Result

• Results miss expectations. LBS Bina Group (LBS) recorded 2Q19 net earnings of RM14.0m, plummeting 32.7% yoy and 20.9% qoq. Overall, 1H19 net profit of RM31.7m (-27.6% yoy) accounts for 37-38% of our full year earnings estimate and consensus. The result is below our expectation no thanks to weaker-than-expected margin as dragged down by its Construction and Trading division, i.e. its listed subsidiary, MGB Berhad (MGB), coupled with the substantially higher effective tax rate and minority interest (MI), amid 1H top line meeting 47% of our full year revenue forecast. 

Comment

• Yoy and qoq performances were dragged down by higher effective tax rate and MI. For 2Q19, the significantly lower yoy and qoq PATAMI were mainly due to higher effective tax rate (2Q19: 46.3% vs 2Q18: 34.7%) and MI (2Q19: RM7m vs 2Q18: RM3.3m and 1Q19: RM1.4m) despite 2Q19 PBT increased by 3.3% yoy and 4.1% qoq.    Lackluster 1H19 amid resilient Property division. Likewise, the weaker 1H19 bottom line was due to the abovementioned reasons coupled with dismal showing posted by the Construction and Trading division (segmental revenue and PBT dropped 0.4% and 62% yoy respectively) in relation to soft margin from on-going projects, loss incurred by MGB and increase in depreciation and finance costs despite rising Group’s revenue, +18.6% yoy. On the other hand, the Group’s Property Development division was the key earnings driver for LBS as segmental revenue and PBT increased 20% and 99% respectively, driven by the impressive take up rates and steady construction progress from on-going projects such as Alam Perdana, Bandar Saujana Putra, Kita @ Cybersouth, Skylake Residence and Cameron Golden Hills in Klang Valley, Pahang and Johor. Notably, projects within Klang Valley remained as the largest revenue contributor, accounting for more than 75% of LBS’ top line during 1H19.    On track to hit RM1.5b new sales target. LBS successfully achieved RM1b new sales as of Aug 19, which constitute 67% of its full year sales target of RM1.5b. Majority of sales were contributed by Klang Valley projects, mainly from its township developments such as CyberSouth (52%), Alam Perdana (26%) and Residensi Bukit Jalil (6%). In tandem with rising new sales, LBS also chalked up higher unbilled sales of RM1.9b as of July 19, which is equivalent to 1.7x of its 2018 topline. This provides the Group’s earnings visibility for the next 2-3 years.

• Strategic launches to capitalise on current Home Ownership Campaign (HOC). LBS aims to launch RM0.9b worth of projects in 3Q-4Q19 (RM1.1b GDV of projects being launched since early this year), mainly targeting for first-time home buyers. New launches for this year are: 1) CyberSouth, Klang Valley with GDV of RM878m; 2) Bintang Bukit Jalil project with GDV of RM453m; 3) Alam Perdana, Klang Valley with GDV of RM473m; 4) Bandar Putera Indah, Johor with GDV of RM85m; and 5) Taman Kinding Flora, Chemor, Perak with GDV of RM71m.   Zhuhai International Circuit (ZIC) update. China government has recently unveiled the national development plan for the Greater Bay Area. We understand that LBS is currently working to improve and revise the ZIC upgrading and transformation plan. The Group will be targeting to resubmit its revised proposal to Chinese authority before end of this year.

Earnings Outlook/Revision

• We revise downwards our net earnings estimates for 2019F and 2020F by respective 20.5% and 15.0% to RM68.1m and RM85.2m after lowering our profit margins assumptions and progress billings as well as imputing higher tax expenses and MI. Our 2019F and 2020F net earnings estimates are based on new sales assumptions of RM1.5b each. 

Valuation & Recommendation

• Maintain BUY on LBS with a lower target price of RM0.65 (from RM0.73), which is now based on a wider discount of 60% (55% previously) to its RNAV/share of RM1.63 pursuant to weak earnings outlook as affected by its Construction and Trading division (i.e. its listed subsidiary MGB), as well as receding catalyst from the Group’s Zhuhai International Circuit (ZIC) transformation plan with no significant progress in the short term. Our target price for the stock also implies 12x 2020F FD PE.

Source: JF Apex Securities Research - 3 Sept 2019