9M17 CNP of RM246m exceeded expectations at 108%/106% of street’s and our full-year estimate due to higher-thanexpected property billings. Headline sales of RM671m are considered broadly in-line because 4Q17 sales will be driven by its well-received Solaris Parq, and Mayfair project in Australia. Management remains confident of its RM1.2b FY17E sales target and we concur. No dividends, as expected. Raise FY17-18E CNP by 19%-3%. Reiterate OUTPERFORM on UEMS with a TP of RM1.30.

Above expectations. 9M17 CNP of RM246m exceeded expectations at 108% of street’s full-year estimates and 106% of ours. The positively surprising set of results was driven by higher-than-expected property billings, thanks to their inventory monetisation initiatives and project completions. Headline sales stood at RM671m for 9M17 and we consider this broadly in-line at 56% and 55% of management’s and our FY17E targets of RM1.20b and RM1.22b, respectively. We gather that the bulk of the Mayfair and Solaris Parq sales have yet to be recognized and these projects have c.RM0.9b worth of take-ups, including booking sales; thus, conversion to SPA sales will be the main driver for the remaining part of the year. No dividends, as expected.

More property billings felt. QoQ, 3Q17 revenue fell by 20% while CNP was flat at RM89m (-1%). EBIT margin improved by 3.5ppt to 20.6% because unlike 2Q17, there was no LAD provisioning this quarter. Additionally, projects like Residensi 22 and Arcoris are at the tail-end while projects in Australia are at critical billings stages. There were some small land sales (RM67m revenue) recognitions during the quarter; if we strip-out this out, 3Q17 CNP would have grown by 153% due to higher development recognition. YoY, 9M17 CNP rose sharply by 160% as it was driven by a 77% increase in revenue and a 5.6ppt improvement in EBIT margins to 18.9% as there were both higher development billings and land sales. Stripping off land sales, 3Q17 CNP grew by 121%. Net gearing eased slightly to 0.43x from last quarter (0.47x).

Management’s FY17E sales target of RM1.20b is intact due to the earlier reasons mentioned. It still has RM1.5-2.0b worth of unsold products (WIP/inventories at market value) as well. We believe more divestments of its Johor landbanks are likely as part of its longer-term strategy to reduce reliance on the Johor market. Management mentioned that resumption of dividends will only be determined in 4Q17; until then, we have assumed no dividends for now. They are also unfazed by the recent DBKL’s approval freeze on commercial and luxury condominiums (refer to Property SU - 20/11/17); but there is an apparent “U-Turn” over the freeze as Putrajaya said that approvals can still be given on a case-by-case basis (The Edge). According to UEMS, plans for FY18 were largely focused on properties priced mainly below RM1m/unit and thus, they do not see it affecting their FY18 plans.

Raising FY17-18E CNP by 19%-3%. Unrecognized revenue of RM2.9b provides over 1-year visibility (refer overleaf).

Maintain OUTPERFORM. Our TP of RM1.30 is based on 70% discount to its FD RNAV of RM4.34. Our applied discount is based at -0.5SD to its historical mean after considering their big exposure in Johor. It sales outlook has stabilized, thanks to more overseas and Klang Valley drivers. Although near-term catalysts are lacking, we believe the company’s outlook is more stable given active efforts in balance sheet management and inventory clearing. UEMS is an unwarranted laggard as it is trading at peak discount to its FD RNAV of 76% while its FY17- 18E core PER of 17.4x-16.5x is close to historical trough levels of 13x.

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

Source: Kenanga Research - 21 Nov 2017