1H18 CNP of RM354m missed expectations (39%/38% of market/ours) due to weaker-than-expected local billings. Sales was at RM1.1b in 1H18 (38% of our target), which is also below expectations. No dividends as anticipated. Expect less new local launches this year. Lower FY18-19E CNP by 8-2%. Downgrade to MARKET PERFORM with an unchanged TP of RM2.00.

Below expectations. 1H18 CNP of RM354m missed expectations, coming at 39% and 38% of street’s and our FY18E estimates, respectively (note our CNP excludes RM79.7m share of impairment loss - refer to footnote*). This is due to slower billings, particularly from its local projects. Sales for the period were at RM1.1b (Malaysia-59%, Singapore-32%, China-9%) or 38% of our FY18E target of RM2.90b (management does not provide official targets); it was softer than expected, lacking sizeable new launches. No dividends, as expected.

Less of Trilinq, Singapore recognition. QoQ, 2Q18 CNP fell by 12% mainly due to a 23% drop in development revenue on weaker billings as its other segments (property investment/leisure & hospitality) registered 6-9% top-line growth. Group EBIT margins slid by 3.0ppt to 34.8% and the culprits were the following segments’ EBIT margins; (i) development (-4.1ppt) saw compression due to less recognitions of the completed Trilinq, and (ii) squeeze in property investment (-5.0ppt) possibly due to higher fixed costs. YoY, 1H18 CNP declined by 26% due to similar reasons mentioned above regarding top-line but saw a 4.8ppt improvement in EBIT margins driven by margin expansions in all segments. Net gearing is now above our comfort level at 0.65x.

Overseas projects to remain a key driver for FY18 sales. There is no official sales target for FY18. Over FY18, the overseas drivers are Trilinq Singapore (c. RM0.3b GDV remaining) and Xiamen 2 (c. RM5b GDV remaining of which the group intends to launch RM0.6b by 4Q18). Locally, the emphasis will remain on affordable housing, i.e. Bandar PuteriBangi, Bandar WarisanPuteri, Bandar Puteri Puchong (Le Pavilion), 16 Sierra, IOI Resort City (Connezion, Par 3). Also pending is the MoA between IOIPG and Hong Kong Land International Holdings Ltd (HKLI) to jointly develop the Central Boulevard, Singapore land on a 67%:33% basis. We have yet to factor the impact of this JV into our estimates, particularly its positive net gearing impact and potential recovery in dividend pay-outs, pending completion of the deal by 1QCY18. Although net gearing is currently at 0.65x, we do not foresee a cash-call unless there are significant acquisitions.

Lowering FY18-19E CNP by 8-5% as we reduce FY18-19E sales targets by 10-7% to RM2.61-2.70b (refer overleaf). Notably, unbilled sales have improved to RM1.25b (less than half-year visibility) from last quarter’s record low of RM0.9b.

Downgrade to MARKET PERFORM (from OUTPERFORM) with an unchanged TP of RM2.00 based on 62% discount to its FD RNAV of RM5.31; applied discount is at the mean level which is conservative considering that the group has overseas drivers to shore up headline sales. Note that our TP implies FY18E core PER of 13.5x which is close to trough levels. Share price has rebounded from its almost 2-year low of RM1.79 back in Dec-17. We may review our recommendation with a favourable bias pending the conclusion of the MoA with HKLI.

Risks include: (i) weaker/stronger-than-expected property sales, (ii) margin fluctuations, (iii) changes in real estate policies/lending environments, and (vi) M&A/cash-calls.

Source: Kenanga Research - 26 Feb 2018