Review

• Excluding exceptional items amounting to a loss of RM65.3mn, Selangor Properties Bhd (SPB) reported 1HFY18 normalised net profit of RM31.0mn. Exceptional items include the unrealised foreign exchange losses of RM53.8mn and fair value loss on financial assets of RM11.5mn. Results came in within ours but above consensus, accounting for 48% and 57% of ours and consensus full-year estimates respectively.

• SPB’s 1HFY18 revenue grew 6.9% mainly due to higher revenue achieved from property development division (+48% YoY) and Australian operations (+16% YoY). Normalised net profit grew at a faster pace (+14% YoY) due to lower finance cost.

• QoQ, the group’s 2QFY18 net profit surged 20% underpinned by a 35% growth in revenue. Stronger sequential performance was largely boosted by Australian operations, which recorded higher rental income from investment properties and higher income distribution from land development projects.

Impact

• In our projections, we postpone the launch of Bukit Permata (GDV: RM125mn) to FY19 from FY18 previously. Meanwhile, we also remove contributions from Wisma Damansara from our earnings model as we do not foresee this project commencing in the next 1-2 years. We had previously assume the Wisma Damansara project to start out in FY20. While maintaining our FY18 earnings forecasts, our FY19-20 earnings are reduced by 3-5%, following the change in the timing of new launches.

Outlook

• Property division earnings is expected to be anchored by Aira Residences (GDV: RM850mn), which is expected to be completed by 2021. Management expects higher contribution from Aira Residences this year underpinned by increased marketing efforts. The re-launch of the Bukit Permata project has been delayed by 3 months to 3QFY18. We do not rule the possibility of further delays given the slow demand for luxury homes.

• As for the redevelopment of Wisma Damansara in Damansara Heights, management has put plans on-hold, until the government’s freeze on shopping complex, offices, serviced apartments and condominium development priced above RM1.0mn each is reviewed/lifted.

Valuation

• Our target price is reduced to RM4.11 (previous RM5.10) as we roll forward our valuation base year to CY19 and factoring in the change in earnings forecasts. Our target price is based on new target average blended CY19 PE/PB of 9x/0.8x (previous CY18 PE/PB ratio of 14x/1.0). In view of the prevalent oversupply of commercial and luxury residential sectors, we believe the government will become very selective in approving high-end real estate development. As such, we see the chance of landbank value realisation is slim over the next 12-month. Downgrade SPB to Sell from Hold previously as we see heightened risk of further delays in the group’s planned redevelopment of Wisma Damansara and other land parcels within Pusat Damansara.

Source: TA Research - 27 Jun 2018