9M16 CNP (RM94m) was below expectations (49%/56% of street/our estimates) while 9M16 sales is on track at RM0.7b or 78%/71% of our/management’s target of RM0.9b/RM1.0b. No dividends, as expected. The group remains confident of meeting its sales targets and is also appealing on the tax penalty case. Lowering FY16-17E earnings by 19-11%. Maintain UNDERPERFORM with a TP of RM1.00.

Below expectations. 9M16 CNP of RM94.0m made up 49% and 56% of consensus and our FY16E estimates, respectively, being its 5th consecutive quarter of disappointments. EBIT-wise, 9M16 came in at 80% of our estimate but earnings were dragged down by higher- than-expected finance cost and tax rates, while share of associates/JCE came in lower than anticipated. 9M16 sales stood at RM707m (-40% YoY) met expectations at 71% and 78% of management’s and our target of RM1.0b and RM0.9b, respectively; drivers were Conservatory@Melbourne, Melia @Gerbang Nusajaya and Serene Heights@Bangi. No dividends as expected.

Aurora buoys 2H16 earnings*. QoQ, 3Q16 CNP was down by 34% to RM36.3m due to lower property billings which dragged revenue down by 22%, despite Aurora and Conservatory’s contributions. Even though EBIT margins improved by 2.4ppt to 16.2%, this was negated by its higher effective tax rate of 32.5% (+7.0ppt) due to some loss- making subsidiaries resulting in unrecognized deferred tax assets. YoY, 9M16 CNP fell by 49% largely on EBIT margin compressions (- 4.7ppt to 13.2%) on lower product margin recognition, rebates arising from clearing of inventory and LADs. Furthermore, associate/JCE contributions (Horizon Hills, Setia Haruman) declined (-46%) while there was a significantly higher effective tax rate of 29.5% (+14.1ppt).

Management maintains FY16E sales target of RM1.0b. Recall last quarter, UEMS slashed its sales target to RM1.0b from RM1.5b due to deferment of St. Kilda@Melbourne launch. No major launches for 4Q16 but we expect some en-bloc sales (Almas Residences, Aurora Offices) to drive sales. We also expect more divestments to manage their net gearing levels (0.43x in 3Q16). There is also the issue of the tax penalty relating to old land deals amounting to RM73.8m, which the group is appealing and believes they have a strong case; if the appeal fails, the group believes they have sufficient tax credits from unmaterialized land sales to offset the cash-flow impact, i.e. negative impact on earnings but none on cash flow while impact is in FY17. No provisions have been made yet.

Lowering FY16-17E CNP by 19-11% on higher effective tax rates and finance costs and lower share of JCE contributions but we conservatively maintain our FY16-17E sales of RM0.9-RM1.0b. We have yet to impute for the tax penalty as this could be a long drawn- out case; impact to FY17E earnings is about c.50%. Its unrecognized revenue of RM4.1b provides 2.5 years visibility.

Maintain UNDERPERFORM with unchanged TP of RM1.00 based on 77% discount (near peak discount levels of 80%) to its FD RNAV of RM4.29. We remain concerned of its sustainable local sales momentum and potential earnings risks. If they are unable to divest enough of assets, odds of some form of cash-calls (particularly non pure equity type cash calls) are high. Risks include: (i) stronger-than- expected property sales, (ii) margin expansions, (iii) positive real estate policies, and (iv) positive changes in lending environments.

*Note that UEMS is the only developer under our coverage that practices progressive recognition for projects in Australia instead of the norm of recognition on completion. However, do note that collection of billings from Australia projects is based on completion by other developers under our coverage.

Source: Kenanga Research - 01 Dec 2016