1Q18 CNP of RM32.3m came sharply below expectations but sales for the quarter of RM452m is encouraging at 34% of our FY18E target. No dividends, as expected. Earnings may be volatile due to more on-going projects at initial stages while inventory sales could be sporadic. Reduced FY18-19E earnings by 18-9% with lower dividends of 14.0 sen each (5.4% yield). Maintain MARKET PERFORM with a lower TP of RM2.30.

1Q18 CNP of RM32.3m is sharply below expectations at 8% each of market and our FY8E estimates. Weaker margins and slower-thanexpected billings were the main drag with lower-than-expected inventory sales and higher cost factors. Positively, the quarter’s sales of RM452m were encouraging coming in at 34% of our FY18E target of RM1.33b. Key driver was SouthLink (67% of sales) which was launched towards end FY17. No dividends, as expected.

Significant margin compressions. QoQ, 1Q18 CNP declined sharply by 68% mainly due to a 26.8ppt compression in EBIT margin to 27.9%. This could be a function of; (i) billings of newer projects at initial stages, which carry lower margins – margins were also affected by MFRS 15, which requires sales commission to be recognized progressively vs. lump sum recognition previously (refer overleaf), (ii) lower inventory sales which enjoy high margins, (iii) higher cost factors (e.g. sewerage cost), and (iv) 27% drop in Other Operating Income. YoY, CNP slipped 26% mainly due to similar reasons. The group remains in a net cash position. For the remaining part of the year, the group is looking to launch RM0.82b GDV worth of projects; Southbank (Ph2), affordable homes in Selayang and The Park Residence II @ Bangsar South. This year, we only expect Southbank Ph II and Danau Kota to be completed. Works on Bandar Tun Razak @ Cheras and South Point @ Bangsar South are expected to commence this year and earmarked for recurring income purposes. This year’s earnings delivery depends on inventory driven sales, which is tough to predict. Currently, we estimate that the group has RM1.3-1.4b worth of completed inventories for sale.

Lowering FY18-19E earnings by 18%-9%. Our FY18-19E sales targets of RM1.33b-RM1.39b are kept unchanged. However, we have tweaked our sales mix to reflect more on the recently launch projects and tone down the proportion of inventory sales, which resulted in lower group margins. Furthermore, we have toned down recurring income streams to reflect the decline in Other Operating Income. Correspondingly, FY18-19E DPS is reduced by 7% to 14.0 sen each (5.4% yield) – we did not reduce dividends as much as earnings as most dividends are taken up in the form of DRP. Unbilled sales of RM1.64b provides c.1.5 years visibility.

More downside to earnings? Since it is more difficult to predict the pace of inventory sales, we qualify that there could be more downside to earnings if inventory sales do not pick up.

Reiterate MARKET PERFORM with a lower TP of RM2.30 (from RM2.40) based on wider RNAV discount of 46% @ -0.50SD (from 44% @ -0.25SD level) to its FD RNAV of RM4.28. We think our valuation level is fair after considering the challenging sector landscape and its defensive attributes such as; (i) pure KL exposure with connectivity plays, (ii) high margins, (iii) net cash position, (iv) more prominent recurring income streams from its hospitality and property investment assets. While we believe this may be a ‘flight to safety’ stock considering its defensive qualities, investors may want to consider cheaper entry levels.

Risks include weaker/stronger-than-expected property sales, margin fluctuations, and changes in real estate policies and/or lending environments.

Source: Kenanga Research - 25 May 2018