FY19 CNP of RM23.7m (-69% YoY) missed our expectation, coming in at just 41% of our estimate although it beat consensus (by 25%). Earnings were dragged down by lower contributions from both the property development & investment and engineering & construction divisions. We have adjusted downwards our forward earnings and target price to RM0.63 (from RM0.70). Nonetheless, following its share price slump (down 18% since mid-Dec 2019), we are upgrading our call to MARKET PERFORM.

Below expectations. FY19 CNP of RM23.7m (-69% YoY) came below our estimate (at just 41%), although it beat consensus expectations (by 25%). The weaker full-year performance was mainly weighed down by lower operating profit (before unallocated corporate expenses and net finance cost) contributions from: (i) property development & investment segment (-24% to RM83.0m) which had previously benefited from land sale amounting to RM66.8m in pretax profit in FY18. Property sales came in at RM537m last year, and (ii) engineering, construction & environment division (-67% to RM23.4m) due to lower income recognition. In particular, its 50% JV for the LRT3 project only contributed net profit of RM0.6m in FY19, compared with RM14.6m in FY18.

Results’ highlight. 4QFY19 CNP of RM6.0m was better than 3QFY19’s RM2.5m and 4QFY18’s RM0.4m. The improvements were largely driven by higher operating profit (before unallocated corporate expenses and net finance cost) contribution of RM18.7m (versus 3QFY19’s RM2.0m and 4QFY18’s 5.6m) from the engineering & construction division. This mitigated the lower operating profit contribution of RM8.8m (vs. 3QFY19’s RM25.3m and 4QFY18’s RM10.6m) from the property segment. A DPS of 1.0 sen was declared.

Outlook. The Group has unbilled property sales of RM1.6b and an outstanding external construction order-book of RM20.7b as of end-Dec 2019. While this is expected to underpin forward earnings visibility, there may be timing delays in income recognitions due to slower progress billings. For example, its RM5.7b LRT3 JV project has been hit by the re-negotiation process with the government and work package contractors following the change in project structure from PDP to fixed-price turnkey model. This project – which is 24% completed as of end-Dec 2019 – is now expected to hit 40% completion stage by end-2020.

Earnings revisions. Post results, we have slashed our FY20E earnings forecast to RM57m (-44%) and introduce net profit of RM68m for FY21. The revisions are made as we tweak the timing recognition of its key projects and lower our margin assumptions.

MARKET PERFORM with a lower Target Price of RM0.63 (from RM0.70). This is derived from our SoP-valuation method, which is anchored using the adjusted PBV multiple for its property business (see table overleaf). Following its share price drop to RM0.66 (down 18% since mid-Dec 2019), we are upgrading our call from UP to MP.

Risks to our call include: (i) stronger-than-expected property sales, (ii) lower-than-expected administrative cost, (iii) positive real estate policies, and (iv) changes in lending environment

Source: Kenanga Research - 27 Feb 2020