9MFY19 CNP of RM577m came above our and consensus expectations at 104% and 113%, respectively, on lower-than- expected tax rates and weaker-than-expected minority interest contributions. 9MFY19 sales of RM2.25b is also above at 105% and 98% of our and management’s targets on on-going promotions and inventory clearing efforts. We increase FY19-20E CNP by 23- 20% on higher sales targets and lower tax rate for FY19. Maintain OP but lower TP to RM1.00 (from RM1.10) post switching to P/BV valuations.

Above expectations. 9MFY19 CNP of RM577m came in above our and consensus expectations at 104% and 113%, respectively. Top-line came in within at 79% but the deviation from our estimates was due to lower-than-expected tax rates (7% vs. ours of 18%) which we had expected to normalize in 3Q and 4Q, and weaker-than-expected minority interest contributions. No dividends, as expected. 9MFY19 sales of RM2.3b also exceeded our target of RM2.14b (105%) and management’s target of RM2.25b (98%) from ongoing marketing campaigns (i.e. Primetime 8, Pop Raya and Spotlight 8) and sales of completed projects.

Results’ highlights. YoY, 9MFY19 top-line was up (38%) driven mainly by the property segment (+48%) on higher recognitions from Denai Alam, Bandar Bukit Raja (BBR), Serenia City, Nilai Utama and City of Elmina. All in, CNP was up by 651% on: (i) higher net interest income (+56%) due to lower financing cost as some items were capitalised, (ii) higher other operating gains mainly from the sale of Darby Park, Singapore and Bukit Selarong land (+1387%), and (iii) lower minority interest contribution which bumped up bottom-line. QoQ, top-line declined marginally by 2% on slightly lower recognitions. However, CNP declined by 67% on: (i) higher marketing (+12%) and administrative expense (+48%), (ii) higher losses from joint venture as marketing efforts intensified as well, and (iii) higher effective tax rate of 62.5% due to certain expenses being not tax deductible.

Outlook. FY19 will ultimately see RM2.0-2.5b worth of launches from projects such as Elmina West (Elmina Valley 5), Serenia City (Adiva 2), Bandar Universiti Pagoh (Harmoni Permai) and Putra Heights (Irama Square). Going forward, upcoming launches will be mostly residential projects located in the GCE, Klang and within the Greater Klang Valley and mostly priced below RM750k/unit. Unbilled sales of RM1.6b provide <1-year visibility.

We increase FY19-20E CNP by 23-20% to RM686-656m. We increase our sales targets to RM2.46-2.53b (from RM2.14-2.10b) for FY19-20. Additionally, our earnings are increased on lower effective tax rate in FY19 of 12% (from 18%) due to lower tax rates in 9M19, while FY20 tax rates remain unchanged at 24%.

Maintain OUTPERFORM on a lower TP of RM1.00 (from RM1.10). We are switching to a P/BV valuation method (from RNAV), adopting a more conservative approach to ascertain the trough valuations of property stocks amid the prevailing market down-cycle. Our TP is based on P/BV of 0.75x (@ -0.5SD of its 3-year historical band) on an adjusted BV/share of RM1.36 (after imputing a 40% discount to its latest available inventory level of completed properties). We believe SIMEPROP remains an OP on the back of strong upsides to earnings and healthy sales growth unlike most developers under our coverage while share price has declined 14% YTD. Our TP represents a 69% discount to our FD SoP RNAV of RM3.24.

Source: Kenanga Research - 28 Nov 2019