1HFY20 CNP of RM154.7m accounted for 34%/35% of our/consensus full-year forecasts. While the property development and infrastructure segments showed improved contributions, both the construction and plantation divisions disappointed. An interim DPS of 2.0 sen was declared. Upgrade to OP with a higher SoP-based TP of RM2.35.

Below expectations. 1HFY20 CNP of RM154.7m represented 34%/35% of our/consensus full-year estimates. The drag came from the construction and plantation segments. An interim DPS of 2.0 sen was declared (similar to 1HFY19).

Result highlight. 1HFY20 CNP fell 18% YoY despite a higher turnover (+13%). In terms of segmental analysis, the property development (+24%) and infrastructure (+139%) divisions posted better YoY performance, led by robust property sales and stronger contribution from Kuantan Port (which contributed PBT of RM52.4m, up 156% YoY). On the other hand, the construction (flattish) and plantation (still loss making) segments disappointed.

QoQ, 2QFY20 CNP rose 21% thanks to a lower effective tax rate (26.3% vs 43.9%). At the pretax profit level, 2QFY20 was down 20% due to losses incurred by associates/JV (–RM41m vs. a profit of RM14m previously). All business segments except manufacturing & quarrying posted lower QoQ performance in 2QFY20.

Outlook. Current construction order-book of RM5.1b and unbilled property sales of RM1.9b will underpin forward earnings visibility. The worst may be over for the plantation division on the back of a recovery in CPO prices. In addition, the infrastructure segment could provide further earnings upside as 60%-owned Kuantan Port is expected to benefit from rising throughputs with a capacity expansion plan on the cards.

Earnings cuts. We have cut our CNP to RM330.5m (-28%) for FY20 and RM396.8m (-16%) for FY21 after scaling back our sales and margins assumptions mainly for the construction and property divisions.

Upgrade to OUTPERFORM with a SoP-based TP of RM2.35. While the broad outlook for both the construction and property sectors remains challenging, the Group is in a position to ride on earnings momentum from the plantation and infrastructure divisions,

Key downside risks for our call are: (i) lower-than-expected margins, and (ii) slower-than-expected progress in construction works and clearing of property inventories.

Source: Kenanga Research - 27 Nov 2019