Period  2Q14/1H14

Actual vs. Expectations 1H14 core earnings of RM157.0m came in below expectations, making up 31% of street’s FY14E estimates and 36% of ours. Revenue was only broadly within expectations, being 44% of street and our FY14E estimates due to higher-than-expected MI contributions and losses from JCE/associates. Our core profit excludes provisioning of GST financial impact of RM21m; this relates to projects, which were previously sold and will be completed post the GST implementation date (Apr-15), hence the provisions.

 7M14 sales of RM3.2b is proportionately ahead of management and our FY14E target of RM5.0b, accounting for 64% of estimates. Major sales drivers were Setia Eco Hill, Battersea, Setia Alam and Melbourne projects.

Dividends  Proposed interim dividend of 4.0 sen (single-tier), which makes up 31% of FY14E NDPS of 13.0 sen (5.7% yield). Note that final dividends tend to be higher than interims.

Key Results Highlights QoQ, core earnings was up by 55 on the back of a 32% increase in topline. There were more billings from on-going projects, which were sufficient to counter a 2.8ppt compression in property PBT margins to 17.6%. In terms of reported earnings, it was down 23% as the previous quarter saw a one-off disposal gain of RM47m.

 YoY, 1H14 revenue rose by 20% while core earnings dropped 17%. The group started its LTIP (Long Term Incentive Plan) in May-13 and since then, we have been seeing LTIP expenses of RM11-12m/quarter. Finance cost has also risen by 51% due to the perpetual bonds undertaken by the company. Losses from JCE/Associates of RM24m and higher MI contributions of RM56m also worsen the situation where previously there were minimal contributions to these reporting lines.

Outlook  Going forward, the group expects to register more provisions relating to GST every quarter, although the quantum may vary from quarter to quarter. This will continue until GST is implemented.

 While the group’s sales appear proportionately stronger than targets, there has been no clear indication of higher targets.

Change to Forecasts Lowering FY14-15E core earnings by 13%-6% to take into account the higher MI contributions and losses from associates. Unbilled sales of RM11.3b provides >2 years visibility.

Rating Maintain MARKET PERFORM

Valuation  No changes to TP of RM3.03 based on 45% discount to its FD RNAV of RM5.46. The applied RNAV discount is at its historical high level. We believe the group needs to iron out its long-term leadership plan. However, the stock could e re-rated if PNB merges its property arms, as speculated by the media. Until then, we prefer to maintain our CALL and TP.

Risks to Our Call  Sector risks. Changes in management/leadership.

Source: Kenanga