FY18 CNP of RM333m came within expectations but sales RM1.48b exceeded our expectations thanks to en-bloc sales. Dividend of 14.0 sen was spot-on with our estimate. The group has lined up c. RM1.3b worth of new launches for FY19 whilst continuing its inventory clearing efforts. Tweaking FY19E CNP lower by 6% on softer margins and lower sales. Maintain MARKET PERFORM with an unchanged TP of RM2.15.

Earnings within but sales above expectations. FY18E CNP of RM333m came within expectations at 98% of street’s full-year estimate and 100% of ours. Our CNP excludes fair value adjustments and RM36m RPGT write-backs. Sales for the year of RM1.48b exceeded our FY18 target of RM1.34b, mainly attributed to the unexpected en- bloc office tower sales at UOA Business Park and The Horizon Bangsar South (combine value: RM254m). However, first and final dividend of 14.0 sen was spot on with our estimate, implying a record-high payout ratio of 78% of CNP (FY16-17: 65% payout of CNP).

Margin compressions. QoQ, 4Q18 revenue rose sharply by 62% given the above-mentioned en-bloc office tower sales, but CNP declined slightly (-2%) due to EBIT margin compressions to 34.2% (- 3.0ppt). YoY, although FY18 revenue was up by 17%, CNP declined by 17% largely due to lower EBIT margin of 39.7% (-11.1ppt) possibly due to a combination of inventory clearing efforts which tend to involve discounts/rebates and lower product margin mix. The group remains in a strong net cash position of 0.08x gearing.

Outlook. New launches for 2019 include; (i) Goodwood Residence@ Bangsar South (GDV RM600m) which has been soft-launched and is seeing promising take-ups, (ii) Sri Petaling land (GDV RM1b but will only be releasing c.RM300m this year) which launch is slated for 2Q18- 3Q18, (iii) Bandar Tun Razak, Cheras (GDV RM300m which will be launched in 4Q18), and (iv) UOA Business Park Ph 2 (RM140m). The remaining part of the year will be driven by on-going projects and inventory clearing efforts.

Tweaking FY19E CNP lower by 6% post house-keeping while we assume slightly more conservative development margins due to inventory clearing efforts. We also reduced FY19E sales by 7% to RM1.32b although we qualify that upsides could come from potential en-bloc sales which we have not factored for. We also introduce FY20E earnings and sales of RM1.41b. Unbilled sales of RM1.50b provide slightly more than 1-year visibility.

Maintain MARKET PERFORM with an unchanged TP of RM2.15 based on RNAV discount of 50% @ -1.0SD to its FD RNAV of RM4.31. The applied discount level is at the better end of our universe’s range (- 2.0SD to -1.0SD). 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 over the sizeable MREITs (net yield of 5.3%).

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

Source: Kenanga Research - 26 Feb 2019