1H19 CNP of RM500m came above our and consensus expectations at 134% and 119%, respectively, on lower-than expected financing cost and tax rate. 1H19 sales of RM1.4b are broadly within at 65% thanks to ongoing promotions in 2Q. We increase FY19-20E CNP by 50-33% on higher product margins, lower financing cost and tax rates. Upgrade to OP on an unchanged TP of RM1.10.

Above expectations. 1H19 CNP of RM500m came above our and consensus expectations at 134% and 119%, respectively. Top-line came in within at 54% but the deviation from our estimate was due to lower-than-expected financing cost (which made up 6% of our FY19 estimate) as a large chunk of financing cost was capitalised this quarter, while effective tax rates (which made up 12% of our FY19 estimate) were also unexpectedly lower as the Group recognised deferred tax assets this quarter, but we expect these items to increase closer to more normalized levels in coming quarters. 1H19 sales of RM1.4b is deemed broadly within our target at 65%, and management’s target at 61%, riding on on-going promotions in 2Q, namely Primetime 8 and Pop Raya. A 1.0 sen dividend was announced, which is within our expectation of 2.2 sen in FY19 (45%).

Result highlights. YoY-Ytd, top-line was up (22%) driven mainly by the property segment (+32%) on higher recognitions from Cantara Residences, Bandar Bukit Raja (BBR), Serenia City and City of Elmina. Bottom-line jumped by 910% on: (i) higher net interest income due to lower financing cost (+53%) as some items were capitalised, (ii) lower losses from associate and joint ventures (-48%), (iii) higher gains from the sale of Darby Park, Singapore and Bukit Selarong land (+1691%), and (iv) lower minority interest contribution, which inflated bottom-line.

QoQ, top-line was up by 51% spearheaded by the property segment due to similar reasons mentioned above. EBIT was up by 170% likely on better product margins. However, bottom-line declined by 11% as 1Q saw increased gains from the sale of Darby Park, Singapore.

Outlook. FY19 will see RM2.0-2.5b worth of launches, while 1H19 launches were worth RM1.2b from projects such as Elmina West (Elmina Valley 5), Serenia City (Adiva 2), Bandar Universiti Pagoh (Harmoni Permai) and Putra Heights (Irama Square). Going forward, upcoming launches will be mostly residential projects located in the GCE, Klang and within the Greater Klang Valley and mostly priced below RM750k/unit. Unbilled sales of RM1.5b provide <1-year visibility.

We increase FY19-20E CNP by 50-33% to RM556-544m on: (i) higher PBT margin of 27% (from 22%) in FY19-20, closer to current levels on better project margins as well as lower administrative and marketing expenses, (ii) slightly lower financing cost in FY19 as some items were capitalized, which brought down borrowing cost in FY19, but we expect this to normalize in coming quarters, and (iii) lower effective tax rate in FY19 of 18% (from 23%) due to low tax rates in 1H19. We maintain our sales targets of RM2.14-2.10b in FY19-20 which are slightly more conservative than management’s FY19 sales target of RM2.3b.

Upgrade to OUTPERFORM (from MP) 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 ROEs of 5-6% in FY19-20. We believe our call is warranted given the attractive upsides as earnings whiles sales momentum remains healthy, which is commendable given the challenging environment, but our valuations remain conservative to account for possible earnings risk in coming quarters from IAS23 as well as lumpy earnings from land sale gains going forward.

Risks include: (i) weaker-than-expected property sales, (ii) weaker margins, (iii) changes in real estate policies, and (iv) changes in lending environment.

Source: Kenanga Research - 29 Aug 2019