Period  4Q14/FY14

Actual vs. Expectations  Tropicana Bhd (TROP)’s recorded a strong set of FY14 core earnings of RM304.5m, which was well ahead of ours and consensus expectations by 31% and 49%, respectively. Topline came within our expectations. So the better than expected results were due to higher than expected land sale recognitions in FY14, i.e. Jalan Kia Peng land (at an associate level) and reclassification of interest expense. In terms of property sales, TROP registered RM1.5b of sales for FY14 that was within with our full-year sales estimates of RM1.5b.

Dividends   No dividend was declared for in 4Q14. However, TROP has paid out a first interim dividend of 4sen in 2Q14 implying a net dividend yield of 3.8% for FY14, and it was within our full-year estimates of 4.2sen.

Key Results Highlights   YoY, FY14 core earnings saw a substantial increase by 109% to RM304.5m underpinned by a strong revenue growth (+34%). The growth in revenue was well supported by its on-going projects, i.e. Tropicana Metropark, Tropicana Heights, and Tropicana Danga Bay. However, the surge in core earnings was mainly driven by i) several parcels of land sales (i.e. Jalan Kia Peng, Canal City, Serdang, KK City and Sadong Jaya in Sabah) recognised amounting to RM231.9, ii) lower effective tax rate of 15.4% (-10ppt), iii) lower financing cost (-26%) due to the reclassification of interest expenses and iv) full contribution from Tenaga Kimia that was acquired back in May-13. Its core earnings without land sales also improve by 30% to RM130.5m.

  QoQ, its 4Q14 core earnings saw a significant increase by 502% from RM29.5m to RM177.7m, due to the recognition of Canal City land sale that was sold to ECOWLD and unexpected smaller parcel land sales (Serdang, KK City and Sadong Jaya in Sabah). That aside, its interest expense also saw a tremendous drop by -76% due to the reclassification of interest expenses which the group is capitalising on its land financing costs. Its net gearing also improved as it came down to 0.68x vis-à-vis 0.72x levels in 3Q14.

Outlook   Going forward, management has set a sales target of RM2.0b vis-à-vis our estimates of RM1.5b for FY15, on the back of RM2.0b planned launches and RM1.2b worth of unsold projects that was launched previously.

  Apart from that, management remains highly committed on its de-gearing activities and has already planned at least RM580m worth of assets to be sold in FY15.

Change to Forecasts   While TROP is targeting RM2.0b sales for FY15, we are keeping our sales estimates flat at RM1.5b in view of a challenging market ahead due to the tight lending environment coupled with the run-up to the implementation of GST, which could badly affect buyers’ sentiment.

  There are no changes to our FY15 earnings estimate of RM192m, as we have previously factored in thinner development margins due to the reclassification of its interest expense that is to be capitalised. Furthermore, we are introducing our FY16 earnings estimate of RM133m. Our FY16E earnings are lower (-31%, YoY), as we have yet factored in any land sale recognition for FY16.

Rating Maintain MARKET PERFORM

Valuation   Although TROP has beat earnings expectations, we note that it was largely driven by non-property development reasons. We reiterate our MARKET PERFORM call on TROP with an unchanged Target Price of RM1.15 based on 71.0% discount (one of the steepest discounts applied under our coverage) to its FD RNAV of RM3.89, due to its large risk exposure in Johor, larger higher-end high-rise components in their developments and also tougher times ahead due to the implementation of GST and also tighter lending criteria imposed by banks.

Risks to Our Call   Failure to meet sales targets.

  Balance sheet risk should its net gearing persistently stays above 0.5x.

  Sector risks, including overly negative policies. 

Source: Kenanga