FY18 CNP of RM85.1m came slightly below our estimate but markedly below market’s expectation mainly due to slower progress billings for its newer projects. Property sales of RM1.5b came within both management’s and our targets. No dividend was declared, pending board’s approval, while we expect 1.7 sen. Maintain FY19E CNP as we believe billings should start to pick up in FY19. Maintain MARKET PERFORM with TP of RM0.720

Below expectations. FY18 core net profit (CNP) of RM85.1m came slightly below our expectation but significantly below market’s at 94% and 86%, respectively. We believe the deviation is mainly due to lower property development revenue contribution from slower billing progress of some of its newer projects. However, full-year sales of RM1.5b were in line with both management and our target of RM1.5b. No dividend was declared, but management has indicated that they will announce at a later date after getting the board’s approval. To recap, LBS has a dividend policy of at least 30% pay-out rate, which was fulfilled in the past few years. We expect 1.7 sen dividend in FY18 based on a payout ratio of 30%.

Results highlight. YoY-Ytd, despite lower LBT recorded from the motor racing circuit segment, FY18 CNP declined by 15.5% mainly from: (i) slower progress billings (-16.7%) of some of its on-going project such as Alam Perdana and CyberSouth, as they are still at the very early stages of construction, and (ii) higher net interest expense (+61.8%) likely from higher borrowings drawn down for its Alam Perdana and CyberSouth township projects. QoQ, revenue declined by 59.3% again due to lower billings of its property projects. However, cost savings in projects such as BSP21 and Desiran Bayu brought EBIT margin higher (+2.0 ppts) to 17.7%, narrowing CNP decline to 29.1%.

Outlook. Management has set FY19 sales target at RM1.5b on the back of RM1.8b launches coming from projects namely, CyberSouth, Residensi Bintang Bukit Jalil, Alam Perdana, Bandar Putera Indah and Taman Kinding Flora. As for land banking activities, we believe that it will be more of a township nature and possibly on a joint-venture basis to avoid straining its balance sheet (net gearing levels now at 0.79x). For the ZIC Land, LBS is in the midst of obtaining relevant approvals from local authorities prior to commencing work. The group may be willing to sell part of the land rights to a China-based company because of local advantage if it means speeding up the development progress.

No changes to earnings. Post results, we make no changes to our FY19E earnings as we believe that billings for its on-going development projects should start to pick up in FY19 once they past the early stage of construction, while we maintain our FY19E sales target at RM1.5b. We also introduce FY20E CNP of RM95.0m and sales target of RM1.5b. Unbilled sales is currently registered at RM1.7b, providing slightly more than one-year of visibility.

Maintain MARKET PERFORM with an unchanged TP of RM0.720, implying 12.2x to FY19E EPS of 5.9 sen. Our target price implies a 56% discount to its SoP of RM1.65. We apply a property discount of 80% (close to -2.0SD to its historical average level) to its Malaysia property projects, which is above MAHSING’s 76% due to the latter having a much lighter balance sheet and offering higher dividend yield. For its construction segment, we ascribed a PER of 7.0x to its FY19E earnings, which is slightly above a comparable like MITRA’s ascribed 6.0x PER. We value ZIC Land based on a conservative price assumption of RMB94psf. We are comfortable with our call as there is a lack of near-term catalyst while we have also accounted for the overall challenging property market. However, positive developments with regards to the ZIC Land may warrant a re-rating of our call.

Source: Kenanga Research - 01 Mar 2019