1QFY21 CNL of RM6.2m came below expectation due to higher-than-expected financing costs and a weaker-than- expected recovery ahead. That said, 1QFY21 sales of RM272m are inline. Outlook remains challenging in view of the group’s high cost structure coupled with the weak property climate impeding significant earnings uptick moving forward. Reduce FY21E/FY22E earnings by 34%/13%. Maintain UP with an unchanged TP of RM0.40 on PBV of 0.3x.

Missed expectations. 1QFY21 core net loss (CNL) of RM6.2m came below our and consensus full-year earnings projection of RM58m and RM71m, respectively. The is due to: (i) higher-than-expected financing costs and (ii) a weaker-than-expected recovery due to the numerous lockdowns impeding construction progress. That said, 1QFY21 sales of RM272m are in line with our target of RM1.0b (management targets RM1.2b sales). No dividends as expected.

*We derive our core net loss of RM6.2m after accounting for reversal of: (i) FV gains worth RM1.4m, (ii) forex gains worth RM1.0m, (iii) write-back of inventories worth RM0.3m and (iv) allowance for doubtful debts worth RM0.8m.

Results’ highlights. QoQ, 1QFY21 CNL of RM6.2m improved against 4QFY20 CNL of RM28.1m mainly due to: (i) better JV/associates contributions, (ii) lower financing costs by 8%, and (iii) lower tax charges by 93% due to the absence of the de-recognition of deferred tax assets incurred in the 4QCY20. YoY, 1QCY21 deteriorated slightly against 1QFY20 CNL of RM3.5m on higher financing costs (+39%) due to higher net borrowings of RM3.0b vs RM2.5b.

We are less optimistic compared to management. During the post results’ briefing, management expressed optimism expecting a stronger second half on higher construction progress which would then be sufficient to cover operating fixed costs and turn the group profitable. They emphasised that most of their ongoing projects are at early stages of construction which will gradually pick up momentum going forward. While we agree that 2H 2021 would be better than 1H 2021, we find that the earnings contributions from ongoing projects would not be overly significant as we believe margins are low in order to drive sales.

Also, while management has guided that the MCO3.0 would not impact its construction progress, our channel checks with contractors indicate that in order to comply to the 60% workforce limit; productivity at construction sites would likely decline.

Meanwhile, we believe the HOC (Housing Ownership campaign) which will end by May 2021 would thwart UEMS’ sales momentum moving forward – hindering them from achieving their intended sales target of RM1.2b. Also, with more than half of its planned FY21 launches being priced over RM500k per unit, we think this would be a tough sell in this climate. As of 1QFY21, unbilled sales stood at RM1.9b (providing c.2x cover).

Reduce FY21/22E earnings by 34%/13% after factoring: (i) higher financing costs on higher debt levels, and (ii) lower progress billings due to slower construction pace in view of the harsher lockdowns.

Maintain UNDERPERFORM with an unchanged TP of RM0.400 on 0.30x FY22E PBV (-2SD; rolled valuation base year forward). All in, we remain cautious over UEMS’ prospect as we think that the group’s high cost structure (operating and financing) may impede significant earnings uptick moving forward amidst the weak property climate.

Source: Kenanga Research - 25 May 2021