9M18 CNP of RM147m and sales of RM1.22b were weaker than expected; but this is the first quarter of disappointment. No dividends as expected. Anticipating landbanking news given recent perpetual securities issuance. Although there were no official revisions to FY18E sales target of RM1.80b, we conservatively lowered our FY18E sales to RM1.65b. FY18-19E CNPs are lowered by 8-5%. Maintain OUTPERFORM and TP of RM1.10.

First quarter of disappointment. 9M18 CNP* of RM147m was below expectations, as it accounted for 53% and 65% of street’s and our full- year estimates, respectively. This was due to weaker-than-expected billings as many of its more recent projects (e.g. M Centura, M Vertica) were at early billing stages. Sales for the period was at RM1.22b which was slightly weaker than expected at 68% of both management’s and our FY18E targets of RM1.80b each. No dividends, as expected.

Weaker billings. QoQ, CNP decreased by 16% to RM46m because of weaker billings as revenue declined by 14% while pre-tax margin was relatively stable at 16.1% (-0.2ppt). YoY, 9M18 dipped by 36% on the back of a 22% decline in revenue and weaker pre-tax margin (-1.0ppt to 15.7%) primarily due to higher perpetual securities interest cost (+61%).

No official revision to FY18E sales target of RM1.80b. 4Q18 sales could come in stronger than this quarter since 74% of its target sales for the year are driven by affordable products (below RM500k/unit) in conjunction with its Easy Home Ownership campaigns, where buyers can enjoy stamp duty incentives immediately (refer below for details), and post Budget-2019 clarity. However, buyers may also adopt a ‘wait- and-see’ approach as Budget-2019 saw REHDA’s commitment to lowering house prices by 10% due to the SST exemptions on building materials. Recently, the group also announced issuance of RM145m perpetual securities (part of the program to issue up to RM1.0b; refer overleaf for details) which suggests potential landbanking activities. MAHSING requires landbank replenishment as all its landbanks have been activated while there is also the need to replenish for the affordable housing supply demands. Positively, the group remains in a net cash position of 0.08x (3Q18) based on the conventional net gearing formula; inclusive of perpetual securities, implied net gearing is healthy at 0.3x. It is also noteworthy that all of the group’sKL projects have D.O. in place, implying that they were not affected by the KL City Plan 2020 whereby the ‘standard’ plot ratio is pegged at 4x or considerably lower than what has been awarded in the past.

Lowering FY18-19E CNP by 8%-5%. The additional perpetual securities will reduce FY18-19E CNPs by 1-4%. Additionally, we conservatively toned downFY18E sales by 8% to RM1.65b as we expect some demand to be pushed forward due to the above- mentioned reasons and tweaked our progress billings assumptions. Nonetheless, we maintain FY19E sales assumptions at RM1.82b as demand momentum should recover in FY19; furthermore, there could be upside in the FY19E sales depending on the landbanking news. Unbilled sales of RM2.51b provide slightly less than one year’s visibility.

Maintain OUTPERFORM with an unchanged TP of RM1.10 based on 73% discount to its property RNAV which implies a SoP discount of 61% (-1.0SD) on its FD SoP of RM2.84 which is in-line with our universe (-2.0SD to -1.0SD). Note that our valuations already include GDV replenishments of RM2.2b (refer overleaf). In view of its landbanking news, the stock could enjoy some rebounds while decent dividend yield of 5.3% provides downside risk support. Risks include:(i) stronger-than-expected property sales, (ii) margin compressions, (iii) changes in real estate policies, and (iv) changes in lending environment.

Source: Kenanga Research - 19 Nov 2018