1H19 CNP of RM2.9m came below both ours and consensus estimates at 30% and 39% due to the higher- than-expected tax expenses. Property sales of RM166.6m is broadly within our sales target because we expect take-up for new launches to be lower on slower property market. No dividend declared as expected. Reduced FY19-20E CNP by 32%-26% after assuming a higher effective tax rate. Maintain MP with a lower TP of RM0.410 (from RM0.465).

Below expectations. 1H19 Core Net Profit (CNP) of RM2.9m came below both ours and consensus estimates, only making up 30% and 39% of respective full year estimates. Despite revenue coming in broadly within expectation, the negative deviation in CNP was due to the higher-than-expected tax expense incurred. Property sales of RM166.6m for 1H19 is broadly within our FY19E sales target of RM249.7m as we expect take-up for new launches to be lower on slower property market. No dividend declared as expected.

Results highlight. Ytd-YoY, 1H19 revenue increased by 43%, backed by sales from its completed units at OneSouth, Citywoods and Metia Residences as well as better billings from its on-going developments. However, 1H19 CNP increased only by 13% being dragged down by a leap in net interest expense(+100%) from increased borrowings and higher effective tax rate of 59% (+8.0 ppts) as some of its expenses were non-tax deductible. QoQ, 2Q19 CNP saw 88% growth mainly from; (i) improvement in EBITDA margins to 11% (+1.0 ppts) likely from recognition of better margin products and lower operating cost and; (ii) lower income tax expense (-27%).

Outlook. Despite the challenging operating landscape in the property sector, we think that HUAYANG is on the right path given their continuous effort in clearing inventories as shown by the 37% drop (from FY18 to 1H19) in inventories from completed projects while also seeking to launch new serviced apartment projects at Bukit Mertajam in 2H19. Moreover, we are also comforted by the group’s commitment to lower its net gearing as shown by the recent proposed disposal of 30% stake in Kajang Height Land for RM21.0m. We hope to see more aggressive efforts to do so as we still estimate that net FY20E gearing will remain at 0.75x. Unbilled sales had increase 28% QoQ and currently stands at RM258.3m, providing slightly more than one year of earnings visibility.

Lowered FY19-20E earnings by 32%-26%. Post results, we reduced FY19-20E earnings down by 32%-26% to RM6.5-7.9m after factoring in the higher-than-expected effective tax rate seen in 1H19. We maintain our FY19-20E sales target of RM249.7m-RM246.8m compared to management’s FY19 sales target of RM400.0m due to the soft property outlook.

Maintain MARKET PERFORM with a lower TP of RM0.410 (from RM0.465). We lowered our RNAV from RM2.78 to RM2.74 on lower project margin assumption to better reflect its current margin trend while also widening our RNAV discount to 85% (previously 83%) which is now at the historical trough level.

Risks to our call include; (i) lower-than-expected sales, (ii) higher- than-expected administrative costs, (iii) negative real estate policies, (iv) less conducive lending environment.

Source: Kenanga Research - 25 Oct 2018