1QFY20 CNP came in below our/consensus estimate at 12%/13%, respectively. No dividend declared as expected. 6M20 property sales of RM317m are tracking below both management and our full year sales target of RM1.6b. Post results, we lower our FY20E and FY21E CNP to RM42m and RM69, respectively. No new development with regards to the ZIC Land. Downgraded to UP with unchanged TP of RM0.330 based on P/BV of 0.40x which is at the minus 2SD level.

Below expectation. 1QFY20 Core Net Profit (CNP) of RM9.3m came in below our/consensus estimate at 12%/13% of full-year forecast. The deviation was mainly due to: (i) lower-than-expected revenue from both property and construction divisions, and (ii) lower-than-expected profit margin from property development segment. Besides, 6M20 sales of RM317m is tracking below both management and our target of RM1.6b each. No dividend was declared as expected.

Results’ highlight. YoY, 1QFY20 registered lower CNP of RM9.3m (- 47%) mainly due to: (i) lower contribution from construction and trading segment (-69%) caused by the implementation of MCO, (ii) lower profit margin from the sales of property despite slight increase in revenue, and (iii) significant drop in motor racing circuit segment revenue which widened losses as the scheduled racing events have been postponed due to the outbreak of Covid-19. QoQ, the first quarter recorded lower CNP by 48% compared to RM17.9m achieved in the preceding quarter, dragged by lower margin from property, construction and motor racing segment.

Outlook. Management has revised the sales target to RM1.0b (from RM1.6b) for FY20 with RM317m achieved as at June 2020. Total planned GDV launch is revised to RM1.701b (from RM2.321b), mainly from CyberSouth, LBS Alam Perdana, Genting Midhills 2, Emerald Garden 3, Cameron Highlands and Taman Kinding Flora. Besides, unbilled sales of RM1.805b as at May 2020 provide slightly more than a year earnings’ visibility. As for the ZIC Land, there is no major new development, and the company is currently working to improve and revise the upgrading and transformation plan after the Chinese government unveiled the national development plan for Greater Bay Area. The company is targeting to resubmit the plan to the authority in the near future.

Earnings review. Post results, we lower our FY20E/FY21E CNP by 46%/15% to RM42m/RM69m, respectively, after revising our sales target to RM1.0b and lower our margin assumption.

Downgraded to UNDERPERFORM with unchanged TP of RM0.330.

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 P/BV of 0.40x (at minus 2SD of its 3-year historical band) on an adjusted BV/share of RM0.82 (after imputing a 40% discount to its latest available inventory level of completed properties).

Risks to our call include: (i) stronger-than-expected property sales, (ii) changes in real estate policies, (iii) changes in lending environment, and (iv) positive news development of ZIC Land.

Source: Kenanga Research - 1 Jul 2020