Review

• Sentoria reported 9MFY19 net profit of RM12.7mn. Results were below expectations at 62% of our full-year earnings forecasts. We attribute the earnings miss to higher-than-expected tax expenses. Note that 9MFY19 PBT were in line at 75% of our full-year PBT forecasts.

• 9MFY19 revenue increased 4.7% YoY to RM240.2mn, driven by higher progress billing from on-going projects in Kuching and Kuantan (+7.0% YoY). However, this was offset by weaker revenue from the leisure and hospitality division, which declined 7.9% YoY on lower visitor arrival and lower occupancy rates in both Bukit Gambang Resort and Borneo Samariang Resort.

• 9MFY19 net profit plunged 58.1% YoY to RM12.7mn, dragged by higher losses from the leisure and hospitality segment and higher tax expenses. 9MFY19 effective tax rate was higher at 34%, as losses from the leisure division are not available to set-off against taxable profits of its property development division. Meanwhile, net profit for the previous corresponding period (9MFY18) was higher, largely boosted by the recognition of a deferred tax asset of RM14.5mn in relation to the unutilised investment tax allowances of Borneo Samariang Water Park.

• Sequentially, 3QFY19 revenue decreased by 31.5% to RM68.6mn. Both property development and leisure and hospitality divisions also reported weaker sequential results. However, these declines have resulted in lower tax provisioning which lifted 3QFY19 net profit marginally to RM4.4mn from RM4.2mn recorded in the immediate preceding financial quarter.

Impact

• Our FY19-21 earnings forecasts are reduced 12-29% after factoring in higher effective tax rate. We previously assume a low tax rate in anticipation of the group receiving the entitlement of tax exemption for the capex incurred for the construction of new theme park.

• We also cut our visitor arrival assumptions by 4-8% and increase the operating cost for the resort operation. We expect the division to remain in the red for FY19 and barely breakeven in FY20 and FY21.

• For property division, we maintain our FY19 sales assumptions of RM300mn but reduce FY20/21 sales assumptions to RM300mn/RM290mn (from RM350mn p.a. previously) as we expect the group would require more time to kick-start its new development in Sungai Petani and Langkawi.

Outlook

• Going forward, the group will continue to focus on building affordable homes in its key operating areas such as Kuantan, Kuching and Klang Valley. Total unrecognised revenue eased to RM370mn as at Jun-19 from RM392.3mn a quarter ago.

• We are cautious on the stock near-term outlook as the challenging operating environment for leisure business continues to drag the group’s profitability.

Valuation

• Factoring in the change in earnings, we value Sentoria at RM0.25 (previous RM0.32), based on a lower target average blended CY20 PE/PB of 4x/0.35x (previous 5x/0.4x). We downgrade our target multiple to reflect our cautiousness on the stock near-term earnings visibility. Downgrade Sentoria to Hold from Buy.

Source: TA Research - 29 Aug 2019