1Q16 CNP of RM3.0m was sharply below expectations (at 1% of both street/our estimates). Sales for 1Q16 were weak at RM229m or 15% of target of RM1.5b. No dividends, as expected. Major launches for the year has been changed (e.g. St Kilda) but management is keeping to their sales target of RM1.5b. Reduce FY16-17E CNP by 30-23%. Reiterate UNDERPERFORM with a lower TP of RM1.00.

Sharply below. 1Q16 CNP of RM3.0m was sharply below expectations as it only accounted for 1% of both street’s and our FY16E CNP. This is due to slower-than-expected recognition for its local and Australia billings i.e. Arcoris and Aurora@Melbourne*, respectively. Sales for the period stood at RM229m (-41% YoY) or 15% of management’s and our FY16E target of RM1.5b. The weak sales could be due to the timing of their overseas launches while local project sales were extremely slow. Notably, 76% of 1Q16 sales were driven by its overseas projects.

Weaker local billings. CNP dropped sharply by 96% QoQ and 94% YoY largely due to: (i) the sharp drop in local billings on the back of weak local sales in previous years, (ii) the anticipated Aurora recognition which has yet to see significant contributions, (iii) drop in associates/JCE contributions (e.g. Horizon Hills, Setia Haruman, BioXCell) due to one-off adjustments, (iv) last quarter saw the sale of Imperia Office block (RM138m). There was also less sales YoY (1Q16: RM1.8m, 1Q15: RM16.1m, 4Q15: none). Net gearing has increased to 0.31x (4Q15: 0.26x) which is still below our threshold of 0.5-0.6x. No dividends as expected.

Land JV with Telekom Malaysia (TM) to develop 1.69ac along Jln Raja Chulan was also announced. However, impact of this project will not be overly significant and may take 2-3 years before project commencement. Thus, we are neutral on the deal (refer overleaf).

Management is sticking to its FY16E sales of RM1.5b (-36% YoY). However, their major launch driver, St Kilda@Melbourne (GDV: RM0.67b) is likely to be deferred to 1Q17 as plans are being revisited to enhance project value (refer overleaf).

Downward revision to FY16-17E earnings by 30%-23% as we made the following adjustments; (i) trim our corresponding sales target to RM1.4b- RM1.5b from RM1.5b-RM1.7b, (ii) account for the slower billings for Arcoris and Aurora, (iii) changes in products launched means lower margins (note that affordable housings are likely to carry much lower development margins). Unrecognized revenue of RM4.7b provides over 2 years’ visibility.

Maintain UNDERPERFORM with a slightly lower TP of RM1.00 based on a wider discount of 77% (close to historical peak of 80%) to its unchanged FD RNAV of RM4.29 (previous TP of RM1.07@75% discount to FD RNAV). The applied discount is one of the steepest under our coverage due to its high exposure in Johor. We had downgraded UEMS to UNDERPERFORM on 25/3/16 (2Q16 Property Sector: “Make Hay While the Sun Shines”) and since then share price has retreated from RM1.15 to RM1.00. We think the stock will continue to be weighed down and potentially de-rate further given the sharp disappointment in numbers, changes in its launch schedule which is now less favourable in our view, while there are no major catalysts in the foreseeable future.

Risk to our call includes: (i) better-than-expected property sales, (ii) favourable changes in real estate policies, and (iii) favourable changes in lending environment.

Source: Kenanga Research - 30 May 2016