Result

• Result significantly below expectation. Titijaya Land Berhad (Titijaya) recorded a net profit of RM2.9m in its 1QFY20 result, plummeting 71.6% yoy and 23.7% qoq. The result is substantially below our expectation as it accounts for 7% of our full year net earnings forecast mainly due to lower-than-expected progress billings and margins.

Comment

• Uninspiring yoy result……. Titijaya achieved weaker yoy result for its 1QFY19 mainly due to lower revenue, - 29.2% yoy, in the absence of one-time compensation income from compulsory land acquisition incurred in 1QFY19 and the property developments at H2O and Mizu completion during FY19. Meanwhile, current projects such as Neu Suites @ 3rdNvenue, The Shore @ Kota Kinabalu, The Riv @ Riveria City were relatively at early stages of construction. Furthermore, the weaker margins (EBIT margin: -8.0ppts; PBT margin: -10.3ppts) also weighed on yoy bottom line pursuant to the higher financing costs on banking facilities utilised for working capital (+36.8% yoy) coupled with the absence of one time reimbursement of costs from Prasarana Malaysia on temporary land occupation for LRT development during 1QFY19.

• ……..as well as qoq. The Group chalked up slightly higher top line, +3.6% qoq, underpinned by on-going projects such as Neu Suites @ 3rdNvenue, The Shore @ Kota Kinabalu and The Riv @ Riveria City as well as sale of completed properties. However, the lower in profit attributable to sales of completed property, namely Zone Innovation Park @ Klang which commands lower GP margin coupled with higher minority interest in relation to profit sharing on the JV development for Neu Suites @ 3rdNvenue.

• Outlook for high rise residence remains challenging. Management opines that property market remains challenging owing to the cautious sentiments and overall sluggish economy activities. The Group will remain focused on developing properties that are affordable. In additional, Titijaya will also focus on enhancing marketing initiatives by capitalising on the Home Ownership Campaign (HOC) and Rent–To–Own (RTO) campaigns to attract potential buyers.

• Envisaging new sales of RM500m on the back of RM1.2b new launches for FY20F. To recap, Titijaya recorded new sales of RM575m for FY19. We believe the Group could sustain its sales of RM500m for FY20F. The Group aims to launch a few projects totalling RM1.2b GDV in FY20F (CY2H19 onwards) which include: a) Damai Suria@Bukit Subang Phase 1 – Serviced apartment with an estimated GDV of RM178m, b) 3rdNveue@KL Phase 2 - Serviced apartment with an estimated GDV of RM338m, c) Riveria City@KL Sentral Phase 2 - Serviced apartment with an estimated GDV of RM570m, and d) Taman Seri Residensi@Klang Phase 3 – Semi-D and SelangorKu affordable housings with a combined GDV of RM96m. In a nutshell, Titijaya aims for RM400-500m sales in FY20F.  

Earnings Outlook/Revision

• We slash our FY20F and FY21F net profit estimates by 39.5% and 42.7% to RM25.0m and RM29.7m respectively after lowering our progress billings and margins to better reflect its higher development costs, marketing/promotional expenses for its future and current projects, finance charges and minority interests. Our FY20F and FY21F new sales are based on RM500m each.  

Valuation/Recommendation

• Maintain HOLD on Titijaya with an unchanged target price of RM0.29. Our valuation is now pegged at 14x FY21F fully-diluted EPS. Our target price also implies c.70% discount to its NAV/share of RM0.92 (small cap. property counters are currently trading at 0.3~0.4x P/B). 
• Major headwinds are: 1) oversupply of high-rise residences in Klang Valley; 2) high mortgage rejection rate; 3) affordability issue due to high cost of living and stagnant wages; and 4) prolonged slowdown in property market.

Source: JF Apex Securities Research - 2 Dec 2019