1H16 CNP was slightly below expectations on weakerthan- expected local billings. 7M16 sales of RM1.35b only made up 34% of our and management’s FY16E target of RM4.0b. Dividend of 4.0 sen announced. Management lowered FY16E sales target to RM3.5b while we lowered ours to RM3.1b, resulting in earnings being trimmed by 2%-11%. Call/TP is UNDER REVIEW (previously MP/TP: RM3.05) pending our sector update next week.

1H16 CNP of RM249m was slightly below expectations, at 36% of consensus FY16 estimate and 35% of ours. While we expect lumpy contributions from Parque@Melbourne and Battersea Ph1 in 2H16, we note that 1H16 local billings were slower than anticipated. 7M16 sales of RM1.35b was soft at 34% of our and managements FY16E sales target of RM4.0b (1H16 sales: RM1.11b). Proposed interim of 4.0 sen (flat YoY) or 23% of our FY16E NDPS of 17.2 sen; note that final dividends tend to be lumpy.

2Q16 CNP was only marginally higher (+2% QoQ) at RM126m albeit the 12% topline growth due to higher marketing and fixed costs. YoY comparable is not available due to changes in year-end. Net gearing has increased to 0.37x from 0.28x.

Management lowers sales target of RM3.50b for FY16E target from RM4.0b given uncertainties caused by Brexit and weak local property scene. We gather that c.55% of sales will be driven by to ’10-90’ scheme which has been well received in terms of take-up rates. Note that SPSETIA is allowed to recognize its local ’10-90’ sales on the typical stages of progress billings instead of ‘on completion’ basis. The iRCPS issuance of RM1.1b is expected to be completed by 4Q16 and given the bullet deliveries from Parque and Battersea, we expect net gearing to drop to 0.27x by year-end.

Lowering FY16-17E earnings by 2-11% as we trim our respective sales assumptions to RM3.1-3.2b from RM4.0b each. We note that this is lower than management’s target as we prefer to remain on the conservative side. Unbilled sales of RM8.2b provide 2-3 years’ visibility.

UNDER REVIEW. We are placing our call/TP under review pending our sector update next week (previous call/TP:MP/TP@RM3.05 based on 45% discount to our FD RNAV of RM5.55). In our last sector strategy (8/7/16), we had highlighted that we are monitoring two key indicators; (i) developers 1H16 sales must meet 40% of full-year targets (before any revisions during the year), and (ii) unbilled sales must have more than one-year visibility. If majority of developers fail on one or both conditions, we are likely to maintain a negative bias on the sector; however, if both are mostly met, we may upgrade the sector to NEUTRAL. So, we will wait for the results round-up to determine our sector call, and thus, our individual stock calls.

We are also aware that the feel-good sentiment from the upcoming Budget-2017 will soon be translated to positive news flow, which in turn, may separate the weak sector fundamentals from developers’ share price performance.

Risks include: (i) weaker/stronger than expected property sales, (ii) margin issues, (iii) changes in real estate policies, and (iv) changes in lending environments.

Source: Kenanga Research - 24 Aug 2016