1H18 CNP of RM247m came above street’s estimate but broadly within our expectation while corresponding sales of RM664m is on track to meet FY18 targets. No dividends, as expected. Expect 2H18 CNP to be weaker given less land sales recognition. No changes to earnings. Downgrade to MARKET PERFORM with an unchanged TP of RM0.970 after the recent share price rally of 30% over the last quarter.

1H18 CNP of RM247m is above street’s estimate but broadly within our expectation, coming in at 102% and 74% of street’s consensus and our FY18 estimates, respectively. We believe that consensus estimates on land sale margins were too conservative. Meanwhile, we expect 2H18 to be weaker than 1H18 as earnings will be driven mainly from property rather than land sales. 1H18 sales of RM664m are on track as it accounted for 55-54% of management’s/our target of RM1.20-1.23b, respectively. This was driven by clearing of inventories, on-going projects and new launches worth RM355m in 1H18. Key drivers were Mayfair@Melbourne, Solaris Parq, Serimbun, Kiara Kasih, Symphony Hills and Estuari gardens. No dividends, as expected.

Big boost from land sales. QoQ, 2Q18 CNP leaped 714% to RM206m as recognition of land sales (disposal of Iskandar Puteri to Country View and sale of RA Suria) made-up 96% of CNP as it carries significantly higher margins than property development with group gross margin expansion by 37.2ppt to 65.0%. YoY, 1H18 CNP rose by 511% largely due to 1H17 restated figures (reversal of its Australian project recognitions) and the above land sale recognition. The land sale is particularly helpful as many of their local on-going projects are at initial stages while sizeable inventory realisation may be dragged to margins (note that 35% of revenue was driven by inventories). Nonetheless, after stripping of land-sales, 1H18 property core earnings rose by 41% to RM41m although revenue declined, largely due to cost saving initiatives and absence of LAD. Positively, inventories (at cost) have declined YoY by 11% to RM545m. Net gearing has crept up to 0.57x (our comfort levels are 0.5-0.6x) as the Australian project recognitions have yet to kick-in.

FY18E sales target of RM1.20b intact. 2H18 should see bullet contributions by Aurora and Conservatory, Melbourne. However, we expect margins to decline to more normalized levels as there will be no major land sale recognition, save for the sale of land to Kimlun (RM82m by 3Q18). Pipeline launches for 2H18 will be GDV of RM666m, including MK27 and other projects. Locally, their focus is to continue to clear inventories. In FY19, UEMS targets c.RM350m worth of land sales as part of their on-going strategy to divest non-core assets, which is part of our current land sales assumptions. Recently, the group also acquired 2.9ac land in Mont Kiara for RM34m, which has a minimal impact on its balance sheet and on our valuations. (Refer overleaf for details).

No changes to earnings. Unbilled sales now stand at RM4.9b which provide close to 2-year visibility.

Downgrade to MARKET PERFORM (from OUTPERFORM) with unchanged TP of RM0.970. UEMS has been our Top Pick (21/6/18) and since then, share price has rallied by c. 30%. With no foreseeable catalyst and the sector’s emphasis remaining on affordable housing, which is a relatively small earnings driver for UEMS, we believe our downgrade is timely. Our TP is based on a 79% discount (trough levels) to its FD RNAV of RM4.51. Fwd PER and PBV valuations are at or close to trough valuations and will likely remain at such levels until there are significant upsides to earnings/sales assumptions.

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

Source: Kenanga Research - 29 Aug 2018