We came away from SIMEPROP’s results briefing feeling reassured of our OUTPERFORM call. Management is tactically managing the challenging property market environment through a strategic pricing review and targeted marketing to clear inventories with 6-10% targeted reduction by end 2018. Maintain OUTPERFORM with a TP of RM1.10.

Targeting lower inventory levels. Inventories declined by 9% QoQ to RM2.22b due to recently completed units at (i) Rimbun Sanctuary and Bukit Jelutong (87 units, RM56m) and (ii) Serini 1 & 2, Taman Melawati (241 units, RM181m), implying that recent product offerings are well received by the market. The Group is targeting to lower existing inventory levels by 6-10% by end 2018 through targeted marketing and has completed its strategic pricing review. Unsold units have also declined by 10% QoQ to 4,469 units, of which only 21% comprise of completed projects, while the bulk of unsold units (73%) are from launches prior to FPE18 (refer to tables in overleaf).

Launches picking up steadily. Sales improved (+35% YoY) to RM712m and units sold (+22% YoY) to 815m was due to tactically targeted launches in previous quarters. The Group is strategically re- planning its launches, targeting RM600-650m launches in 2QFP18, focusing on landed residential projects along the Guthrie Corridor Expressway with developments such as Bandar Bukit Raja 2 & 3 (GDV: RM122m), Elmina West (GDV: RM137m) and Serenia City (GDV: RM98m) all priced below RM800k per unit. FY19 launch target of RM3-4b will also prioritise landed residential as well as integrated development, mostly in the Greater Klang Valley area (refer overleaf).

Strategic price review unlikely to impact margins. In efforts to clear inventories, rebates/discounts/freebies and other incentives have been offered. However, this does not necessarily mean that it will erode project margins significantly from current levels as certain phases of each project have also been reviewed to be closer to market prices. We are currently assuming GP margins of c.23% for the Group’s property projects vis-à-vis their 1Q18 property development margins of 20%.

Outlook. For the next quarter, we expect stronger earnings trajectory as we have estimated disposal of non-core assets amounting to a PBT of RM100m, in addition to the usual billings from on-going projects and clearing of inventory efforts. Management is also expecting sale of Battersea Phase 2 Commercial to EPF and PNB (estimated value of GBP1.6b) to be finalized by Jan 2019. This would certainly alleviate future balance sheet stress and positively, this could also allow for progressive recognition of the project; note that we have yet to impute for this into our estimates pending finalization of the deal. Melawati Mall’s narrowing losses are expected to turn to a marginal profit in the near term, while KL East Gallery will come on stream by 4Q19. Note that we make no changes to FPE18E and FY19E earnings of RM183m and RM402m, respectively.

Maintain OUTPERFORM and TP of RM1.10 based on an implied 66% discount to its FD SoP of RM3.24. Our discount is in line with SPSETIA, which valuation is lower to the -2.0SD levels. Although earnings came weaker than expected, we noted that sales still remain 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.

Source: Kenanga Research - 29 Nov 2018