1QFY20 CNP of RM33.5m came in below our (15%) and consensus (16%) expectations. 1Q20 local sales of RM305m (9% of FY20E) was below, while EWINT (27%-owned associate) sales of RM314m* are also deemed below our expectations (6%). No dividends, as expected. Both ECOWLD and EWINT are lowering FY20E sales target to RM4.2b (from RM8.2b previously). All in, we lower FY20E CNP by 8% to RM199m and lower FY21E by 21% to RM184m from lower FY20 sales. Maintain MP but on a lower TP to RM0.410 (from RM0.750).

1Q20 Below Expectations. 1Q20 CNP of RM33.5m came in below our expectations (15%) and consensus (16%) expectations, on weaker than expected contributions from its JCE projects. FY20 sales of RM305m was below at 9% of our and management’s sales target of RM3.3b, while EWINT (27% associate), recorded RM314*m sales (6% of FY20E sales target for RM4.9b). Historically, 1Q sales is comparatively weaker (c.5-8% of FYE) and usually picks up in 4Q, but we deem this as below on expectations that coming quarters will be weak due to delays arising from the escalating Covid-19 situation globally. No dividends, as expected.

Result highlight. YoY, top-line jumped by 10% on increased recognitions from mostly Klang Valley and Johor projects and one Penang project (Eco Meadows), with topline driven by incentives offered in 2019 in support of the government’s Home Ownership Campaign (HOC). All in, CNP was up by 11% despite weaker EBIT margins (-0.8ppt) due to the lower margins from HOC campaign products, but was lifted by lower effective tax rate of 17% (vs. 24%). QoQ, topline was down by 41% as 4Q typically sees strong recognitions from a higher progress of work, while 1Q usually falls during the year-end holiday and festive season. This coupled with lower contribution from associate/JV contributions (-61%) due to a lumpier handover of UK projects in 4Q19, caused CNP to decline by 58%. Net gearing remains high at 0.77x (from 0.79x in 4Q19).

Outlook. Note that management previously guided a 2-year sales target of RM12.0b* over FY19-20, implying RM3.3b sales for ECOWLD and RM4.9b sales for EWINT in FY20E. However, the group has decided to revise their target ahead of the Covid-19 pandemic would put a dampener on sales in coming months. As such, we tone down FY20 sales target to RM4.2b (from RM8.2b) in line with management’s target. Details of maiden dividends in FY20 will likely gain more clarity in 2H20 when there is a clearer picture on the Covid-19 situation.

Lower FY20 sales and FY20-21E due to restricted movement. We lower sales in FY20E to RM4.2b (RM2b from ECOWLD and RM2.2b from EWINT) and increase FY21 sales to RM6.0b (from RM4.5b) as we expect part of FY20 sales to be pushed over to FY21, but this will only be recognised in FY22E revenue. All in, we lower FY20E CNP by 8% on slower progress billings at ECOWLD and slower recognitions from EWINT projects as we expect delays in completion due to the restricted movement in place globally, and lower FY21E CNP by 21% post trimming FY20 property sales numbers. Unbilled sales of RM4.7b provide 2 years’ visibility.

Maintain MARKET PERFORM but on a lower TP of RM0.410. In line with the sector revisions in our upcoming strategy report to reflect recent market meltdown, our TP is lowered to RM0.410 (from RM0.750) on a lower P/BV multiple of 0.28x @ -2.0SD (from 0.51x @ -1.5 SD) on an adjusted BV/share of RM1.48 (after imputing a 40% discount to its latest available inventory level of completed properties) in view of the prevailing market down cycle and the pre-existing challenging property climate. However, we are comfortable with our MP call as we believe we have priced in most negatives for now, and in light of the overselling of the counter which was down a steep 44% YTD, while we believe valuations are poised to make a quick rebound post crisis, along with improved sales and revenue recognitions.

Source: Kenanga Research - 27 Mar 2020