1H16 CNP of RM57.7m was sharply below expectations (22%/27% of street/our estimates). Sales for 1H16 was weak at RM427m or 31%/28% of our/management’s target of RM1.4b/RM1.5b. No dividends, as expected. Management slashed FY16E sales target to RM1.0b. We reduce our FY16-17E CNP by 20%-27%. Call/TP is UNDER REVIEW (previously UP/TP: RM1.00) pending our sector update.

Sharply below expectations. 1H16 CNP of RM57.7m made up 22% and 27% of consensus and our FY16E estimates, respectively. 1H16 sales at RM427m (-29% YoY) also disappointed, at 28% and 31% of management’s and our targets of RM1.5b and RM1.4b, respectively. Key sales drivers were Conservatory@Melbourne, Laman Melia@Gerbang Nusajaya and Sefina@MK. This is the 4th and 5th consecutive quarter of earnings and sales disappointments, respectively, which is severe since developers under our coverage only tend to miss by two quarters maximum. No dividends as expected.

Aurora earnings kicked in. YoY-Ytd, 1H16 CNP dropped by 50% to RM57.7m although billings were maintained with flattish revenue (+1%) due to lower margin products and higher other expenses (A&P cost) which compressed EBIT margins by 8.8ppt to 11.6%; furthermore, there were increased finance cost (+20%) and lower associate/JCE contributions (-34%). QoQ, 2Q16 CNP surged to RM54.7m from last quarter’s RM3.0m on a sharp increase in billings (+109%) as Aurora@Melbourne contributions kicked in this quarter with the land sale of SiLC Ph2 to AMOREPACIFC Corp (RM91.7m, 25.4ac) which helped to normalize fixed costs and thus, allowing EBIT margins to expand to 13.8% (+6.7ppt).

FY16E sales target slashed to RM1.0b from RM1.5b as St. Kilda@Melbourne launch is deferred to FY17 (re-planning to enhance GDV). Net gearing increased to 0.42x and the group expressed that they will consider divestments over cash-calls to manage gearing levels (refer overleaf). UEMS MD/CEO, En. Anwar Syahrin, is back from his leave of absence (since Apr 2016) and will resume duties on 1-Sep, which should strengthen investors’ confidence. Note that the group owns 100% of Solaris 3 (18.7ac, GDV: RM1.3b) after buying the remaining 38% from Melavest S/B; this has no material impact (<0.5%) of our FD RNAV of RM4.29. The group is still looking at Klang Valley landbanking opportunities and have opted to cool off on overseas acquisitions due to heavy cash-flow commitments. Cutting FY16- 17E CNP by 20%-27% as on reduced sales target of RM0.9b-RM1.0band lower product margin mix (refer overleaf). Unrecognized revenue of RM2.78b provide close to 2-year visibility.

UNDER REVIEW. We are placing our call/TP under review pending our sector update (previous call/TP: UP/ RM1.00 @ 77% discount to its property RNAV to FD RNAV RM4.29). 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 the 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 feelgood 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) stronger-than-expected property sales, (ii) margin expansions, (iii) positive real estate policies, and (iv) positive changes in lending environments.

Source: Kenanga Research - 1 Sep 2016