Period

3Q15/9M15

Actual vs. Expectations

9M15 core earnings of RM185m came in below expectations, making up 50% of street’s FY15 estimates and 48% of ours, due to slower-than-expected project billings and margin compressions arising from higher overheads costs (possibly marketing costs).

9M15 sales of RM1.18b accounted for 59% of our FY15 target of RM2.0b (also UEMS’ base target); however, this is broadly inline as we expect more sales from The Conservatory@Melbourne to be felt in 4Q15 (refer overleaf)

Dividends

None, as expected

Key Results Highlights

QoQ, core earnings fell by 43% on the back of a 14.7ppt compression in pretax margins. Last quarter had a ‘highbase’ effect as it saw one-off recognition of other income1; stripping this out from last quarter, 3Q15 core earnings would have fallen milder by c.20% even though 3Q15 saw very low effect tax rates of <1%2. We reckon that there was recognition of a lower product margin mix while billings were softer.

YoY, 9M15 was down by 11%, inline with revenue decreasing by 13% given less billings on the back of weaker historical local sales trends and weaker contributions from associates/JCE (-29%).

Outlook

The group is comfortable with keeping to their FY15E base sales target of RM2.0b on more sales from The Conservatory, Aurora, sale of Imperia. However, earnings target of RM500m may not be achievable as some strategic land sale deals will take longer to materialize; revised earnings target was not provided.

Privatisation rumours have kept its share prices buoyant, but there is no confirmation yet. We think privatisation is unlikely in the near-term because keeping the entity listed would allow UEMS to raise money when landbanking opportunities arise (e.g. in Australia, Klang Valley) as the group aims to diversify out of Johor. If the group go for any sizeable acquisitions in the Klang Valley or Australia, we believe that cash-calls may be possible. Their net gearing has inched up to 0.32x. Change to

Forecast

Lowering FY15-16E core earnings by 35-30% (refer overleaf). Unrecognized revenue of RM4.06b provides two years visibility.

Rating

Maintain MARKET PERFORM

Valuation

Lower TP to RM1.28 based on wider discount of 70% on FD RNAV of RM4.27 (TP of RM1.38 based on 68% discount previously) largely due to management not being able to meeting their earlier earnings target guidance. Our discount rate is steeper than our big-cap developers’ average of 48% while we prefer to peg it at - 1SD levels due to its high exposure in Johor while we see no near-term catalyst. We also see no near-term catalysts to re-rate the stock, other than the privatisation rumours, which we reckon is unlikely.

Risks

(i) Balance sheet risk, (ii) weaker-than-expected property sales, (iii) higher-than-expected sales and administrative costs, (iv) negative real estate policies, and (v) tighter lending environment.

Source: Kenanga Research - 27 Nov 2015