FY17 CNP of RM272m met our (98%) expectation but beat street’s estimates (115%). Headline sales of RM1.49b also beat both management’s, and our, targets. Dividend has also been resumed (1.0 sen). Net gearing inched up to 0.48x. UEMS targets FY18E sales of RM1.20b and is looking to unload more non-core assets. Minor tweaks to FY18E CNP (-2%) post house-keeping. Downgrade to MARKET PERFORM with unchanged TP of RM1.20.

Headline sales beats target. FY17 CNP of RM272m met our expectation (98%) but exceeded street (115%) which could be due to lower billings assumptions. Headline property sales of RM1.49b beat both management and our targets of RM1.20b and RM1.22b, respectively, thanks to the stronger-than-expected take-ups from Solaris Parq. After a year absence of dividends, UEMS has resumed dividend payment with 1.0 sen for FY17 vs. our expected zero dividend.

Higher billings. QoQ, 4Q17 CNP dipped by 71%. Although top-line grew by 5% on higher billings and sale of completed units, EBIT margins compressed by 8.8ppt to 11.7% because there were fewer project completions while higher A&P expenses was incurred due to the launch of Mayfair, Melbourne and Solaris Parq. YoY, FY17 CNP grew by 84% largely due to pick-up in billings for its Australia projects, the Alderbridge land disposal and local project completions (e.g. Arcoris) which resulted in EBIT margins expanding by 5.2ppt to 17.0%. This more than negated the sharp 64% drop in associate/JCE contributions. Net gearing is now at 0.48x. Management sets FY18E property sales target at RM1.20b which is conservative considering FY17 sales. FY18E sales will be driven by RM1.0b new launches (only local) and RM1-1.5b worth of unsold products (WIP/inventories at market value). The group has also earmarked RM300-350m worth of assets for disposal to ensure that its net gearing remains manageable while ensuring there is room to capitalise on land banking opportunities.

Minor tweaks to FY18E CNP (-2%) post house-keeping and we introduce our FY19E estimates. We are maintaining our FY18-19E sales target at RM1.23-1.24b and also expect dividend of 1.0 sen each over FY18-19. The group’s unbilled sales are at RM4.77b; but note that UEMS does progressively recognize its Australia projects in the income statement although payments are only received from buyers upon completion. As a result, based on our computations, the balance of unrecognized revenue is RM1.95b or close to 1-year visibility.

Downgrade to MARKET PERFORM (from OP) with an unchanged TP of RM1.20 based on 72% discount to its FD RNAV of RM4.36. Our applied discount is close to -0.5SD of its historical mean after considering their big exposure in Johor. We note that its share price has rebounded sharply since the start of the year as well. Sales outlook is more stable and we like their active efforts in balance sheet management and inventory clearing, which has resulted in resumption of dividends. However, we note that their net gearing is inching closer to our net gearing comfort threshold of 0.5-0.6x. Meanwhile, sales trajectory continued to remain flat. We will review our call if there are fresh catalysts.

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

Source: Kenanga Research - 28 Feb 2018