1H18 CNP of RM150m was within our, but slightly below street’s, expectations, while sales of RM807m is on track to meeting our target. No dividends, as expected. Expect launch of Park Residence II, Bangsar South in 2H18. Maintain earnings. Reiterate MARKET PERFORM with a TP of RM2.30.

Within our, but below street’s, expectations. 1H18 CNP of RM150m is within our expectations but came in slightly below consensus’ full- year estimate at 45% and 41% of our and street’s full-year estimates, respectively. We believe the consensus margin estimate may have been on the aggressive side. Corresponding sales of RM807m is on- track at 61% of our FY18 target of RM1.33b as one of their major launches is earmarked for 2H18. Key sales drivers were SouthLink, United Point and Sentul Point. No dividend, as expected.

Office tower sale boosts earnings. QoQ, 2Q18 CNP leaped 266% to RM118m due to; (i) 77% jump in revenue on improved billings and recognition of sale of an office tower in Horizon, Bangsar South (RM54m), and (iii) the low-base effect of 1Q18 where MFRS 15 impact and recognition of projects at initial stages affected margins severely. Thus, EBIT margins improved by 29.8ppt to 57.7%. YoY, 1H18 CNP dipped by 28% on the back of a 23% decline in revenue as there were less project completions this time around. The group remains in a net cash position of 0.04x. Inventories (at cost) have exceeded the RM1b mark; but we note this is typical for UOADEV given their high margins, strong holding power due to its strong balance sheet, while many are offices that are yet to be sold.

Outlook. For the remaining part of the year, the group is looking to launch The Park Residence II @ Bangsar South (RM600m GDV). 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. The group has also acquired 16.1 ac in Sepang recently for its assisted living project pipeline (refer overleaf). This year’s earnings are likely to be volatile as it will be dependent on inventory driven sales, which is tough to predict.

No changes to estimates. Unbilled sales of RM1.68b provide c.1.5 years’ visibility.

Reiterate MARKET PERFORM with a TP of RM2.30 based on wider RNAV discount of 46% @ -0.50SD to its FD RNAV of RM4.29. 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, and (iv) more prominent recurring income streams from its hospitality and property investment assets. Note that most our universe’s RNAV discounts are pegged at -1.0SD to trough levels. 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 - 29 Aug 2018