1Q19 CNP came broadly within our/consensus estimates at 19% each. 5M19 property sales of RM524m is also broadly in-line as we expect stronger sales in subsequent quarters. No dividend declared, as expected. Post-results, no changes made to our estimates. No new development with regards to the ZIC Land. Thus, we maintain MP but lower TP to RM0.495 (from RM0.675) after removing the ZIC Land valuation that may require a longer time to materialise.

Broadly within. 1Q19 Core Net Profit (CNP) of RM17.7m is broadly within both our/street’s estimates at 19% each. We deemed the performance as broadly within as we expect stronger billings over the subsequent quarters. Similarly, 5M19 sales of RM524m also came broadly in-line with both management and our target’s of RM1.5b at 35% as we expect stronger sales with new launches coming from Residensi Bintang Bukit Jalil, Alam Perdana, Bandar Putera Indah, Taman Kinding Flora and CyberSouth projects. No dividend was declared as expected.

Results highlight. YoY-Ytd, despite stronger revenue (+36.0%) coming from stronger property development billings (+37.1%), CNP declined by 23.3% due to: (i) lower margin from construction segment due to higher operating expenses, (ii) higher net interest expense (+31.8%) particularly with the development of Alam Perdana and CyberSouth township as per guided by management, and (iii) higher effective tax rate of 47.9% (+8.1 ppt). QoQ, 1Q19 revenue was higher by 95.7% due to stronger property progress billings. However, CNP was only higher marginally (+3.4%) due to lower property development segment’s PBT margin (-15.3 ppt) as previous quarters saw higher cost savings from projects such as BSP21 and Desiran Bayu.

Outlook. Management has set FY19 sales target at RM1.5b with a balance of RM1.2b worth of projects yet to be launched, coming from projects namely, CyberSouth, Residensi Bintang Bukit Jalil, Alam Perdana, Bandar Putera Indah and Taman Kinding Flora. As for the ZIC Land, there is no new development on the transformation plan. Given that the group is highly geared (at 0.81x net gearing), it is more likely that they will find a partner to develop the land. The group may sell part of the land rights to a China-based partner for local advantage if it means speeding up the development progress. However, we think that this may not happen any time soon due to the uncertainties arising from the on-going trade war between U.S. and China.

No changes to earnings. Unbilled sales currently at RM1.7b, providing slightly more than one-year of visibility.

Maintain MARKET PERFORM with a lower TP of RM0.495. We lowered our TP to RM0.495 (from RM0.675) after we removed the ZIC Land from our valuation because we believe that the land value may take longer than expected to be realised. Given its high net gearing position and the US-China trade tension is showing no sign of easing, we think that LBS may develop this land only when market condition is more conducive and upon better balance sheet health. For its Malaysia property projects, we apply a property discount of 80% (at historical trough level), which is above MAHSING’s 76% due to the latter having a much lighter balance sheet. 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 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 rerating of our call.

Risks to our call include; (i) stronger/weaker-than-expected property sales, (ii) changes in real estate policies, (iii) changes in lending environment, and (iv) positive/negative news development of ZIC Land.

Source: Kenanga Research - 3 Jun 2019