FY19 CNP of RM312.2m (-4% YoY) came in below our expectation (90% of our estimate) but above consensus expectations (at 129%). After locking in property sales of RM1.13b in FY19, UEMS has set a sales target of RM2.0b for FY20. Forward earnings will be underpinned by unbilled sales of RM1.8b as of end-Dec last year. Still OUTPERFORM but with a lower TP of RM0.72 (from RM0.85) based on adjusted P/BV multiple of 0.46x (which is pegged at 1SD below its 3-year mean).

Slightly below our expectations. FY19 CNP of RM312.2m (-4% YoY) made up 90% of our forecast and 129% of consensus estimate. The full-year results included profit recognition from land sales amounting to RM55m in FY19, versus a profit of RM260m in FY18. No dividends were declared, as expected.

Results’ highlights. Full-year performance was lifted by its international projects (in particular Aurora Melbourne Central and Conservatory), which contributed RM284.8m (or 80%) of property development earnings, up from RM69.1m (or 30%) of the segment’s profit in FY18. However, overall reported earnings was dragged down by RM88.4m losses from exceptional items (see breakdown in table overleaf), mainly from: (i) RM51.1m in impairment of interest in JV company (40%-owned Malaysian Bio-Xcell which is involved in a development in Iskandar Puteri), and (ii) RM25.9m in restructuring cost from a staff separation scheme. QoQ, stripping out exceptional items, CNP of RM165.2m came in higher than 3Q19’s RM36.7m and 4Q18’s RM47.1m. Net gearing stood at 0.32x as of end-Dec 2019 (versus 0.50x end-Dec 18).

Inventory on the decline. UEMS saw property sales of RM1.13b in FY19, compared with RM1.43b in FY18. This included sales of completed properties of RM392m, as inventory of completed properties declined from RM695m end-Dec 2018 to RM546m in end-Dec20019.

Optimistic on FY20. The Group plans to launch RM1.5b worth of new properties this year and targets to lock in property sales of RM2.0b. This includes land sales valued at between RM400m and RM500m in non-strategic areas.

Keeping earnings projection. Forward earnings will be driven by unbilled sales of RM1.8b as of end-Dec 19. We have retained our net profit forecasts at RM283m for FY20 and introduce RM244m (new) for FY21.

Maintain OUTPERFORM with a revised TP of RM0.72 (from RM0.85), which is based on P/BV multiple of 0.46x (pegged at minus 1SD below its 3-year historical band) on an adjusted BV/share of RM1.56 (after imputing a 40% discount to its latest available inventory level of completed properties). This is to take into consideration the still challenging property market conditions which are expected to persist.

Risks to our call include: (i) weaker-than-expected property sales, (ii) margin fluctuations, (iii) changes in real estate policies, and (iv) changes in lending environment.

Source: Kenanga Research - 25 Feb 2020