Period  2Q14/1H14

Actual vs. Expectations Tropicana Corporation’s (TROP) reported 1H14 core earnings of RM41.6m, accounting 18% and 19% of our forecast and consensus full-year estimates, respectively. However, we deem the results as broadly inline as we are expecting 2H14 to be stronger, underpinned by the completion of the Canal City land (308.7ac) sale to EcoWorld and also the recognition ofJalan Kia Peng land sale in 3Q14 as the deal was completed on July-14.

 For 1H14, TROP registered total property sales of RM935m which makes up 46% of management target and our full-year sales forecast of RM2.0b.

Dividends  No dividend was proposed during this quarter, but a 4 sen dividend was paid on May-14 in relation to FY14.

Key Results Highlights YoY, 1H14 core earnings declined by 36% to RM41.6m after stripping out the gains from the disposals of investment properties and a subsidiary of a jointly controlled entity as TROP did not manage to recognise any land sale as compared to 1H13. However, should we exclude the land sale gains of RM60.4m in 1H13, TROP’s core earnings without the land disposal impact would have seen an increase of 108% from RM20.0m previously which indicated major improvements in operating efficiencies.

 QoQ, its 2Q14 core earnings improved significantly from RM7.8m to RM33.8m (+332%) after stripping out the one-offs driven by improvements in revenue (+19%) from its property development (+25%) and investment holding division (+24%) due to better progressive billings from its existing development projects i.e. Tropicana Garden, Metropark, Tropez and Bora coupled with the contribution from the consolidation of a newly acquired subsidiary, Tenaga Kimia Sdn Bhd in its investment holdings division.

Outlook  Looking ahead, management remains focused with their degearing exercise in which they are still actively looking to dispose of their non-core assets i.e. Mall and Office Towers.

 Apart from that, management is also maintaining its sales target of RM2.0b for FY14 with another RM2.6b launches in 2H14 which we believe is achievable given that TROP are launching more landed residential products in the Central Region.

 However, we highlight that there could be a potential earnings deferment risks as the Ecoworld deal may take longer to complete implying recognition in FY15, rather than our assumption that it will take place in 2H14. This could lower our FY14E earnings by 37% if the deal is not completed by year end, while FY15E net profit will be higher by 42%.

Change to Forecasts No changes to our earnings estimates at this juncture as we are still expecting its Canal City land deal to be completed by yearend.

Rating Maintain MARKET PERFORM

Valuations  Lower TP to RM1.40 based on a wider discount of 64% on our FD RNAV RM3.89 (TP of RM1.65 @ 58% discount previously).

TROP’s share price has corrected sharply since 20th June 2014 from RM1.56 to the current levels of RM1.36 largely due to risk exposure issues in Johor and possible delay in the conclusion of the Ecoworld deal, which may affect FY14 earnings. Additionally, the group does have significant higher-end highrise property exposures in Johor, which is viewed negatively. Hence, we widen our RNAV discount to 64% or closer to its historical high levels (67%). At these levels, downside risks should be minimal while property sales indicators, which are on track, offer some assurance to investors. The group is also highly committed to further divesting its non-core assets as part of their de-gearing exercise.

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

Source: Kenanga