Quarterly Results

• Back into the black – HCK posted 4Q18 PATAMI of RM6.3m which was same as in 4Q17 as higher revenue, lower operating cost and a RM11m fair value gain on investment properties cushioned higher interest cost.

• Higher revenue - Quarterly revenue grew 73% YoY to RM17.4m due to disposal of 8 units of property inventories and higher contribution from its F&B business.

• Improved QoQ – HCK’s 4Q18 net profit more than tripled from RM1.9m in 3Q18 mainly due to the fair value gain while revenue more than doubled to RM17.4m.

• Higher property income – Revenue from Property division increased 75% YoY and 143% QoQ to RM16.4m. The property division posted an operating profit of RM14.6m (-11% YoY but +235% QoQ) due to the fair value gain.

• Other divisions remain in the red – Revenue from Others grew 38% YoY and 106% with operating losses narrowing 12% YoY and 36% QoQ to RM0.73m.

• For the full year, FY18 net profit surged 30% YoY to RM6.6m despite a lower fair value gain (vs RM16m in FY17) as revenue rose 28% YoY thanks to higher property sales.

• Redeveloping Remix 2 - Last month, HCK took over the development of Remix 2 @ Subang Jaya and rebranded it as Edumetro education hub. HCK also awarded a RM280m contract to Kerjaya Prospek as the main contractor of the development, which is expected to complete in 28 months. We are concerned as the financing of the development would add on HCK’s gearing of 0.8x currently.

Valuation & Recommendation

• Within expectation – FY18 revenue exceeded our full year forecast of RM20.6m while 12 months’ core PBT of RM1.5m also met out FY18 estimate of RM1.0m. Immediate earnings growth will be supported by higher take up of the Edusphere @ Cyberjaya.

• Slashing earnings forecast – We are lowering our FY19 EPS estimates by 44% after the delay in Remix 2 which prompted HCK to take over the development.

• To recap, HCK purchased 2 properties en bloc in the Remix 2 from Empire Mammoth in 2012 but were not completed due to the latter’s financial troubles. HCK has sold over half of The Duo units but revenue could only be recognized when the properties are delivered upon completion in 28 months.

• Maintain SELL call with a lower target price of RM1.02 (from RM1.06) based a discount of 40% on a lower realizable net asset value (RNAV)/share of RM1.70 (previously RM1.78) due to the delay in the Duo project. The steep discount is due to the unfavourable outlook on the property sector.

Source: JF Apex Securities Research - 28 Feb 2019