FY18 CNP of RM326m came above street’s estimate but within our expectation, while corresponding sales exceeded targets at RM1.43b. No dividends against our expected 1.0 sen. Management remains prudent on FY19E sales target (RM1.20b) and will continue its inventory clearing and divestment of non-core asset efforts. Earnings largely maintained. Downgrade to MARKET PERFORM with an unchanged TP of RM0.850 due to recent sharp rebound as sector catalysts are still lacking.

Earnings above market’s estimate but within ours. FY18 CNP of RM326m came above street’s full-year estimate (129%) but within ours (97%). We believe consensus underestimated the delivery momentum of land sales and its Australian bullet contributions. Positively, FY18 sales of RM1.43b exceeded both targets of management’s (RM1.20b) and ours (RM1.22b) thanks to better-than-expected take-up rates for both on-going projects and inventories; notably 30% were from inventories. However, there were no dividends proposed vs. our FY18E expectation of 1.0 sen.

Boosted by Australia. QoQ, 4Q18 CNP was up by 101% to RM53m due to the continuation of the second separable portion settlement of Aurora, Melbourne and the first separation portion settlement of Conservatory; both these projects made up 62% of revenue contribution. The quarter was also boosted by the land sale recognition (to Kimlun) of RM86m and sharp recovery in associates/JCE (+173%). YoY, FY18 CNP leaped by 216% due to the abovementioned reasons and strong cost rationalisation efforts (note that we are using re-stated FY17 figures, which have been adjusted for MRFS15 impact). Net gearing remains at 0.51x or similar to last quarter and is close to our comfort threshold of 0.5-0.6x.

Management keeps to a prudent FY19 sales target of RM1.20b although FY18 sales were higher. FY19 sales will be backed by RM1.2b new launches according to the management and will focus on mid-market or reasonable sized pocket launches in mature locations, including Aspira ParkHomes@Gerbang Nusajaya, Serimbun 2@Iskandar Puteri, and maiden Kepong launch (two residential towers) while the rest will be driven by new phases of on-going projects (e.g. Serene Heights) and inventory clearing efforts. Inventories (available for sale) are at RM695m (at cost) and management intends to clear at least half of this by 2019 but note that inventory figures may not fully reflect this effort due to timing of other project completions. Aurora and Conservatory (cumulative sales of RM3.2b of which only RM662m settlement was done in FY18) will also see bulk settlements throughout FY19. Divestment of non-core assets (targeting RM300m) 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. In terms of land banking, the group is looking towards niche parcels of land with quick turnaround time span in matured areas. Earnings largely maintained (refer overleaf).

Downgrade to MARKET PERFORM (from OP) with an unchanged TP of RM0.850. Our TP is based on an 81% discount (trough levels) to its FD RNAV of RM4.51. Note that our universe is pegging discounts to - 1.0SD to trough levels. Share price has done well since we featured it as our Preferred Pick (Property SU 3/1/19) with a sharp 26% rebound vs. the KLPRP index (+11% during the same period). While we laud the management’s effort to rationalize its high fixed cost structures and non-core assets, as well as aggressively clearing inventories, we require stronger ROE recoveries (FY19E: 4.9%) or impactful sector catalysts to consider re-rating the sector, and hence the stock. However, downside risk is limited given that it is trading at trough levels of Fwd PBV of 0.5x and Fwd. PER of 10.8x.

Source: Kenanga Research - 27 Feb 2019