Period  2Q14/1H14

Actual vs. Expectations  1H14 core net profit of RM87.8m came in below expectations, making up 25% of both street and our full-year estimates. The disappointing set of results was due to weaker-than-expected billings and higher development costs due to new project start-ups.

 The group chalked up RM698m of property sales in 1H14 (-47% YoY). While this appears to be behind schedule at only 35% of our FY14E sales target of RM2.0b, this was expected as timing of two new project launches were skewed towards mid-year.

Dividends  None, as expected.

Key Results Highlights QoQ, 2Q14 revenue was up by 25% on higher billings, particularly from Le Yuan, which should see completion by 2H14. However, core earnings declined by 3% on the back of a sharp 8.6ppt compression in gross margins to 38.2%, largely due to new project start-up costs (e.g. Southbank/Sentul Village) and higher A&P expenses. Reported net profit includes non-cash fair value adjustments of RM39m.

 YoY, 1H14 core earnings fell by 55% as the previous corresponding period saw en-bloc sales of RM226m worth of already-completed offices (The Horizon @ Bangsar South) which flowed straight to the bottomline. This year, UOA was also hit by higher costs arising from pre-opening expenses of their hospitality division (Capri and Nexus @ Bangsar South), along with the reasons mentioned above.

Outlook  As highlighted above, we gather that Southbank Residences and Sentul Village were launched towards end-2Q14. These projects have seen strong bookings and conversion to SPA sales will take place in 3Q14, implying better QoQ sales. The new launches earmarked for 2H14 are Desa Business Suites, Kepong V (Phase 1) and Jalan Ipoh Land (Phase 1) with combined GDV of RM900m. However, in light of the challenging lending environment and tightening measures, we believe that the group may opt to defer some projects or tone down launch sizes, which ultimately affects sales.

Change to Forecasts Lowering FY14-15E core earnings by 18%-9%. However, we maintain our dividend estimates for the next two years at 14.0 sen or 6.7% net yield p.a. thanks to their strong cash position (refer overleaf).

Rating Maintain MARKET PERFORM

Valuation  Reduce TP to RM2.00 (from RM2.13) based on a wider 46% discount to unchanged FD RNAV of RM3.69. We believe the stock will see strong support at our TP, which implied net dividend yield of 7.0% and this is more attractive against sizeable MREIT and small/mid cap developer’s yields. On the other hand, the stock has no near-term catalysts and is subject to the sector’s negatively biased sentiment. Hence, we expect the stock’s share price to remain range bound (refer overleaf).

Risks to Our Call Unable to meet its sales target or better than expected sales/earnings. Unexpected en bloc sales of office inventories. Sector risks, including further negative policies.

Source: Kenanga