1QFY21 CNP of RM40.4m is broadly within our and consensus estimates on expected 1Q RCPS payments. 1QFY21 sales of 31% are also broadly within the unchanged RM3.8b target. However, we downgrade FY21E CNP by 16% as we turn cautious with recent surges in the Covid-19 situation which may affect sales and work progress in coming months. Maintain OP and TP of RM1.19 as prospects remain positive with significant contributions from land sale gains, Battersea Phase 2 and Phase 3A.

1QFY21 recorded a CNP* of RM40.4m which is deemed as broadly within our and consensus expectation at 14% and 15%, respectively, as 1Q is generally weaker due to the RCPS payment of RM66m made on a semi-annual basis which weigh heavily on bottom-line. Sales of RM1.19b sales make up 31% of the Groups and our RM3.8b sales target driven by sales in the central region. We deem this as broadly within for now as we anticipate some weakness in 3QFY21 due to the recent rise in Covid-19 cases. No dividends, as expected.

Results’ highlights. YoY-Ytd, top-line was up by 50% on progressive revenue recognition from strong take-up rates of mature townships and pent-up demand following the roll-out of the Covid-19 vaccine in many countries. As a result, CNP was up, to RM40.4m (from CNL of RM43.1m), also aided by lower interest expense (-32%). QoQ, top-line was down marginally by 5% due to slightly lower recognitions vs. 4Q, while bottom-line declined by 50% due to perpetual bond payments during this quarter. Net gearing increased slightly to 0.67x (from 0.65x).

Outlook. The Group expects flattish sales of RM3.8b in FY21. Management remains cautious on the outlook for the sector but expects improvements in 2HFY21 which are reliant on the economy recovering from the pandemic with the roll-out of mass vaccinations currently. For now, the Group will continue to focus on stock clearing and acceleration on the digitalisation journey, while we do not discount the possibility of more land sales.

Lower FY21E CNP by 16% to RM246 (from RM294m) and maintain FY22E CNP of RM509m. We lower FY21E CNP as we anticipate slower progress billings and recognitions in 3QFY21 due to slower work progress as the Covid-19 situation worsens. FY22 on the other hand will be driven by increased contributions from Battersea which is expected to be completed by Aug 2021 for Phase 2 and Mar 2022 for Phase 3A, as well as the recent land sale gain of the Pelangi land in Johor. Unbilled sales of RM10.1b provide two years of earnings visibility allowing for some buffer during this challenging period.

Maintain OUTPERFORM and Target Price of RM1.19 based on an unchanged FY21E BV/share of RM2.94 and P/BV of 0.41x @ -1.5SD. Our valuation of -1.5SD is to encapsulate the Group’s near-term risk but we are more positive in the longer run, from FY22 onwards. FY21 and FY22 are expected to be recovery years (vs. FY20) on better local demand in general, while FY22 earnings improvement prospects are driven by land sale gains which would help alleviate the burden on the balance sheet, and contributions from Battersea.

Risks to our call include: (i) lower-than-expected property sales, (ii) margin fluctuations, (iii) changes in real estate policies and lending environment, (iv) cash-calls, and (v) timing of overseas/local billings.

* 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 - 27 May 2021