Period  1Q14

Actual vs. Expectations 1Q14’s core earnings of RM1.4m was way below our expectations, accounting for a mere 6% of street and 7% of our estimates, although topline was within our expectations at 27% of our estimate. The main reason was higher interest expense related to GP Mall, which can no longer be capitalized.

 Sales for the quarter was at RM16m (-41% YoY) which came within expectations at 20% of our estimate. It was driven largely by sales of Infiniti inventory, followed by Gurney Paragon Condos (inventory) and Bandar Putra Bertam homes.

Dividends  None, as expected.

Key Results Highlights QoQ, revenue declined 5% while core earnings was lower by 79%. EBITDA margin was compressed by 10.3ppt to 28.8% due to the reasons mentioned above while the company registered more billings from lower margin projects like BPB compared to Infiniti and GPC. Reported profit fell by 99% as last quarter included a significant fair value adjustment for GP Mall.

 YoY, core earnings was lower by 76%. Topline improved due to sale of property inventory and better GP Mall revenue. However, the mall continued to register slight operating losses, although this has narrowed to RM0.3m from RM1.1m. Net finance cost was up by 27% mainly due to the reasons mentioned earlier.

Outlook  The main drivers will be the affordable Bandar Putra Bertam (BPB) township and Gurney Paragon Mall rental income, while Alila 2 and Bayan Baru project will likely commence in mid-FY16 onwards. We also believe investors’ perception of the company may be affected by Datuk Khor’s resignation as executive chairman (refer overleaf).

Change to Forecasts Lowering FY14E and 15E core earnings by 23% and 14% to take into account the higher-than-expected operating losses from its non-development division and interest expense. Even though we have trimmed earnings, we do not discount further weaknesses in earnings, depending on their ability to roll out new launches and speed of profitability of their mall operating profits.

Rating Downgrade to UNDERPERFORM (from MP)

Valuation  Lower TP to RM2.15 (from 2.40) based on a widened 33% discount (25% previously) to our FD RNAV of RM3.20. Our discount rate reflects historical average levels. We are concerned about their weakened earnings and perception of the company since Datuk Khor has resigned as executive chairman. We hope to gain further clarity before reviewing our call/TP again.

Risks  Sector risks, including negative policies.

Source: Kenanga