1Q17 CNP of RM66.3m met expectations while sales of RM169m is deemed broadly within due to timing of new launches. No dividend, as expected. Management is still confident of FY17E sales target of RM1.20b and hence, we maintain estimates. Maintain OUTPERFORM and TP of RM1.45.

In-line. 1Q17 CNP of RM66.3m met expectations being 30% of street’s and 28% of our FY17E estimates. We consider 1Q17 sales secured of RM169m as broadly within although it only made-up 14% each of management’s and our FY17E sales targets of RM1.20b-RM1.22b, respectively, due to timing of new launches which will take place from 2Q17 onwards. No dividends, as expected.

Margin recovery. QoQ, 1Q17 CNP rose by 24% on the back of improved EBIT margins of 19.6% (+10.4ppt) due to recognition of agriculture land sale near Horizon Hills to Zhi Yong Property S/B for RM14m which has very high margins, overall improvement in both local (Teega was completed) and overseas project margin mix and significantly lower overheads. Key revenue drivers are Residensi 22, Teega, Aurora@Melbourne. YoY, 1Q17 CNP improved 18.8x on sharp growth in revenue (+110%) and normalization of property project margins as 1Q16 was an exceptionally weak quarter. Net gearing has moved up slightly to 0.45x.

Management is still confident of their FY17E sales target of RM1.20b. Over the remaining 3 quarters, they will launch RM1.70b worth of new projects/phasis (St Kilda@Melbourne, Dahlia@Serene Heights Bangi, Solaris 3, D’Santuari@Johor) and still has c. RM2.4b worth of unsold projects (WIP/inventories at market value). We can also expect completion of Bayu Angkasa and Arcoris in 2017. The issue of the tax penalty (RM73.8m) is still under appeal and no provisions has been made yet. Besides selling lands in SiLC 3, which we have imputed for, we believe the group may embark on other divestments (details yet to be disclosed) which could include strategic land sales in Gerbang Nusajaya and Puteri Harbour.

No changes to earnings. Unrecognized revenue of RM3.65b provide 1.5 years’ visibility.

No changes to TP of RM1.45 based on 66% discount to its FD RNAV of RM4.30. Our applied discount is based on - 0.25SD to its historical mean which is fair considering their big exposure in Johor while sales outlook has stabilized. We believe the stock will be a beneficiary of our tactical sector play where high beta stocks with minimal earnings risks will be in favour in view of a better broad market. Maintain OUTPERFORM.

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

Source: Kenanga Research - 18 May 2017