Result

• Earnings below expectations. LBS Bina Group (LBS) recorded 2Q20 net profit of RM2.8m, tumbling 80.0% yoy and 69.9% qoq. Similarly, the Group recorded RM12.1m net profit for its 1H20, which fell 61.8% yoy. The result is below expectations, accounting for 21%/26% of our/street’s full year earnings estimates mainly due to higher-than-expected effective tax rate, weaker profit margin coupled with lower progress billings as a result of movement control order (MCO) which was meant to curb the outbreak of Covid-19 pandemic. 

Comment

• Subdued 2Q20. The weaker 2Q20 bottom line was mainly due to lower revenue (-47.7% yoy, -44.2% qoq) coupled with weaker profit margin (PBT margin: -4.7ppt yoy, - 1.0ppt qoq) as a result of unfavourable sales mix and lower contribution from other income. Moreover, the higher effective tax rate of 65.8% in this quarter (vs 2Q19: 44.9% and 1Q20: 52.7%) also weighed on its net earnings. Likewise, the abovementioned reasons also bogged down LBS’ 1H20 performance under its lacklustre Property Development and Construction divisions. During 1H20, projects within the Klang Valley such as LBS Alam Perdana, Kita@CyberSouth, Residensi Bintang Bukit Jalil, Zenopy Residence and Skylake Residence remained as the largest revenue contributor, accounting for more than 77% of the Group’s top line. 
• Come close to hit yearly sales target. We opine that LBS could easily exceed its revised sales target of RM1.0b for this year as the Group achieved RM0.9b sales as of 24 Aug 20. Majority of new sales were underpinned by Klang Valley projects (81%), mainly from its township developments such as Kita@CyberSouth and LBS Alam Perdana. Besides, the Group’s affordable township project, Bandar Putera Indah in Batu Pahat, Johor also contributed to the overall sales. Meanwhile, the Group chalked up RM2.2b unbilled sales as of July 20, which is equivalent to 1.6x of its 2019 topline. This provides the Group’s earnings visibility for the next 2-3 years.
• No significant progress on Zhuhai International Circuit (ZIC). The Group is in the midst of working on submission of a more enhanced and comprehensive upgrading and transformation plan to the local authority. At the same time, LBS also continues to explore and negotiate with any potential parties on sales offers or JV developments.

Earnings Outlook/Revision

• We slash our net earnings estimates for 2020F and 2021F by 36.2% and 10.8% to RM36.0m and RM57.9m respectively after revising higher the Group’s sales assumptions and effective tax rate whilst lowering its progress billings and profit margins. Our 2020F and 2021F net earnings estimates are now based on new sales assumptions of RM1.3b each.  

Valuation & Recommendation

• Maintain BUY on LBS with a higher target price of RM0.53 (from RM0.46). Our revised target price is pegged at 14x 2021F PE. We reckon that share price has discounted the sloppy 1H20 earnings as affected by the MCO. We favour the stock for its: a) Commendable sales amid prevailing soft property market, b) Sound business strategy of concentrating in selling affordable landed housings especially in Klang Valley; c) Strong earnings visibility underpinned by its healthy unbilled sales; and d) Unlocking potential landbank values in Zhuhai International Circuit (ZIC), China in the longer term.  

• Fundamental prevails under trying times. We opine that LBS is in good shape to weather the storm backed by its sound fundamental – sturdy balance sheet (net gearing of 0.5x), positive operating cash (RM60m as of 2Q20), declining inventories (from RM374m to current RM257m) and decent earnings visibility (unbilled sales equivalent to 1.6x 2019 topline).

Source: JF Apex Securities Research - 28 Aug 2020