Period  1Q14/3M14

Actual vs. Expectations We consider Tropicana Corporation’s (“TROP”) reported 1Q14 PAT of RM7.8m as broadly within our and consensus forecast despite making up only 4% and 3% in 1Q14 of full-year estimates, as we are expecting a stronger 2H14 underpinned by completion of land sale from Canal City (308.72ac). Note that we have yet to impute the contribution from its Jalan Kia Peng (1.45ac) land sale.

 As for property development segment, TROP registered total sales of RM322m in 1Q14. While this appears to be proportionately lower than management’s and our FY14E target of RM2.0b, we are expecting a stronger 2H14 due to the timing of its new launches in Tropicana Heights (GDV: RM376m) and Tropicana Aman (GDV: RM770m) which will take place in 2H14. These are landed residential projects.

Dividends  No dividend was declared as expected.

Key Results Highlights On a YoY basis, the group’s 1Q14 PAT was down by 82% to RM7.8m mainly due to the absence of land sales being recognised this quarter. Should we adjust for the impact from the land sale in 1Q13, its 1Q14 revenue would improve by 66% underpinned by the construction progress of its key ongoing projects, i.e. Tropicana Cheras, Tropicana Avenue coupled with the contribution from its new project Tropicana Metropark has begun to kick in. However, its earnings would still be down by 49% due to a significant increase in minority interest (+866%) to RM11.8m as billings came from more JV projects.

 QoQ, TROP’s earnings saw a sharp decline of 87% from RM61.8m to RM7.8m was mainly due to similar reasons above.

Outlook  Management continues to target FY14E sales of c.RM2.0b (refer overleaf). Unbilled sales remain fairly strong at RM2.4b or about 2 years earnings visibility.

Change to Forecasts We tweaked our FY14E earnings higher by 20% from RM194m to RM233m. We have included the land sale gains of Tropicana Aman and Jalan Kia Peng which is expected to be completed by 2014. At the same time we also introduced our FY15E earnings of RM207m, which includes the Jalan Bukit Bintang land sale.

Rating Maintain OUTPERFORM

Valuations  We raise our TP higher by 3% to RM1.94 as we updated our model to capture the confirmed land sale gains in FY14 based on an unchanged 50% discount to our newly derived FD RNAV of RM3.89 (RM3.79 previously) which includes the recent land sale transactions. Our applied discount rate reflects the current tough and subdued property market condition.

 The stock offers 22% potential capital gain despite our heavy discount of 50% on its FD RNAV of RM3.89. Hence, we are maintaining our OUTPERFORM rating for now.

Risks  Execution risks (i.e. shortage of labours). Later than expected land sale recognition timeline.

Other Points  Management indicates that they are maintaining their sales target of RM2.0b in FY14 on the back of RM3.0b new launches of properties despite the market being subdued due to the cooling measures introduced by the Malaysian government. Hence, the group would be shifting their focus to launch more “safer” products (landed residential properties) in Greater Klang Valley, i.e. Tropicana Heights (GDV: RM376m), Tropicana Aman (GDV: RM770m) in 2H14. To recap, its Tropicana Heights project (landed residential) that is located in Kajang has received well response from the market with a take up rate of 87% to date since its maiden launch in 1Q14.

 Apart from its development front, management also has reiterated that they are still highly committed to its de-gearing exercise through the disposals of its land bank and also non-core assets to at least maintain its net gearing at a manageable level. To recap, in 1H14, TROP had already locked in the sale of two of its prime landbanks in Canal City (308.7ac) and Jalan Bukit Bintang (3.14ac) that are still pending for completion at this stage, which should be recognized by 2H14 and 1H15, respectively.

 Jalan Bukit Bintang Land Sale. The recent land sale measuring 3.14 acres and 30:70 joint venture with Agile Property Holdings Ltd (“AGILE”) was a positive move by TROP as part of its de-gearing exercise. TROP sold the land to the JV for approximately RM3280psf double of the cost of RM1609psf when TROP first acquired it in 2012. The land sale is expected to be completed by 1H15 and TROP is expected net gain of RM145m, we would expect its net gearing to come down from 0.54x (Mar-14) to 0.43x should TROP not buy any land in near future.

 Agile Property Holdings Ltd. It is one of the leading property developers in China focusing in Zhongsan, Guangzhou, Hainan and etc. It is listed on the main board of Hong Kong Stock Exchange with a market capitalization of HKD21.5b. We believe that with the joint venture, TROP would be able to leverage of AGILE’s expertise and market in Hong Kong to further attract foreign investors into the local scene, especially on its joint-development in Jalan Bukit Bintang.

Source: Kenanga