Yong Tai has started off the new financial year on a disappointing note, reporting a net loss of RM5.2m for 1QFY19, largely dragged by weaker-than-expected contributions from the Encore Melaka theatre. While missing both our and consensus estimates considering the full-year net gain expectations, we are leaving earnings unchanged at this juncture as we had already taken fairly conservative views in our recent note dated 4 October. We caution for potential downside risk however should the significantly-lowered ticket sales target of 500,000 for the financial year fail to be met. While we retain our Outperform call on the stock, we lower our sum-of-parts derived target price further to RM0.82 (RM1.07 previously) as we impute a higher 40% discount to account for greater uncertainties. While recent share price weaknesses may be attributed to failed delivery on promises, we think benefit of doubt should still be given to promoters of the Encore (and Impression) Melaka projects who are also significant shareholders of the company, ones probably more aggrieved than most others. Investment merits of Yong Tai remain sound, timing of earnings contribution notwithstanding.

• Property development-related contributions are not in question, with revenue of RM24.7m (-7.0% YoY) and pretax profit of RM3.4m (-23.6% YoY) recorded during the quarter. While new sales may be in question in light of current market conditions (we have assumed zero launches in 2019), near-term earnings contribution will nonetheless be underpinned by its mostly-sold The Apple (78.7% completion), Amber Cove (22% completion), The Dawn (13% completion) and Impression U-Thant (4% completion) projects. Subsequent quarters in FY19 will undoubtedly be stronger given the more advanced stages of these various developments.

• Encore Melaka, until recently touted as the Group’s crown jewel, is its Achilles Heel at the moment. For the current 1QFY19 quarter, pretax losses of RM7.5m recorded in the property investment division is largely a result of lower-than-expected ticket sales, with depreciation and interest charges also taking a bite off bottom-line. For 1QFY19, only about 50,000 tickets have been sold in total, hardly an inspiring number though management anticipates significant pickups in the months ahead owing to on-going initiatives.

• A key re-rating catalyst could come from resolution of the Terra Square impasse. Last word is that the Group was in advanced stages with a Hong Kong-based party for the sale of the entire project, as per a Nikkei Markets newsflash. Management remains mum on this however. We are unconcerned over the project’s commercial viability and reckon new buyers will be secured. Only the timing of a deal completion is in question.

Source: PublicInvest Research - 30 Nov 2018