1Q19 CNP of RM264.5m is broadly within ours (67%) and consensus (56%) expectations as a large chunk of projected non-core asset disposals was recognised this quarter. 1Q19 sales of RM403m is also deemed broadly within our target (19%) of RM2.14b and management’s target of RM2.30b (18%) as we expect sales to catch up in coming quarters. Maintain FY19-20E CNP of RM395-462m. Reiterate OP on an unchanged TP of RM1.10.

Results broadly within. 1Q19 CNP of RM264.5m came in broadly within ours (67%) and consensus (56%) expectations. We deem this as broadly within as a large portion of the gain on non-core asset disposal of RM204m was recognized in 1Q19, as expected. Note that we accounted for gain on disposals as part of our core earnings as it is part of management’s active plan to rationalize its non-core assets. 1Q19 sales of RM403m (19%) is also broadly within our expectation of RM2.14b and management’s target of RM2.30b (18%) as we expect sales to play catch-up in coming quarters. 1Q19 sales were driven by projects at Bandar Bukit Raja and Elmina West. No dividends, as expected.

Result highlights. YoY, top-line was up (+3%) driven by the property segment (+2%) on higher recognitions and property investment segment (+39%) on higher rental at Melawati Mall and contribution from facility management services. Positively, bottom-line jumped by 818% mainly due to: (i) lower operating cost (-4%) from better cost management, (ii) higher gains on disposal of RM204m driven by the sale of Darby Park, Singapore, (iii) higher net interest income (+304%), (iv) positive contributions from JV project (RM3.8m) namely PJ Midtown alongside lower share of losses from Battersea and Sime Darby Sunrise, and (v) low tax rate of 9% as the gain on disposal was not subjected to Singapore tax. QoQ, top-line was down by 27% due to lower recognitions from the property development segment. However, EBIT returned to the black on better margin of 12.2% (vs. LBIT of RM21m) as the previous quarter experienced thin margin inventories and inventory impairments. Additionally, the positive gains on disposals and positive contributions from JV due to reasons mentioned above elevated CNP back into the black to RM264.5m (vs. RM16m losses).

Outlook. FY19 will see c.RM1.5-2.5b launches of mostly landed residential located in the Greater Klang Valley and GCE, and priced below RM750k/unit. The Group’s latest unbilled sales of RM2.1b provide around one-year’s visibility. For FY19, we expect a total of RM280m pretax gains on disposals from non-core assets with upcoming disposals (e.g. Kedah land). However, we will seek further clarity during today’s briefing on whether the company expects more disposals this year; recall that management guided for RM2b in disposal gains over the next 4-6 years; this may prompt us to review our earnings estimates.

Maintain FY19-20E CNP of RM395-462m. We maintain our sales target of RM2.14-2.10b in FY19-20E which is slightly more conservative than managements FY19 sales target of RM2.3b.

Maintain OUTPERFORM 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, given expected thin ROE’s of 4-5% in FY19-20. However, we believe our call is warranted as our valuations have accounted for possible earnings risk while we also acknowledged the fact that sales momentum remains healthy, which is commendable given the challenging environment. Note that we have also recently lowered FY21E earnings to account for potentially lower forward earnings on conservative take-up rates at Battersea Phase 2 and 3a, but even so, our TP implies a 15x FY21E PER which is close to its peer SPSETIA’s implied FY21E PER of 14x (- 1.0SD levels to our Fwd 7-year average PER).

Source: Kenanga Research - 30 May 2019