9M18 CNP of RM273m came above street’s estimate but broadly within our expectation. Sales for the period of RM901m are on track to management’s and our targets. No dividends, as expected. 4Q18-FY19E should see more Australian project deliveries, which will sustain earnings amidst margin pressures faced by local inventory clearing efforts. No changes to earnings. Reiterate OUTPERFORM with an unchanged TP of RM0.850.

Above street’s forecast but broadly within ours. 9M18 CNP of RM273m came above street’s forecast but broadly within our expectation as it accounted for 101% of consensus’ full-year estimate and 81% of ours. The positive deviation to street’s estimates could be due to lower project margin assumptions and timing from Aurora @ Melbourne project contributions. Corresponding sales are on track at RM901m as it made-up 75% and 74% of management’s and our target of RM1.20b and RM1.22b, respectively. Positively, sales have actually hit RM1.1b as of Nov 2018. Noteworthy is the aggressive efforts to clear inventories as it drove 32% of sales. No dividends, as expected.

Australia starts contribution. QoQ, although Aurora has started its first positive contribution, 3Q18 CNP still dipped by 88% to RM26m primarily because of last quarter’s high-base effect where there was a lumpy recognition of land sales (disposal of Iskandar Puteri to Country View and sale of RA Suria); excluding the land sales, CNP would have risen by 16% thanks to cost rationalisation initiatives. Note that Aurora saw a very encouraging settlement rate of 92% for its 127 residences and 10 office suites (first separable portion completed) which alleviates concerns of buyers pulling out. YoY, 9M18 CNP was up by 46% largely driven by the said land sales and Aurora@Melbourne’s positive contributions. Net gearing has increased slightly to 0.58x (2Q18: 0.57x) while inventories (at cost) had risen by 27% to RM695m due to recent project completions; but this has not taken into consideration the RM262m (market value) worth of inventories booked during their recent inventory monetisation campaign (Aug to early-Nov).

Management keeps to its sales target of RM1.20b for FY18. We expect Conservatory @ Melbourne to see settlement of the first separable portion by 4Q19 while both Aurora and Conservatory’s remaining portions should be fully felt by FY19. Earnings-wise, we believe this may result in a sequentially stronger 4Q18. Meanwhile, launches for the remaining part of the year amounted to RM172m (Serene Heights, Aspira Park Homes@Gerbang Nusajaya, Parcel i6 Iskandar Puteri). Projects like Residensi Astrea @ Mont Kiara and Eugenia @ Serene Heights (GDV: RM386m; launched in mid-Oct) will also be the key sales drivers. Disposal of non-core assets is expected to continue into next year as well, and if all goes well, net gearing will likely reduce next year closer to 0.4x.

Earnings unchanged (refer overleaf). Unbilled sales now stand at RM4.67b which provide close to 2-year visibility. Maintain OUTPERFORM with an unchanged TP of RM0.850. Our TP is based on an 81% discount (trough levels) to its FD RNAV of RM4.51. Given the bullet deliveries of their Australian projects over FY18-19E, coupled with aggressive efforts to monetize their land banks via land sales/JVs amidst the challenging property landscape, this would shore- up earnings. FY18-19E core PER and PBV valuations are at 10-9x and 0.5-0.4x which are almost historical trough levels. While there is no sales guidance for FY19 yet, many of their newly acquired projects in Klang Valley will be launched next year.

Risks to our call include: (i) weaker-than-expected property sales, (ii) margin fluctuations, (iii) changes in real estate policies, and (iv) changes in lending environments.

Source: Kenanga Research - 29 Nov 2018