6MFPE18 CNL of RM126.1m is weaker than expected. However, sales at RM1.34b came above management’s and our 6MFPE18 target (+34%). Dividend of 1.0 sen is close to our expectation of 1.1 sen. Maintain FY19E CNP for now pending the briefing later today, but we caution a downside bias to earnings given margin compressions. Downgrade to MARKET PERFORM on an unchanged TP of RM1.10.

Strong sales but weak earnings. 6MFPE18 CNL of RM126.1m came in weaker than our 6MFPE18E CNP of RM183m. Top-line came in within, at 97% of our estimates but the deviation was mostly due to margin compression with severe EBIT margin compression to 1.7% (vs. our expectations of 17%) due to higher operating cost, which was partly caused by inventory impairments and higher tax provisions. On a positive note, 6MFPE18 sales of RM1.34b exceeded management’s target (RM1.00b) and ours (RM1.01b) by 34% driven by City of Elmina and Bandar Bukit Raja. A 1.0 sen dividend was announced, which is close to our expectation of 1.1 sen (91%).

Result Highlights. QoQ, top-line was up by 64% mainly driven by the property development segment (+68%) and concession arrangement segment (+192%). However, operating cost surged 87% causing EBIT to go into the red (–RM21.3m) as development saw PBIT losses possibly due to sale of very thin margin inventories and inventory impairments. This coupled with higher taxes of RM256m (vs. RM17m) resulted in a CNL of RM154m. YoY, top-line increased by 8% due to both the property development segment (+9%) and concession arrangement segment (+10%) from the supply of teaching equipment and higher contribution from facility and asset management services. Higher operating cost caused EBIT margin compressing to 1.7% from 14.6% on higher interest expense (+16%) and negative contribution from Battersea (-RM47m) compared to last period’s bullet delivery from Battersea Phase 1. All in, bottom-line recorded a CNL of RM126m after excluding one-offs from write-offs and impairments.

Outlook. So far, the group has launched RM676m GDV of new phases in Bandar Bukit Raja, Serenia City, Nilai Impian and Elmina West mostly priced between RM200-800k/unit. Going forward, we believe launches will still be from on-going townships with emphasis on affordable housing, the industrial land sales in Bukit Raja and clearing of inventories. 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. Pending today’s results briefing, we maintain our earnings estimates (refer overleaf).

Downgrade to MARKET PERFORM (from OP) with an unchanged 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 peer SPSETIA with its valuations pegged closer to the -2.0SD levels. Although earnings came in weaker than expected which we will seek further clarification today, we note that sales momentum remains healthy, which is commendable given the challenging environment. However, without fresh catalysts and earnings improvement, coupled with thin ROE of 4% (in FY19E) and the recent share price rally of +23% YTD vs. the KLPRP index (+11% YTD), we believe our downgrade is warranted.

Source: Kenanga Research - 28 Feb 2019