1H19 CNP came below our/consensus estimates at 34%/38%, respectively. 8M19 property sales of RM1,007m is in-line with management and our expectations. No dividend declared, as expected. Post-results, we cut FY19E-20E earnings by 28-15%. No new development with regards to the ZIC Land. Maintain MP with unchanged TP of RM0.495

Below expectation. 1H19 Core Net Profit (CNP) of RM31.7m came in below our/consensus estimate, making up 34%/38% of respective full- year estimates. The deviation was mainly due to: (i) weaker-than- expected profit margin from property development and motor racing circuit segment, and (ii) higher-than-expected depreciation and finance costs. However, 8M19 sales of RM1,007m came in-line with both management and our targets of RM1.5b at 67%. No dividend was declared as expected.

Results highlight. YoY-Ytd, 1H19 registered lower CNP of RM31.7m (-27.7%), despite stronger profit contribution from property development segment (+98.7%). However, it was offset by lower profit generated from construction segment (-61%) and loss-making management and investment segment (-187.9%) as well as motor racing circuit segment (-38.9%). The lower profit generated from construction segment was mainly due to weaker profit margin from on-going construction project, loss incurred by subsidiary company and higher depreciation and finance cost. QoQ, 2Q19 recorded CNP of RM14.0m (-20.7%) compared to RM17.7m in 1Q19, mainly due to losses from management (-RM15.9m) and motor racing circuit segment (-RM3.4m) on lower income from racing events.

Outlook. Management has set FY19 sales target at RM1.5b with a balance of RM878m worth of projects yet to be launched, coming from projects namely, CyberSouth, Residensi Bintang Bukit Jalil, Alam Perdana, and Taman Kinding Flora. As for the ZIC Land, the company is currently working to improve and revise the upgrading and transformation plan after the Chinese government unveiled the national development plan for Greater Bay Area. The company is targeting to resubmit the plan to the authority before end of the year. Besides, given that the group is highly geared (at 0.7x 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.

Earnings review. Post results, we slash our FY19-20E earnings by 28- 15% by lowering our margin assumption from property, construction and motor racing circuit segments as well as increasing our depreciation and finance cost assumptions. However, with unbilled sales currently at RM1.7b, providing slightly more than one-year of visibility, we maintain our top-line estimation.

Maintain MARKET PERFORM with unchanged TP of RM0.495. The valuation does not include ZIC Land as we believe that the land value may take longer than expected to be realised. Our TP is based on SoP discount of 67% on its FD SoP/share of RM1.47. For its Malaysia property projects, we apply a property discount of 80% (at historical trough level), which is above MAHSING of 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 comparable peer like MITRA with an 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 re-rating 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 Sep 2019