new sales as of November 2018, which account for 83% of its sales target of RM1.8b set for this year and 88% of our sales assumption of RM1.7b. Majority of sales were contributed by Klang Valley projects such as developments in Bukit Jalil, Alam Perdana, Zenopy Residences (Seri Kembangan), SkyLake Residence (Puchong) and recently-launched CyberSouth project. Despite the prevailing subdued property market, LBS’ ytd sales are 14% higher than a year ago (Jan-Nov 2018 new sales of RM1.3b) and exceed last year’s actual sales of RM1.4b.

• Commendable unbilled sales to underpin future earnings. Meanwhile, LBS chalked up RM1.7b of unbilled sales as of 3Q18, which is equivalent to 1.2x of its 2017 topline. Hence, this underpins the Group’s revenue visibility of more than a year.

• Overwhelming response towards its recently launched CyberSouth project. Early this month, LBS received good take-up rates for its newly launched township project in Dengkil, Klang Valley. Amongst all, 162 units of Kita Bayu 2-storey terrace houses were snapped up in hours with average selling price of RM530k/unit. Besides, Kita Bayu townhouses were 40% sold with average selling price of RM400k. We believe the Group could replicate its success in maiden launch of Alam Perdana township project in end of last year for its CyberSouth project.

• Status on Zhuhai International Circuit (ZIC). In October this year, the Y bridge was officially opened by Chinese President Xi JinPing. It is the world’s longest sea crossing bridge connecting Zhuhai-HK-Macao. We believe this latest development could benefit LBS’ ZIC which is strategically located in Zhuhai. To recap, LBS had terminated its HOA with NWP to jointly develop its 60% interests in 264-acre ZIC land in China. Currently, the Group is exploring other viable options for its development of ZIC project and it would take another 3-6 months to finalise the proper plan.

Earnings Outlook/Revision

• We slightly reduce our net earnings estimates for 2018F and 2019F by respective 6.8% and 4.3% to RM102.2m and RM125.4m after adjusting our MI and effective tax rates. Our new sales assumptions of RM1.7b for 2018F and RM1.9b for 2019F remain unchanged.

Valuation & Recommendation

• Maintain BUY on LBS with a lower target price of RM1.06 (RM1.30 previously), which is now based on wider discount of 35% (from 20% discount) to its RNAV/share of RM1.63. Our target price also implies 13.1x 2019F FD PE. The wider discount applied is to factor in current weak market sentiment on property counters whilst awaiting catalyst stemming from kick start of its ZIC project. Still, our target price renders over 50% upside to current share price.

• LBS is our top pick in the sector as we favour the stock for its: a) Robust new sales amid prevailing soft property market, with the Group’s sound business strategy of concentrating in selling affordable landed housings especially in Klang Valley; b) strong earnings visibility underpinned by its healthy unbilled sales; and c) unlocking potential landbank values in Zhuhai International Circuit (ZIC), China. We advise investors to accumulate the stock in view of its current share price weakness.

Source: JF Apex Securities Research - 3 Dec 2018