1H16 CNP of RM220m beat expectations with impressive sales of RM612m (61% FY16E target). No dividends as expected. Being the only developer to enjoy pure exposure to KL while rolling out a pipeline of urban-affordable priced products will provide it an edge to generating stronger sales. Raise earnings by 10%-14% on higher sales assumptions. Call/TP is UNDER REVIEW (previously OP/TP RM2.22) pending our sector update next week.

Above expectations. 1H16 CNP of RM220m came above expectations at 62% of both street’s and our FY16E estimates. The positive variance was brought about by higher-than-expected development margins and associates contribution. 1H16 sales was impressive at RM612m (+21% YoY) or 61% of our FY16E target of RM1.0b. Key new launches which did well and drove 79% of sales was United Point Residence (a.k.a. Kepong V) and Danau Kota Suites@Setapak. No dividends announced, as expected.

Growth driven by margins and billings. 2Q16 CNP rose by 29% QoQ to RM124m on higher billings as revenue surged by 47% as Desa Green was completed, while other income was up by 52% due to their hospitality segment (Connexion@Nexus, Capri; note that VE Hotel has yet to turn positive as it has just started commencement). 1H16 CNP grew by 49% YoY-Ytd on similar reasons while we note that development pre-tax margin was much stronger at 54.4% vs. (1H15: 36.8%); also, associates contribution (e.g. Kencana Square) has doubled YoY. The company remains in a net cash position of 0.14x.

Better than sector outlook. UOADEV benefited from their pure positioning in Kuala Lumpur while churning out ‘affordable’ priced products at RM400-500k/unit. Furthermore, their United Point project is next to the KTM station, i.e. connectivity play. For the rest of the year, the group will be releasing phases from the above-mentioned projects. New project launches include Sentul Point (a.k.a. Desa Sentul Phase II) with total GDV of RM1.5b but sizes of launch will be paced out over 24-36 months.

Raise FY16-17E CNP by 10%-14%. The group does not provide official sales guidance but based on their launch pipelines and positioning, we think raising FY16-17E sales assumptions by 20%-8% to RM1.2-1.3b is justified. In view of the earnings upgrade, we also raise FY16-17E NDPS to 15.0 sen from 14.0 sen. Unbilled sales of RM1.2b provide one-year visibility.

UNDER REVIEW. We are placing our call/TP under review pending our sector update next week (previous call/TP: OP/TP RM2.22 @ 44% discount to FD RNAV of RM4.00). 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), ii) unbilled sales must have more than 1-year visibility. If the majority of developers fail on one or both conditions, we are likely to maintain a negative bias on the sector; while 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. Downside risks to our call include weakerthan- expected property sales, margin issues, negative real estate policies, and tighter lending environments.

Source: Kenanga Research - 25 Aug 2016