• 4QFY20 results met expectations; 45%-owned Country Garden Properties surprised with profit contribution

• RM160m unbilled sales to sustain near term earnings visibility

• Persistently weak market sentiment to dampen property sales

• Maintain HOLD with lower RM0.11 TP

What’s New

In-line 4QFY20 performance. Stripping out write-backs of RM8.4m, Land & General Bhd (LGH) reported 4QFY20 core earnings of RM2.6m. This takes its FY20 core profit to RM7m which accounts for 95% of our full-year estimates. Its 45%-owned Country Garden Properties (M) Sdn Bhd surprised with RM5.1m share of profit in 4QFY20, offset by RM4.0m loss on fair value changes on its investment.

Dragged by slow progress billings. LGH’s property segmental earnings before interest and taxes (EBIT) plunged 88% y-o-y to RM0.5m as segmental revenue came in at a depressed RM12.8m (-69% y-o-y). This was most probably due to the impact of the Movement Control Order (MCO) imposed since 18 March which has slowed down its construction progress.

Weak property sales. LGH achieved low property sales of RM13m in 4QFY20, taking FY20 property sales to RM78m (+9% y-o-y) which was within our projection of RM79m. This was mainly contributed by its Damansara Seresta project in Bandar Sri Damansara. Unbilled sales stood at RM160m (-16% y-o-y) which will underpin its earnings visibility in the near term.

Impressive education arm. Its education business posted a record high quarterly EBIT of RM2.4m (+16% y-o-y) due to increased student enrolment for its international school with the opening of additional classes for upper primary and secondary levels. Its EBIT margin came in at 42% which was higher than the usual ~30% margin.

Conserving cash. LGH did not declare any dividend for FY20 which could be due to its senior management being prudent with its cash flow management. Also, its balance sheet has deteriorated over the years from a net cash position to net gearing of 8% as at end-March 2020.

Outlook

Challenging property market. So far, LGH has only launched the second phase of Damansara Foresta called Damansara Seresta (RM480m gross development value (GDV)) in 2HCY18 in view of the sluggish property market. We believe most of its pipeline will be further delayed until there is a turnaround in the operating environment. The delay has derailed LGH’s earnings growth momentum. A strong sales performance from Damansara Seresta will be critical to sustain its earnings growth given its declining trend of unbilled sales.

Earnings downgrade. We revise downward LGH’s FY21-22F earnings forecast by 28%/21% to account for the weaker margins for its property division as well as the impact of the MCO which has affected its progress billings.

Valuation and Recommendation

Maintain HOLD. We lower our target price (TP) of RM0.11, based on a wider 80% discount (from 75% previously) to our revised revalued net asset value (RNAV) after incorporating lower land bank valuation. We believe it will take much longer for the company to monetise its deep land value given the persistently weak property market which has resulted in delays of its launch pipeline

Source: Alliance Research - 24 Jun 2020