Period

1Q15

Actual vs. Expectations

1Q15 core earnings of RM53m came below expectations at 12% of street, and 14% of our, full-year estimates. The main disappointment was due to softer billings, margin compressions and unexpected share of losses in associates.

Sales for the quarter was RM390m or 20% of our FY14E target of RM2.0b (also management’s base target), which can be considered within expectations. However, Australia was the biggest driver making up 64% of sales and recall that Australian projects are recognized upon completion.

Dividends

None, as expected.

Key Results Highlights

QoQ, core earnings fell by 80% largely due to last quarter’s high base effect. This quarter saw less land sales (RM16.1m revenue) vs. 4Q14’s lumpy land sale gains (KLK and Motorsports City deal) which translate to a PATAMI of c. RM240m. If we strip out the land sale gains effect, its core earnings rose by 40%.

YoY, revenue grew slightly (+4%) while core earnings dropped by 14%. The biggest drag was RM3.8m losses from its share of associates, which resulted in a 43% decline in JCE/associates contributions. Their associates were affected because: (i) Setia Haruman had significantly less land sales compared to the last period, and (ii) BioXCell is running below capacity and hence, is incurring operational losses. Additionally, the group has also recognized its Aurora@Melbourne sales and marketing expenses upfront, which are about 4%-5% of launched GDV.

Outlook

The Group’s KPI of achieving at least RM500m earnings in FY15 appears to be more bullish than ours. However, we reckon that in order for the group to meet their target, a strategic lumpy land sale must take place; we have not factored for this in our estimates.

2015 sales will be largely driven by Australia while the group has lined up some new launches in Johor and Klang Valley in the next two quarters (refer overleaf).

Change to Forecasts

No changes to estimates. Although 1Q15 has missed expectations, we are keeping our estimates unchanged because of expected land sale deals in the coming quarters; but we are unable to build this into our estimates as the amount can vary significantly. As it is, our estimates are already one the lowest in the market. Unrecognized revenue of RM3.9b provides 1.5 years visibility.

Rating

Maintain MARKET PERFORM

Valuation

Reiterate MARKET PERFORM with a lower TP of RM1.26 (from RM1.47) based on a higher discount rate of 70% (65% previously) to its FD RNAV of RM4.26. The higher discount rate is applied because: (i) the recent exclusion from the MSCI index caused a round of selldown as investors rebalanced their portfolios, and (ii) we reckon that reliance on land sales (particularly essential this year for meeting their earnings KPI) does not go well with investors. T

he applied discount rate is the second steepest under our coverage (sector average: 46%). Although downside risk appears limited at 0.8x Fwd PBV, the stock lacks near-term catalysts and is plagued by concerns on its Johor exposure.

Risks to Our Call

Downside risks: Unable to meet/exceed its sales target. Impact from Singapore’s property policies. Sector risks, including further negative policies. Upside risks: New fresh catalysts (e.g. infrastructure/connectivity plays in Johor) and improvements in property demand trends.

Source: Kenanga Research - 22 May 2015