1H19 CNP of RM59.9m came in below expectations, at 33%/29% of our/consensus full-year estimates. 1H19 sales of RM761.4m are on track to meeting management’s target and ours. No dividends declared, as expected. Management is sticking to its FY19 sales target of at least RM1.50b, driven mainly by its Klang Valley affordable housing products. Lowered FY19E earnings by 12%. Reiterate OUTPERFORM with a lower TP of RM1.00 (previously, RM1.05).

Below expectations. 1H19 CNP* of RM59.9m came in below expectations as it only makes up 33%/29% of our/consensus full-year estimates. We believe this is due to our optimistic progressive billings assumptions while street’s estimates could be on the high-side due to definitions of CNP where some forecasts included perpetual sukuk distributions while others did not. 1H19 sales of RM761.4m are on track to meeting management’s target of at least RM1.50b and our RM1.52b forecast. No dividends, as expected.

Results’ highlights. YoY, 1H19 CNP fell 40% primarily due to a 21% drop in revenue given the declining annual sales trend over the last few years, coupled with the decline in EBIT margin to 15% (1ppt) which we believe was due to timing differences in its progressive billings recognition as some projects might command a lower margin. QoQ, 2Q19 CNP fell 37% due to higher interest expense (+78%), and higher minority interest contribution (+50%) underpinned by its perpetual sukuk distributions. We note that inventories have dropped by 10% QoQ to RM595.6m (at cost), thanks to their strong marketing initiatives, including the Home Ownership Campaign.

FY19E sales target of RM1.50b remains intact, driven byc.RM2.0b GDV worth of launches (of which RM723m was launched over 1H19) from its on-going projects. Products offered are mainly urban affordable units to residential upgrades of which 81% are priced below RM700,000. With its light balance sheet, we note that MAHSING is still on the lookout for affordable housing land bank in Klang Valley, likely those in more established areas.

Earnings review. We lowered our FY19E earnings by 12% after rescheduling some of our billings recognition and fine-tuning our margin assumptions. Unbilled sales of RM1.65b provide less than 1-year’s visibility.

Reiterate OUTPERFORM with a lower TP of RM1.00 (previously, RM1.05) based on a SoP discount of 63% (-1.25SD) on its FD SoP of RM2.80 (from RM2.84) as we fine-tuned our margin assumptions for some of its projects. This is in-line with our universe’s valuation range (- 1.0SD to trough levels) while MAHSING’s positioning as an affordable housing player warrants the better-end of our applied discount spectrum. Nonetheless, Fwd. PBV of 0.6x is at historical trough levels. We also expect the group to continue land bank replenishment in the affordable housing space (note that our FD SoP already included remaining GDV replenishments of RM0.6b).

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

Source: Kenanga Research - 3 Sep 2019