1Q19 CNP of RM4.1m came in below expectations, accounting for only 4% of both our/consensus full-year estimates. This is the fourth disappointment in a row. Property sales of RM75.0m is also short of our/management’s sales target of RM524.8m/RM800.0m. No dividend was declared, as expected. Cut FY19E CNP by 18%. Maintain UP with an unchanged TP of RM0.750.

Below expectations. 1Q19 CNP of RM4.1m came in below expectations, accounting for only 4% of both our/consensus full-year estimates. This is the fourth disappointment in a row. The negative variances are mainly due to: (i) slower-than-expected construction billings, and (ii) lower-than-expected billings progress from unbilled sales of RM1.6b. Property sales of RM75.0m is also short of our/management’s sales target of RM524.8m/RM800.0m. No dividends declared, as expected.

Results highlight. 1Q19 CNL fell sharply by 81%, underpinned by the decline in revenue (-45%). This is due to softer billings from both its construction and property divisions where revenue declined by 31% and 61%, respectively. The low billings from its construction division is due to the fact that most of its contracts are still at start-up phase or going through cost rationalisation, while the lower property revenue is because most of its projects are still at sub-structure level or are from overseas, which can only be recognised upon completion. QoQ, 1Q19 CNP grew 540% (low base effect), amid lower revenue (-38%), thanks to the improvements in construction operating margin from 5.8% to 12.6%, and lower effective tax rate of 82% vis-à-vis 94% in 4Q18.

Outlook. Management maintains their sales target of RM800.0m underpinned by planned launches of RM900.0m of which RM400.0m are in Australia and inventories clearing from Vivo, 9 Seputeh with an estimated GDV of RM250.0m. However, we are only targeting sales of RM524.8-550.0m for FY19-20. Its unbilled sales stand at c.RM1.6b which will provide the group 3-4 years of earnings visibility. On its construction front, management does not rule out potential participation in ECRL given their strong interest in rail-related projects.

Earnings review. Post results, we cut our FY19E earnings by 18% as we re-timed some of the billings progress for both its construction and property divisions. Our FY19E sales is kept unchanged at RM524.8m, as we believe they have a better chance in meeting our target, which is lower than management’s target of RM800.0m.

Maintain UNDERPERFORM with an unchanged SoP-driven Target Price of RM0.750. Our TP implies price to book ratio of 0.68x, which is close to trough levels.We opine that the long-term outlook for the company is relatively stable compared to other contractors or developers due to their massive outstanding order-book and transit- oriented developments. However, we note that management would need to step up to enhance efficiency by further lowering their operating costs to remain competitive and improve overall profitability as margin erosions have been evident. While we are aware that the potential newsflow on ECRL could result in positive share price sentiment; we prefer to be prudent as the margins might not be as compelling.

Risks include: (i) stronger-than-expected property sales, (ii) lower- than-expected administrative cost, (iii) positive real estate policies, and (iv) changes in lending environment.

Source: Kenanga Research - 31 May 2019