What’s New

Weak 2QFY20 performance. L&G reported a 2QFY20 profit of RM1.7m, on the back of RM39.2m revenue. This takes 1HFY20 earnings to account for 31% of our initial full-year estimate which was below expectation, largely due to the weaker-than-expected margins from its on-going projects (Astoria, Sena Parc and Damansara Seresta).

Improved property sales. L&G achieved RM30.2m property sales in 2QFY20, taking 1HFY20 property sales to RM45m (forming 57% of our FY20 assumption of RM79m), mainly contributed by its Damansara Seresta project in Bandar Sri Damansara. Meanwhile, unbilled sales stood at RM183m which will underpin its earnings visibility in the near term.

Higher expenses for education arm. Its education business experienced a much weaker EBIT margin of 21% during the quarter, compared to its usual >30% margin. This is mainly attributable to higher overheads following the recruitment of additional teachers from Aug 2019 due to its international school expansion plan.

Outlook

Challenging property market. L&G only launched the second phase of Damansara Foresta called Damansara Seresta (RM480m GDV) in 2HCY18 in view of the sluggish property market. We believe most of its pipeline will now be further delayed until there is a turnaround in the operating environment. The delay has derailed L&G’s earnings growth momentum, and a strong sales performance from Damansara Seresta would be critical to sustain its earnings growth. We have revised down our FY20-22F earnings by 18%/19%/17% to account for weaker margins for both its property and education divisions.

Valuation and Recommendation

Maintain HOLD. We maintain our TP of RM0.16, based on an unchanged 75% discount to our RNAV. We believe it would take a much longer time for the company to monetise its deep land value given the persistently weak property market that has resulted in delays for its launch pipeline.

Source: Alliance Research - 26 Nov 2019