1H16 CNP of RM232.8m met expectations accounting for 48%/44% of our/streets’ full-year estimates. 1H16 property sales of RM613.0m exceeded ours but was within management’s target of RM1.0b and RM1.4b, respectively. FY17E CNP raised by 3% post estimate upgrade for sales. 5.0 sen dividend declared as expected. Call/TP UNDER REVIEW (previously MP, TP: RM3.22).

Within expectations. 1H16 CNP of RM232.8m came in within expectations, making up 48% and 44% of our and streets’ full-year estimates, respectively. 1H16 property sales of RM613.0m exceeded our conservative sales target of RM1.0b for FY16 but is on-track to meet management’s target of RM1.4b. 5.0 sen interim dividend was declared, as expected, amounting to 51% of our fullyear DPS estimate of 9.8sen.

Results highlight. YoY-Ytd, 1H16 CNP was down by 13% despite revenue growth of 6%. The decline in CNP was mainly due to higher minority interest incurred due to lower recognition from SUNCON as it was listed back in July 2015. However, its 1H16 performance is highly commendable as its property division revenue and operating profit saw an improvement of 15% and 42%, respectively, driven by better contribution from its project in Singapore namely Avant Parc coupled with higher progressive billings from its local projects. That said, its trading & manufacturing arm also saw an improvement of 28% in operating profit underpinned by a strong revenue growth of 19% due to additional contribution from newly an acquired company, i.e. Winstar Group of companies. QoQ, 2Q16 CNP improved by 28% driven by several factors;(i) improvements in revenue (+8%), (ii) lower tax (-27%) due to deferred tax, (iii) lower minority interest contribution (-38%), and (iv) a marginal decline in interest cost (- 3%).

Upgrade in sales. Post results, we raised our FY16E sales target of RM1.0b to match management's target of RM1.4b. Following the upgrade in sales, we raised our FY17E CNP by 3%. Its property unbilled sales of RM2.0b provide 2-year visibility while outstanding construction orderbook of RM4.9b provides visibility for 2-3 years.

UNDER REVIEW. We are placing our call/TP under review pending our sector update (previous call/TP:MP/TP@RM3.22 based on SoP). 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. Downside risks to our call include: Weaker-than-expected property sales and construction orderbook replenishment, Higher-than-expected sales and administrative costs, Negative real estate policies, and Tighter lending environment.

Source: Kenanga Research - 30 Aug 2016