FY16 CNP of RM374m met expectations while sales of RM1.42b were on track to meeting estimate. FY16 dividend of 15.0 sen is on the dot of our expectation. Expect flattish sales in FY17 while FY17E CNP is toned down by 11%. FY17E NDPS is maintained at 15.0 sen. Given the strong share price run-up while we remain comfortable with our TP of RM2.54, we recommend taking a breather with a downgrade to MARKET PERFORM.

FY16 CNP of RM374m met expectations at 99% of consensus and 95% of our full?year estimates. Sales for the period were on track at RM1.42b as it only exceeded our estimate by 3%. Key drivers were United Point, Sentul Point and Danau Kota. Proposed FY16 dividend is 15.0 sen (flat YoY) which is on the dot to our FY16E estimate.

Strong margins and growing recurring income compensates weak top-lines. YoY, FY16 CNP was only lower by 6% albeit the 39% drop in revenue on lower billings. This was due to by strong gross margin expansions by 13.7ppt to 54.5% due to project completions (Desa Green) and higher margin project recognition. Furthermore, other operating income grew by 26% on improved hospitality performance (e.g. VE Hotel). Note that FY16 CNP is net of FV adjustments and deferred RPGT amounting to RM303m. QoQ, 4Q16 CNP rose by 53% as the quarter saw book closures on previously completed projects which resulted in cost write-backs while other operating income surged by 65% due to the above reasons. The group remains in a net cash position of 0.11x.

Assuming conservative FY17E sales targets of RM1.42b with RM1.89b worth of launches lined up for the year which include the last phases of Sentul Point (GDV: RM500m), United Point (GDV: RM500m), The Sphere (Residential component GDV: RM800m) and Selayang affordable homes (GDV: RM90m). Additionally, the group has about RM0.9b worth of unsold units. We have yet to include potential en blocs (e.g. Desa Business Suites, Horizon Offices). We may review our assumptions depending on the next quarter?s momentum. Expected project deliveries in FY17 include SouthView, Southbank, Desa Sentul Phase 1 and Suria North Kiara.

Lowering FY17E CNP by 11% and introducing FY18 estimates. While we maintain FY17-18E sales at RM1.42b each, we have adjusted for more conservative recognition timing and fixed cost assumptions. Unbilled sales of RM1.46b provides between 1-1.5 years visibility. FY17-18E NDPS is maintained at 15.0 sen each based on similar pay- out of 65% in FY16.

Limited upsides. Since our upgrade to OUTPERFORM (24/11/16) with a TP of RM2.54 based on 36% discount (+1SD to its mean) to its FD RNAV of RM4.00, share price has rallied above our TP. We are comfortable with our TP as it implies FY17E net yields of 5.9% - a decent spread compared to the less risky sizeable MREITs? average net yield of 5.1%. While upsides are limited, the stock is worth holding in view of FY16 dividend pay-outs (mid-2017) and yield stability given the company?s defensive nature (pure KL exposure with connectivity plays, high development margins and a strong net cash position). We downgrade our call to MARKET PERFORM (from OP) with an unchanged TP of RM2.54. We may review our call with an upside bias if there is an upward revision in sales or sharp pull-back in share price.

Risks include weaker/strong-than-expected property sales, margin fluctuations as well as changes in real estate policies and/or lending environments.

Source: Kenanga Research - 23 Feb 2017