Actual vs. Expectations 1H14 core earnings of RM136m made up 25% of both our forecast and street’s FY14 estimates. However, both estimates include RM250m in land sale gains, which are expected to be booked in 2H14. Excluding this item from our estimates, the 1H14 core earnings is still below expectations as it accounted for 43% of both our and street estimates.

 Sales in 1H14 was RM439m and is below expectations as it made up 14% of both our RM3.1b estimate and its management internal RM3.2b target.

Dividends  None, as expected.

Key Results Highlights QoQ, 2Q14 core earnings rose by 21% on improved property billings. Although EBIT margins saw a 2.1ppt compression to 14.0% due to GST-related cost revisions, its bottomline was aided by a 28% increase in associates/JCE contributions thanks to Horizon Hills and 44% reduction in finance cost.

 YoY, 1H14 revenue was down by 29% while core earnings dipped 57%. This was largely due to recognition of land sale gains to Liberty Bridge in 1H13, which amounted to a sum of RM401m and gain of RM90m. Stripping this item, 1H14 revenue is higher by 6% while core earnings decline lesser by 40%. Although JCE/associates contributions improved by 85%, this was not sufficient to negate the one-off GST-related cost revisions on projects that were launched last year.

Outlook  Management is now guiding lower FY14E property sales targets of RM2.0b (RM3.2b previously) while all other KPIs remain intact. The reduction in targets is mainly due to deferment of certain project launches. The move is not entirely surprising considering the recent cooling measures and negative newsflow from Johor, which have affected sales. The new MD/CEO of UEMS, Encik Anwar Shahrin, will be in his effective role by 1-Sep and we hope to get more clarity on UEMS’ future directions by then.

Change to Forecasts Reducing FY14-15E core earnings by 10%-29% as we have reduced property sales assumptions by 35%-20% to RM2.0b-RM2.2b, respectively. This is the second consecutive quarters of downward revision in earnings.

Unrecognized revenue stood at RM3.04b which provides >1 year visibility.

Rating Downgrade to MARKET PERFORM (from OP)

Valuation  Currently, UEMS is trading at a 57% discount to its FD RNAV, which has exceeded its historical high by 55%.

This is possibly due to the de-rating brought about by the issues down in Johor while investors are looking for clues on the direction of the company.

 Hence, we are lowering our TP to RM2.05 based on a wider discount of 55% to our unchanged FD RNAV of RM4.56 (TP of RM2.40 based on 47% discount, previously). We reckon that the market has priced-in a lot of negatives already and downside risks are deemed limited; while the share price has hit a new 52-week low, it also registered 18% decline YTD, being the biggest laggard among big-cap developers. However, share price may remain subdued until the issues in Johor are settled or if pre-GST demand is stronger than expected, which may result in better than expected sales.

Risks to Our Call Unable to meet its sales target or exceeding sales target.

Impact from Singapore’s property policies. Sector risks, including further negative policies.

Source: Kenanga