1QFY20 CNL of RM38.5m is below our and consensus expectations on lower-than-expected revenue recognitions due to the MCO and so was sales of RM470m. Lower FY20- 21E CNP by 23-13% on lower property sales targets and lower recognitions from slower work progress. Maintain OP and TP of RM0.860 based on PBV of 0.30x (-2SD below mean).

1QFY20 CNL* of RM38.5m came in below our and consensus expectations of CNP of RM379m and RM331m, respectively. The deviation from our estimate was mainly due to top-line coming below our expectation at only 15% of full-year estimate. Note that bottom-line declined into the red this quarter, dragged down by the lumpy semi- annual payment of i-RCPS interest costs totalling RM66m, but this has largely been priced into our estimates. 1QFY20 sales of RM470m were also below at 10.3% of our FY20 target of RM4.55b. 1QFY20 sales was driven from the central (47%), southern (18%), northern (12%) and overseas (23%) segments. No dividend announced, as expected.

Results’ highlights. YoY, top-line was down by 19%, partly due to the Movement Control Order (MCO) arising from the Covid-19 pandemic. As a result, earnings was down to RM38.5m CNL (from CNP of RM52.8m) dragged by the higher effective tax rate of 46% (vs. 38% in 1QFY19) due to certain non-tax deductible expenses, as well as the semi-annual i-RCPS interest cost payment of RM66m. Pretax profit (before accounting for i-RCPS interest cost) of RM103.8m (-18% YoY/- 11% QoQ) represents 13% of our initial full-year estimate. QoQ, top-line was down by 12% on lower recognitions, likely due to similar reasons mentioned above. This coupled with lower contributions from associates and JCE losses, a higher effective tax rate, and i-RCPS cost, caused bottom-line to fall into the red (from RM88.3m). Positively, inventories of completed properties eased QoQ to RM1.34b (from RM1.44b).

Outlook. We lower our FY20 sales target to RM3.80b (from RM4.55b) in line with management’s revised lower target given the slower economy and signing pace of SPAs in CY20 thus far. Strong unbilled sales of RM9.8b provide two years of earnings visibility, providing a good buffer during this challenging period.

Lowering earnings by 23-13% in FY20-21E. Even though the construction sector has been allowed to resume work under strict safety conditions, the MCO and future construction progress may see delays going forward as a result of Covid-19. As such, we lower FY20E CNP by 23% to RM291m (from RM379m), and lower FY21E CNP by 13% to RM529m (from RM605m) post lowering our sales target to RM3.8-4.0b (from RM4.55b each in FY20-21) and lowering recognitions on slower progress billings in FY20 due to the MCO. FY20 top-line is driven by recognitions from strong FY18-19 sales of RM5.1-4.6b, albeit with some delays in construction progress, while strong FY21E CNP includes overseas contributions, namely Battersea Phase 2 and 3A.

Maintain OUTPERFORM and Target Price of RM0.860. We maintain our conservative P/BV valuation method as a gauge to ascertain the trough valuations of property stocks amid the prevailing market down- cycle. Our TP is based on an unchanged P/BV of 0.30x (@ -2.0SD below mean) on an adjusted BV/share of RM2.86 (from RM2.88) after imputing a 40% discount to its latest available inventory level of completed properties while this also takes into account the Group’s relatively high net gearing of 0.60x. While its challenging outlook is expected to persist, the stock is trading at depressed valuations, which has rebounded from RM0.62 since our last update to as high as RM0.82 on 8th May 2020 before settling at RM0.775 yesterday. For now, things are looking up with the easing of the MCO allowing for construction progress to resume and expectations of strong earnings deliveries especially in FY21 from Battersea.

* Note our CNP is based on profit attributable to ordinary shareholders i.e. after deducting Perpetual Bonds and iRCPS (A & B) interest costs. Note that consensus’ estimates have defined their CNP as before iRCPS interest costs, resulting in higher estimates.

Source: Kenanga Research - 15 May 2020