9M19 CNP of RM110.3m came in above our expectation at 103% of full-year estimate due to our bearish billings assumptions, but sales came in within at 76%. We increase FY19-20E earnings by 19% each to RM127-133m on stronger recognitions going forward from Monet Residences and Forum II projects. Downgrade to MP (from OP) on an unchanged TP of RM0.760.

9M19 CNP of RM110.3m exceeded our expectation at 103% of FY19 estimate. No consensus is available. We believe the deviation from our estimates is due to stronger-than-expected billing assumptions (107% of our FY19 estimate) as we may have been bearish in light of the weak 1Q19 results and lumpy 2Q19 earnings due to the adoption of MFRS 15* as Jasper Square was completed, while EBIT margins were also stronger than expected at 43% (vs. our expectations of 38%). 9M19 sales of RM306m was within at 76% of our FY19 estimate of RM0.40b with key sales drivers being Forum II and Monet Residences. No dividends were proposed, as expected.

*MFRS 15 implies that revenue from commercial property development projects, which was previously progressively recognised over time, will be recognised based on completion.

Results’ highlights. YoY-Ytd, top-line was down by 2% mainly due to the recognition of Forum 1 commercial development in 3Q18, but this was offset by recognition from existing projects this quarter, namely, The Olive, Bell Suites SOHO, Monet Lily, Monet Springtime, Monet Garden and Forum 2 SOHO. However, higher EBIT margin of 43% vs. 37% likely due to a better product mix, spurred bottom-line to increase by 68%. QoQ, top-line was down by 61% likely due to the lumpy recognition from Jasper Square last quarter, which cascaded straight to bottom-line, which declined by 85%. This was on weaker EBIT margins from lesser commercial recognitions this quarter as commercial developments tend to command better margins vis-à-vis residential developments.

Outlook. Upcoming launches will mostly cater to the affordable high-rise or mid-market landed residential, priced mostly below RM800k/unit from Sunsuria City. The bulk of FY19E sales hinges on Monet Residences (GDV: RM994m) at Sunsuria City, and Forum II (GDV: RM893m), as well as other projects, including Tangerine (GDV: RM242m) and Giverny Walk (GDV: RM67m). We believe the Group could aggressively land bank going forward due to its light balance sheet.

Increase FY19-20E by 19% each to RM127-133m post increasing recognitions for Monet Residences projects and Forum II. However, we make no changes to our FY19-20E sales target of RM0.40b each as sales is on track. Unbilled sales of RM362m provide slightly under one year visibility.

Downgrade to MARKET PERFORM (from OP) with an unchanged Target Price of RM0.760 on a property RNAV discount of 75% implying a SoP discount of 68% on an unchanged FD SoP RNAV of RM2.34. Our discount is pegged to -1.25SD level to account for lumpy earnings going forward due to the adoption of MFRS 15 as well as IAS23, which would inflate financing cost, and as such we are not overly bullish on the longer-term outlook for now. Furthermore, we are comfortable with our call on SUNSURIA as we have priced in most foreseeable risks for now while our TP implies a FY19E PER of 5.3x which is slightly below peers’ average Fwd. PER of 7.0x, but we believe this is fair given the lumpy quarterly earnings trend.

Risks include: (i) weaker or stronger-than-expected property sales, (ii) higher than-expected sales/administrative and finance costs (i.e. margin fluctuations), (iii) changes in real estate policies, and (iv) changes in lending environment.

Source: Kenanga Research - 29 Aug 2019