1Q18 CNP of RM45.9m missed expectations on weaker margins. However, the quarter sales of RM470m are on track to meeting FY18E target of RM1.80b. No dividends as expected. Management is confident of achieving its sales target but cites margin pressures due to heavy marketing initiatives. Lower FY18-19E earnings by 22-19%. Downgrade to MARKET PERFORM with a TP of RM1.10.

Earnings miss, but new sales on track. 1Q18 CNP of RM45.9m came below expectations at only 14% of consensus and 16% of our full-year estimates. Although top-line met our expectations (20% of our estimate), the drag on earnings was caused by lower margin product mix and higher overheads. This is the second consecutive quarter of earnings disappointment which is uncommon for MAHSING. Positively, the quarter sales of RM470m are on track at 26% of management’s and our FY18E target of RM1.80b each. No dividends, as expected.

A weak quarter. QoQ, 1Q18 CNP fell by 31% on the back of a 23% decline in revenue due to weaker billings from festive periods as well as most recognitions were mainly new projects at initial stages during the quarter. Pre-tax margin was relatively stable at 14.7%. YoY, 1Q18 CNP dropped by 36%. Besides the 19% fall in revenue, pre-tax margin compressed by 1.9ppt to 14.7% on reasons mentioned in the paragraph above. The group remains in a net cash position.

Management is confident of its FY18 sales target of RM1.80b. We think that FY19 target is achievable since 74% of its target sales are driven by affordable housing products priced below RM500k/unit; 24% are priced between RM500-1m/unit while only a small 2% is priced above RM1m/unit. With its light balance sheet, the group intends to either acquire land or enter JV in the Greater KL area and will focus on affordable housing products.

Reduce FY18-19E earnings by 22-19% as we assumed lower margins to reflect the company’s efforts to clear inventories as more marketing initiatives and promotional costs are required. Unbilled sales of RM2.68b provide under one year’s visibility.

Downgrade to MARKET PERFORM (from OUTPERFORM) with an unchanged TP of RM1.10 based on SoP implied discount of 61% (- 1.25SD) on its FD SoP of RM2.84; note that we have pegged -1.0SD to -2.0SD valuation levels for most of the developers under our coverage due to sector challenges. The stock has done well since our Preferred Pick recommendation during our sector strategy (5/4/18), rebounding by 10% since then. However, in view of the company’s margin pressures, sector uncertainties and challenges (affordability and lending liquidity to the sector), we believe upsides are limited. Nonetheless, its FY18E yields of 5.0% may provide some downside risk protection.

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

Source: Kenanga Research - 1 Jun 2018