1H18 CNP of RM101m came below street’s consensus but within our expectation. Street’s estimate could be inflated due to the absence of perpetual bond dividend payment assumption. Sales of RM942m are on track to meeting management’s/our FY18E target of RM1.80b. No dividends, as expected. Maintain earnings. Reiterate MARKET PERFORM with a TP of RM1.10.

Below street’s but within ours. 1H18 CNP* of RM101m came below street’s but within our expectations at 34% of street’s consensus, and 45% of our, full-year estimates. However, we opine that consensus’ figures may be over inflated as some estimates may not have deducted dividends arising from the perpetual bonds (1H18: RM59m, our estimate for FY18: RM81m) from their CNP. Corresponding sales achieved was at RM942m, which is on track at 52% of management’s target and our FY18E target of RM1.80b each. Key sales drivers were M Vertica, Cheras, M Centura, Sentul and Sutera Avenue, Sabah. No dividends as expected.

Result highlights. Although top-line was flattish (+1%), 2Q18 CNP was up by 19% QoQ to RM55m on the back of; (i) a 1.6ppt expansion in PBT margin to 16.3% on better product mix and lower overheads, and (ii) lower effective tax rate of 20.0% because of the utilisation of deferred tax assets. YoY, 1H18 CNP dipped by 38% largely because of; (i) lower billings resulting in a 19% drop in revenue, (ii) 1.1ppt compression in PBT margins to 15.5% on higher overheads (e.g. marketing expenses), and (iii) commencement of the second perpetual bond dividend payment which increased overall perpetual bond dividends by 122% to RM41m. Positively, the company is seeing declining inventory trend at RM543m (vs. FY17: RM629m) and remains in a net cash position (0.08x).

Confident of FY18 sales target of RM1.80b, according to management. 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 RM500k-1m/unit while only 2% are priced above RM1m/unit. With its light balance sheet, the group intends to either acquire land or enter into JV in the Greater KL area and will focus on affordable housing products.

No changes to earnings. Unbilled sales of RM2.65b provide slightly less than one year’s visibility.

Reiterate MARKET PERFORM 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 trough valuation levels for most of the developers under our coverage due to sector challenges. FY18E yields of 4.7% may provide some support. Pending the announcement of the new national affordable housing policy, we see no near-term earnings/sales catalysts.

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 - 03 Sep 2018