1Q18 CNP of RM30.5m is broadly in-line as we expect a very lumpy 2H18 due to adoption of MFRS 15. Quarter sales of RM434m is ahead of schedule against both management’s and our FY18E sales target of RM1.2b. Management is sticking to its RM1.2b sales target although we think prospects are brighter for outperformance. Raise FY18-19E CNP by 21-55% due to MFRS 15 impact. Upgrade to OUTPERFORM with a TP of RM0.970.

1Q18 CNP of RM30.5m is considered broadly in-line even though it only made-up 13% and 11% of street’s and our FY18E estimates, respectively. However, this was due to adoption of MFRS 15 this quarter where its Australian projects (Aurora, Conservatory) will be recognized on completion basis rather than progressively as previously, resulting in no Australian revenue contributions this quarter. The timing of completion of these projects will result in a significantly stronger 2H18 (refer overleaf for details). 1Q18 sales of RM434m were impressive at 36% each of management’s (RM1.20b) and our (RM1.23b) target. Key drivers were Central region (mainly from Solaris 3) and International (mainly Mayfair, Melbourne) – notably, nearly a quarter of sales are from inventories. No dividends as expected.

Absence of Australian contributions due to MFRS 15. Please note that the following QoQ and YoY commentaries are based on re-stated 4Q17 and 1Q17 figures as provided by management. QoQ, 1Q18 CNP improved by 150% largely due to OPEX improvements and coming off a very weak 4Q17 which saw losses of RM61.1m (reversal of land sale, LAD charges, higher A&P expenses from new launches like of Mayfair and Solaris 3). YoY, although 1Q18 revenue slid 32% on less completions compared to 4Q17, 1Q18 CNP increased by 8%. This was due to a 239% rise in associate/JCE contribution to RM10.3m thanks to land sales and lower tax effective tax rate of 14.6% due to over provision of non-deductible expenses in prior years.

Management conservatively sticks to FY18E sales target of RM1.20b, although they did mention there are pipelines ready for launch if demand picks up significantly. Upcoming new project launches include MK27 while the others are on-going phases of their townships. Locally, their focus is to clear as much inventories as possible. The Iskandar Puteri Land sale (RM310m) should be recognized in 3Q18 while reversal of land sales in 4Q17 (RM55m) will be recognized in 2Q18. On top of that, UEMS has also earmarked RM300-350m worth of strategic assets to be sold this year. In terms of diversifying out of Johor, the group is still looking for niche land banking opportunities in Klang Valley. Management also reiterated that its land deal with DBKL (e.g. Kepong JV) is not part of the 64 land deals under investigation.

FY18-19E CNP raised by 21-55% after we adjust for the MFRS 15 impact (refer overleaf). Unbilled sales now stand at RM4.76b which provide slightly more 1-year visibility.

Upgrade to OUTPERFORM (from MP) with unchanged TP of RM0.970. Our TP is at a 79% discount (trough levels) to its FD RNAV of RM4.51. UEMS’ share price has been severely bashed down at - 24% YTD vs. the KLPRP (-10%) or big-boy peers’ average (-13%). The stock is now trading at 0.5x FY18E PBV which we believe is unjustified as the company is still profitable while its net gearing remains below our comfort threshold of 0.5x. FY18-19E PERs are at trough levels. With the adoption of MFRS15, we believe that 2H18 earnings momentum should excite investors while there are also the prospects of UEMS exceeding its own sales target.

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

*CNP excludes unrealized FOREX losses/gains, gain/loss on disposal of non-property assets, FV adjustments

Source: Kenanga Research - 23 May 2018