9MFY19 registered CNL of RM16.6m, missing our expectation, mainly due to weaker-than-expected sale of service apartments and shop offices in its Jalan Kuching project coupled with lower-than-expected CNP margin. No dividend was declared as expected. Moving forward, MAGNA’s focus will continue to be on inventory clearing. Post results, we widened our FY19E and FY20E CNL estimates to RM22.2m and RM20.9m, respectively. Maintain UNDERPERFORM with lower TP of RM0.695 (from RM0.710).

Below expectation. After stripping out one-off loss from the deconsolidation of subsidiary amounting to RM4.3m, 9MFY19 recorded CNL of RM16.6m, missing our FY19 earnings estimate drastically. The deviation was mainly due to lower-than-expected property sales and profit margin. No dividend declared, as expected.

Results’ highlight. YoY, 9MFY19 recorded higher CNL of RM16.6m compared to CNP of RM12.2m one year ago, largely due to: (i) lower property revenue contribution by 53% due to poor sale of service apartments and shop offices in its Jalan Kuching project affected by weaker market condition, (ii) loss margin widening to 25% compared to profit margin of 37% in 9MFY18, possibly due to lower property selling price from higher rebates and lower revenue, which could not cover fixed overheads. QoQ, 3QFY19 registered CNL of RM6.7m; no changes compared to 2QFY19. We see recovery in property revenue by 22% coupled with higher gross profit margin of 31% from 21% in 2QFY19, and the impact was partially offset by higher interest cost of RM4.3m (+18%).

Outlook. Moving forward, MAGNA’s focus will continue to be on clearing existing inventory at cost in its Boulevard Business Park, Jalan Kuching, and Desa Mentari projects. As for The View Residence at Shah Alam, the group aims to re-open booking by offering better sales package to encourage better response. Apart from these projects, we believe earnings could be boosted if MAGNA successfully monetize its 2.6 acres of land along Jalan Ampang, valued at c.RM400m which we have not imputed into our estimates.

Earnings estimate. Post results, we further increase the losses estimates for FY19 and FY20 to RM22.2m and RM20.9m (from RM6.3m RM4.5m) after lowering our revenue estimation to reflect weaker property sales demand for projects in its Jalan Kuching and Desa Mentari commercial projects as well as adjusting the margin assumption, factoring in higher rebates given to customers in view of MAGNA’s effort in clearing existing inventories.

Maintain UNDERPERFORM but with a lower Target Price of RM0.695 (from RM0.710). We maintain our UNDERPERFORM call with reduced TP of RM0.695 (from RM0.710) based on increased property RNAV discount of 73% (from 72%), implying a 61% discount (which is at the historical trough level) to unchanged FD SoP of RM1.79 in view of the volatile earnings in recent quarters.

Risks to our call include: higher-than-expected margins/property sales, lower-than-expected administrative costs, changes in real estate policies, and changes in lending environment.

Source: Kenanga Research - 22 Nov 2019