FY20 CNP of RM53.9m sprung above our estimate at 303% on a stronger-than-expected top-line, but below consensus at 79% on weaker-than-expected margins. FY20 sales was spot on at RM3.82b, while unbilled sales of RM10b provides two years of visibility. Maintain FY21E earnings of RM294m and introduce FY22E earnings of RM411m on steady recognitions pipeline and contributions from Battersea Phase 2 and 3A. Upgrade to MP and TP to RM0.94 (from RM0.68) post rolling forward our valuations to FY21E on PBV of 0.28x (from 0.24x) at -2SD.

FY20 recorded a CNP* of RM53.9m which is above our expectation of RM18m (303% of our estimate) due to a low base effect, but below consensus at 79%. The deviation from our estimate was due to a stronger-than-expected top-line which came in at 117% of our estimate from higher recognitions in 4Q, which trickled straight to bottom-line, while the deviation from consensus earnings were likely due to weaker- than-expected EBIT margin which only came in at 90% of consensus’. FY20 sales of RM3.82b were spot on with our and management’s targets of RM3.8b each on strong 4QFY20 sales of RM1.56b, with local sales making up 82% of total sales driven by sales in the central region. No dividends, as expected.

Results’ highlights. YoY-Ytd, top-line was down by 18% due to halted work progress during the MCO period mostly in 2QFY20 vs. FY19 when the group completed the sale of its British Embassy land in Jalan Ampang for RM449m resulting in weaker EBIT margin of 12.9% (vs. 22.4%). Impairments of RM336m at Phase 2 and 3A of Battersea resulted in a NL of RM453m (vs. NP of RM236m). Post accounting for impairments and other one-off items, the Group recorded a CNP of RM53.9m (-79%). QoQ, top-line was up by 3% on marginally better progress billings. All in, CNP improved to RM80.1m (from RM7.4) due to the absence of perpetual bond payments.

Outlook. The Group expects flattish sales of RM3.8b in FY21. Management remains cautious on the outlook for the sector but expects improvements in 2H21 which are reliant on the economy recovering from the pandemic with the roll-out of mass vaccinations currently. Unbilled sales of RM10b provide two years of earnings visibility allowing some buffer during this challenging period, but its high gearing of 0.65x remains a concern. For now, the Group will continue to focus on stock clearing and acceleration on the digitalisation journey, while we do not discount the possibility of possible land sales.

Maintain FY21E CNP of RM294m and introduce FY22E CNP of RM411m. FY21-22 will be driven by steady recognitions from ongoing projects and unbilled sales and will also see more significant contributions from Battersea which is expected to be completed by Aug 2021 for Phase 2 and Mar 2022 for Phase 3A.

Upgrade to MARKET PERFORM (from UNDERPERFORM) and a higher Target Price of RM0.94 (from RM0.680) as we roll forward our valuation to FY21 on BV/share of RM3.48 (from adjusted BV/share of RM2.83 based on FY20) post updating earnings and applying a higher P/BV of 0.28x @ -2.0SD (from 0.24x @ -2.0SD). We believe that FY21 would be a recovery year for the Group, albeit in the 2H and increased contributions from overseas, but we remain cautious in the near term and given its high net gearing of 0.65x.

Risks to our call include: (i) higher-than-expected property sales, (ii) margin fluctuations, (iii) changes in real estate policies and lending environment, (iv) cash-calls, and (v) timing of overseas/local billings.

Source: Kenanga Research - 26 Feb 2021