FY16 CNP of RM147m came within street’s, but slightly above our, estimates. Sales of RM1.37b beat both our and management’s targets. Negatively, no dividends were proposed. Management targets FY17E sales of RM1.20b and we raise our sales target in tandem with management resulting in a 5% increase in FY17E CNP. Upgrade to MARKET PERFORM with a higher TP of RM1.24 while rising net gearing may cloud the stock.

Within street’s but slightly above ours. FY16 CNP of RM147m was within street’s expectation (99%) but came slightly ahead of our estimates (107%) on higher-than-expected billings. Sales of RM1.37b (-42% YoY) beat both our and management’s target of RM0.90b and RM1.0b, respectively, and were largely due to the unexpected en bloc sales from Almas@Puteri Harbour while other key drivers were The Conservatory and Serene Heights, Bangi. Surprisingly, there were no dividends declared vs. our expectations of 1.6 sen as management conserves cash as its Australian projects are now in full-swing.

Australian earnings in full swing. YoY, FY16 revenue rose by 5% mainly on higher land sales while CNP dropped by 43% due to 7.6ppt compression in gross margins to 27.7% on higher rebates/discounts and lower margin product mix while their JCE/associate projects saw lower contributions. Effective tax rates were also higher at 31.8% (+6.8ppt) given more Australian driven earnings. QoQ, revenue surged 48% on higher Australian billings while JCE/associate contributions improved due to project completions. Net gearing remains at 0.43x.

Management targets FY17E sales of RM1.20b (-12% YoY) on the back of RM1.70b worth of new launches (St Kilda@Melbourne, Serene Heights@Bangi, Solaris 3, D’Santuari@Johor) and c. RM2.4b worth of unsold projects. At this juncture, we estimate FY17E net gearing will rise to 0.52x due to the Australian projects which will only see cash on completions although billings are recognized in the income statement. However, the group expects to do more divestments (e.g. Alderbridge, Canada land), which we have not yet to impute for. The issue of the tax penalty (RM73.8m) is still under appeal and no provisions has been made as yet as the company believes there are strong grounds; if the appeal fails, the group believes they have sufficient tax credits from unmaterialized land sales to offset the cash-flow impact. We raise FY17E CNP by 5% as we increase FY17E sales by 20% to RM1.22b (refer overleaf).

Upgrade to MARKET PERFORM with higher TP of RM1.24 based on narrower discount of 71% (close to its -0.5SD) to its FD RNAV of RM4.29 (previously OP and TP of RM1.00 on 77% discount). While results surprised us positively, we note that target sales are still on a downtrend. Nonetheless, the stock has likely bottomed with more stabilized sales outlook. Additionally, the absence of dividends and increasing net gearing will cloud the stock and if they are unable to divest enough of assets, the possibility of some form of cash-calls (particularly non pure equity type cash calls) are high.

Risks include: (i) stronger/weaker-than-expected property sales, (ii) margin fluctuations, (iii) changes in real estate policies, (iv) 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 - 28 Feb 2017