9M18 CNP of RM573m missed expectations while corresponding sales of RM1.47b is also behind our FY18E target of RM2.61b. No dividends, as expected. Expect Singapore (Sentosa Cove) and Xiamen 2 to come on-line soon. Reduce FY18-19E CNP by 15-16% on weaker sales targets. Maintain MARKET PERFORM with a TP of RM1.70.

9M18 CNP of RM573m missed expectations as it only made up 67% each of consensus and our FY18E estimates; this is the second consecutive disappointing quarter. This was mainly due to weak property billings on the back of lower local launches and fewer inventory sales (e.g. Trilinq, Singapore). Additionally, we were also anticipating Xiamen 2, China launch in 4Q18 (RM0.6b GDV out of c. RM5b) which would have resulted in strong billings as launches can only take place after the construction progress reached 50% completion; but based on management’s guidance, they are only likely to launch GDV of RM0.2b by 4Q18. 9M18 sales of RM1.47b only made up 56% of our FY18E target of RM2.61b. No dividends, as expected.

Margin improvements help mitigate softer top-lines. QoQ, 3Q18 CNP rose by 33% to RM220m despite the 23% drop in revenue, largely due to a 1.6ppt improvement in group EBIT margin to 36.4%, thanks to property investment and development, and a more normalized associate/JCE contribution. YoY, although 9M18 revenue declined by 29%, group EBIT margin expanded by 8.4ppt to 36.4% due to similar reasons mentioned above, which only resulted in 9M18 CNP being only marginally weaker (-1%). Positively, net gearing has eased to 0.53x (2Q18: 0.56x) (we prefer less than 0.5x net gearing).

Less new launches. There is no official sales target for FY18. To date, local launches have been slower as the group has only launched RM1.0b YTD (mainly from on-going townships) due to uncertainties leading up to GE-14 while the landscape remains challenging as IOIPG’s products are in the mid-to-high-end segment. For the remaining part of the year, the group will be launching Xiamen 2 (as mentioned above). There is also another c.RM0.2b GDV remaining for Trilinq, Singapore to be sold as well. We gather that soft launch of its Sentosa Cove projects, namely Cap Royale and Seascape, which have a combined GDV of RM6.6b, will be taking place soon. These JCE projects are completed ones, meaning billings of sales will be like Trilinq. However, risk lies with timing of SPA sales from the Sentosa Cove project spilling over into FY19 while we note that Sentosa Cove projects are luxurious ones, which may take a longer time to clear compared to Trilinq.

Reduce FY18-19E CNP by 15-16% as we reduce FY18-19E sales targets by 15-11% to RM2.21b-RM2.40b to account for the lower value launch for Xiamen 2 and timing of release of Sentosa Cove projects. We also change our sales mix to reflect more Sentosa Cove sales and fewer local launches. Unbilled sales have dropped by 21% QoQ to RM990m which provide less than 1-year visibility. Risk to our estimates lie with the speed of its Sentosa Cove sales.

Maintain MARKET PERFORM with an unchanged TP of RM1.70 based on 68% discount to its FD RNAV of RM5.31. Although results have disappointed, our RNAV discount is at historical peak levels whilst its FY18-19E core PER of 12.8-12.3x is also close to trough levels with potential yields of 3.8%.

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 - 21 May 2018