9MFY19 CNP came in above our estimate but in line with consensus at 80%/74%, respectively. 11M19 property sales of RM1,475m is above management and our expectations. No dividend was declared, as expected. Post-results, we increase FY19E/FY20E earnings by 6%/7%. No new development with regards to the ZIC Land. Maintain MP with higher TP of RM0.520 (from RM0.495) as we switch to adjusted P/BV valuation method.

Slightly above expectation. 9MFY19 Core Net Profit (CNP) of RM52.8m came in slightly above our estimate, making up 80% of full- year estimates but in-line with consensus’ estimate. The deviation was mainly due to stronger-than-expected profit from property development. Besides, 11MFY19 sales of RM1,475m are on track to exceed both management and our full-year targets of RM1.5b. No dividend was declared as expected.

Results highlight. YoY, 9MFY19 registered lower CNP of RM52.8m (- 22%) mainly due to i) lower contribution from the construction and trading segment caused by softer profit margin from on-going projects, increase in both finance and depreciation cost, and ii) higher effective tax rate of 43% in 9MFY19 compared to 37% in 9MFY18 due to losses from certain subsidiary companies that could not be set off against taxable profit, non-tax deductible expenses and non-recognition of deferred tax asset for certain temporary difference; and iii) pretax loss of RM23.9m (vs a profit of RM9.0m in 9MFY18) in the management, investment & other division. QoQ, 3QFY19 recorded higher CNP of RM21.1m (+50%) largely due to i) increase in property revenue by 29% to RM357.7m driven by good take up rate and steady construction progress from on-going projects within Klang Valley, Pahang and Johor as well as ii) lower losses from motor racing circuit due to higher income from sponsorship and consultancy services.

Outlook. Management has achieved property sales of RM1.47b in 11M19, almost achieving the RM1.5b sales target. Total GDV launched amounted to RM1.7b for FY19 with no more new launches in the last quarter. Moving forward, launches will be mainly from CyberSouth, Bukit Jalil, Alam Perdana, Bandar Putera Indah 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 in near future. 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.

Earnings review. Post results, we increase our FY19/FY20E earnings by 6%/7% after raising our property sales and margin assumptions in view of the stronger take-up rate and improved margin.

Maintain MARKET PERFORM with higher TP of RM0.520 (from RM0.495). Our TP is based on P/BV of 0.67x (at minus 1.5 SD of its 3- year historical band) on an adjusted BV/share of RM0.78 (after imputing a 40% discount to its latest available inventory level of completed properties). We are switching to the more conservative P/BV valuation method (from RNAV) as a gauge to ascertain the trough valuations of property stocks amid the prevailing market down cycle. Our revised TP implies a 65% discount to our SoP valuation of RM1.47 per share (partial GDV and partial land bank basis).

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 - 26 Nov 2019