9M18 CNP RM243m and corresponding sales of RM1.14b are broadly within expectations. No dividends, as expected. Sales for 4Q18 will be driven by on-going projects and inventory clearing efforts. Maintain earnings estimates. Downgrade to MARKET PERFORM with an unchanged TP of RM2.15.

Broadly within expectations. 9M18 CNP of RM243m is broadly within expectations at 68% of street’s full-year estimate and 73% of ours. For the last three years, we note that 2Hs were stronger than 1Hs. Sales for the period was at RM1.14b, accounted for 85% of our FY18E target of RM1.34b, which we also deem as broadly in-line as there will be no new launches for 4Q18. Major drivers were South Link, United Point Residence, Sentul Point Suite Apartments and inventory clearing efforts. No dividends, as expected.

Result Highlights. QoQ, 3Q18 CNP of RM92m was down by 22%. This is due to last quarter’s high base effect where 2Q18 saw sale of an office tower in Bangsar South, which carries significantly higher margin, coupled with inventory clearing this quarter which entailed discount/rebates/freebies, resulting in lower development pre-tax margin (-22.7ppt to 30.9%). YoY, 9M18 CNP declined by 19% because there were less project completions this year compared to last year. The group remains in a net cash position of 0.05x. Inventories (at cost) is still above RM1b; but we note this is typical for UOADEV given their high margins, and strong holding power due to its strong balance sheet, while many are offices that are yet to be sold.

Outlook. As mentioned, for the remaining part of the year, there will no new launches. New project launch, Goodwood Residence (a.k.a. The Park Residence II) @ Bangsar South (GDV: RM600m) which was earmarked for launch in 4Q18, will be postponed to FY19. The remaining part of the year will be driven by on-going projects and inventory clearing efforts.

No changes to estimates. Unbilled sales of RM1.63b provide c.1.5 years’ visibility.

Downgrade to MARKET PERFORM (from OP) with an unchanged TP of RM2.15 based on RNAV discount of 50% @ -1.0SD to its FD RNAV of RM4.29. The applied discount level is at the better end of our universe’s range (-2.0SD to -1.0SD). The stock has rebounded by 17% from its low of RM1.84, which was observed in late Oct 2018 (lowest since 2016). 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. The group has more defensive attributes than other developers but is still considered slightly riskier than MREITs and thus, our TP implies 6.5% yield which we believe offers a fair premium to the sizeable MREITs (net yield of 5.5%).

Risks include weaker/stronger-than-expected property sales, margin fluctuations, and changes in real estate policies and/or lending environments.

Source: Kenanga Research - 28 Nov 2018