3MFPE18 CNP of RM29m was weaker than expected. However, sales at RM712m are broadly in-line with management’s 6MFPE18 target (RM1.00b) and above ours (RM0.92b). No dividends, as expected. Management remains confident of achieving its target. Conservatively revised down 6MFPE18E-FY19E CNP by 7-4%, although we have raised 6MFPE18 sales estimates. Maintain OUTPERFORM and TP of RM1.10, pending an analysts’ briefing today.

Sales did well, but earnings were weaker than expected. 3MFPE18 CNP of RM29m came in weaker than expected at 15% of our FPE18E estimate of RM197m. Although we still anticipate sizeable asset sales next quarter (already factored into our estimates), the results are still considered to be on the softer end due to timing of property billings and softer-than-expected development margins. Bloomberg consensus’ estimate for 6MFPE18E is not fully representative as it may include both full-year FY19E and FPE18E estimates. Positively, sales for the period hit RM712m (+35% YoY) of which 79% was driven by City of Elmina and Bandar Bukit Raja (including industrial land sales). We consider this as broadly in-line with management’s target of RM1.00b and above our target of RM0.92b. No dividends, as expected.

Result Highlights. QoQ, CNP rose by 42% albeit the 22% revenue decline largely due to a slight improvement in EBIT margin (+0.4ppt to 8.9%) thanks to all its divisions and significantly lower MI contributions. YoY, CNP was down sharply by 84% on flattish revenue trends (+2%) largely due to the absence of Battersea’s contributions. Net gearing remains healthy at 0.16x.

Management is confident of achieving RM1.0b sales target. So far, the group has launched GDV RM311m worth of new phases in Bandar Bukit Raja, Serenia City and Nilai Impian with residential products priced between RM200-800k/unit. As for launches for the remaining part of the year, we believe it will still be from its on-going townships with emphasis on affordable housing, and their industrial land sales in Bukit Raja. Recall that 461 ac of land (c. RM5.1b GDV) has been identified for industrial development, of which, 253 ac (including strategic JVs) will be used for industrial build-to-suit facilities that will be retained for recurring income purposes. We are also expecting sale of Battersea Phase 2 Commercial to be finalized soon.

FPE18E and FY19E earnings are lowered by 7% and 4%, respectively. We have raised our sales target by 9% to RM1.0b while maintain FY19E sales at RM2.32b. However, our property billings assumptions and development margins have been tweaked lower. Unbilled sales of RM2.3b provides close to one-year visibility.

OUTPERFORM with a TP of RM1.10. Our current recommendation is based on an implied 66% discount to its FD SoP of RM3.24. Our discount is in line with SPSETIA, which valuations are lower to the - 2.0SD levels. Although earnings came weaker than expected, we note that sales still remains healthy, which are extremely commendable considering the challenging local environment; note that most developers under our coverage relying on locally-driven sales did not fare as well as SIMEPROP this quarter. However, if the analysts’ briefing today suggests a gloomier outlook, we may review our recommendation.

Risks include; (i) weaker-than-expected property sales, (ii) margin fluctuations, (iii) changes in real estate policies, and (iv) changes in lending environment.

Source: Kenanga Research - 28 Nov 2018