Period  3Q14/9M14

Actual vs. Expectations Tropicana Corporation’s (TROP) reported 9M14 core earnings of RM126.8m which was below our, and consensus’, expectations, at 54% and 52% full-year estimates, respectively. The lower-than-expected earnings were largely due to the delayed recognition of its disposal gains from Tropicana Aman land to Eco World Development (ECOWLD) which could be potentially pushed to 4Q14 or 1Q15.

 For 9M14, TROP registered total property sales of RM1.15b that only make up 58% of our, and management’s, full-year sales target of RM2.0b. The slower sales was attributable to the weak sentiment on the overall property market, particularly running up to Budget-2015 announcement, coupled with management’s decision to scale back its initial planned launches of c.RM3.0b to only RM1.14b.

Dividends  No dividend was announced as expected.

Key Results Highlights YoY, 9M14 core earnings surged by 33% to RM126.8m despite a marginal decline in revenue (-2%). The surge in core earnings was driven by: (i) recognition of several land sale gains recognised amounting to RM63.9m, (ii) lower effective tax rate of 17.5% (-18.1ppt), (iii) lower finance cost on reclassification of interest expense, and (iv) full contribution from Tenaga Kimia which was acquired in May-13. Core earnings without land sales increased by 104% to RM78.9m.

 QoQ, 3Q14 core earnings saw a sharp decline of 67% to RM29.5m due to the lack of land sales recognition as compared to 2Q14. Its core earnings excluding land sales also decreased by 44% to RM25.5m mainly due to the increase in operating expenses (+9%) and also financing cost (+18%). The sharp increase in financing cost was due to additional loans drawn down for the acquisition of its Gelang Patah land while we believe that the higher operating cost could be due to higher sales and marketing expenses incurred in 3Q14. Its net gearing increased to 0.72x from 0.60x previously.

Outlook  Moving forward, we expect: (i) net gearing to continue to come down from current levels of 0.72x due to continuous de-gearing exercise, (ii) sales to be lower as management scaled back launches, (iii) potential earnings deferment risks as ECOWLD deal may take longer to complete implying recognition in FY15. (Kindly refer overleaf for more details).

Change to Forecasts Maintain FY14E core earnings of RM233m but lowering FY15E core earnings by 7% to RM192m. (Kindly refer overleaf for more details).

 Its unbilled sales remained healthy at RM2.7b providing them at least 2 years earnings visibility

Rating Maintain MARKET PERFORM

Valuations  We are keeping our MARKET PERFORM call on TROP with an unchanged Target Price of RM1.28 with a 67% discount to its FD RNAV RM3.89. The stock will be capped by its large risk exposure in Johor, larger higher-end highrise components in their developments and also tougher times ahead moving into 2015 due to the implementation of GST and also tighter lending criteria imposed by banks. However, we think downside risks could be capped as the stock is already trading at very steep discount of 67% to its RNAV vs. our sector average of 41%.

Risks to Our Call  Execution risks (i.e. shortage of labour). Later-thanexpected land sale recognition timeline.

Source: Kenanga