1Q19 CNP of RM31.3m and corresponding sales of RM215m came broadly within expectations. No dividends, as expected. Management maintains its FY19E sales target (RM1.20b) and will continue clearing inventory and divestment of non-core assets. Earnings maintained. Maintain MARKET PERFORM with an unchanged TP of RM0.850.

Broadly within. 1Q19 CNP* of RM31.3m accounted for 11% of street’s full-year estimate and 9% of ours. However, we deem this as broadly within expectations as we have built in lumpy land sales in our estimates (makes up 29% of our FY19E CNP); recall that management guided divestments of non-core assets during the 4Q18 results’ briefing. 1Q19 sales of RM215m are at 18% and 17% of management’s (RM1.20b) and our (RM1.25b) respective FY19 targets. Again, we deem this as broadly in-line due to timing of new launches, which are mainly in 2H19. Positively, 45% of sales were driven by completed units, showing aggressive inventory clearing efforts. No dividends, as expected.

Results’ highlights. QoQ, 1Q19 CNP dropped 41% primarily due to a very strong 4Q18 previously which enjoyed partial settlements of Conservatory and Aurora, Melbourne with contributions of RM466m vs. RM221m in this quarter and last quarter also recognized lumpy land sales (Iskandar Puteri) while there were minimal land transactions this quarter. YoY, 1Q19 revenue rose by 46% thanks to the Australian project contributions but CNP only grew marginally at 3% due to: (i) associate/JCE contributions going into the red at RM6.8m due to lack of property/land sales from its JV projects, (ii) significantly higher effective tax rate of 28.2% (1Q18: 14.6%) due to the Australian projects’ higher recognition which attracts a higher corporate tax rate than Malaysia. Net gearing has eased slightly to 0.49x (last quarter: 0.51x) and is just below our comfort threshold of 0.5-0.6x.

Management is confident of its RM1.20b sales target, backed by RM1.25b worth of new launches (including the maiden Kepong Metropolitan, on-going projects of RM1.50b and inventories of RM1.03b (market value); but note that the bulk of new launches are in 4Q19. The group will continue its active inventory clearing efforts with a target to halve it by year-end. Divestments of non-core assets are still in the cards with RM41m worth of land deals signed and another potential RM305m worth of assets for sale this year. Net gearing is expected to drop to 0.40x by end-FY19 thanks to the divestments and remaining settlements of Aurora and Conservatory. In terms of land banking, the group is looking towards niche parcels of land with quick turnaround time span in matured areas; note that the group acquired a small parcel of land in Mont Kiara. (Refer overleaf for details).

No changes to earnings. Unbilled sales of RM4.11b provides close to 2-year visibility.

Reiterate MARKET PERFORM with an unchanged TP of RM0.850. Our TP is based on an unchanged 81% discount (trough levels) to its FD SoP of RM4.52. Note that our universe is pegging discounts to - 1.0SD to trough levels. 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 (FY19-20E: 4.9%-4.2%) or impactful sector catalysts to consider rerating the stock. However, downside risk is limited given that it is trading at trough levels of FY19E PBV/PER of 0.5x / 10.8x.

Source: Kenanga Research - 24 May 2019