Downgrade to SELL with lower target price (TP) of RM0.68
- Excluding the disposal gain of c.RM80mn (net) and a one-off grant of RM26.3mn, Glomac’s 1HFY17 normalised net profit of RM4.9mn came in below expectations. It only accounted for 8% of both ours and consensus’ full-year forecasts. The variance was largely due to 1) lower-than-expected revenue, and 2) weaker-than-expected property margin.
- Glomac’s 1HFY17 headline revenue and PBT grew 25% and 140% YoY to RM335.4mn and RM143.5mn respectively. However, normalized revenue and PBT would have declined by 29% and 80% YoY after adjusting for the impact of land disposal (Cheras land sale to PR1MA for RM145.6mn announced in Oct-15) and one-off grant received for upgrade and improvement of infrastructure surrounding Glomac Damansara development amounting to RM26.3mn. The poor results were attributable to slow progress billing as its previous key contributing projects are nearing completion or have completed during the period under review.
- Results were also weak on a QoQ basis with 2QFY17 normalised revenue and PBT decreasing 21% and 105% respectively. On a normalised level, the group sunk into a net loss of RM1.5mn in 2QFY17 on weak revenue and high operating and sale and marketing expenses.
- Glomac secured new sales of RM80mn in 1HFY17 (flat YoY). This accounted for 20% of our sales assumptions of RM400mn. Nevertheless, the weak sales performance in 1HFY17 was not unexpected as this was similar with its last year’s sales performance – 1HFY16 sales only accounted for 26% of the group’s FY16 full-year sales. The group usually accelerates its new launches towards the second half of the financial year.
- In terms of sales mix, landed properties within Saujana KLIA and Lakeside Residence Puchong, accounted for 68% of property sales in 1HFY17. As at Oct-16, the group’s unbilled sales depleted to RM415mn from RM512mn a quarter ago, providing the group with less than 12-months’ earnings visibility.
- FY17-19 earnings forecasts are reduced by 18-38% after we incorporate lower progress billings and property margin assumptions. Nevertheless, we maintain our FY17-19 new sales assumptions of RM400mn- RM766mn.
- Management plans to double its property sales to RM600-650mn in FY17, premised on new launches worth ~RM1bn in 2H17 – see Table 2. Recall, the group recorded RM304mn sales in FY16. Of the new launches, we expect Saujana Utama 4 in Sungai Buloh to be well-received. Featuring 626 double storey houses with GDV of RM267mn (ASP: RM426k/unit), we understand that Phase 1 of the township has received warm response with 88% of 108 units booked since the soft launch in October.
- However, we maintain our FY17 sales projections of RM400mn as we assume that the launch of Plaza Kelana Jaya 4 will be postponed to FY18. We believe the serviced apartments/condominium market in Klang Valley is expected to be challenging in the near term in view of large incoming supply scheduled for completion in 2016-2017. In our earnings model, we project ~60% take up for other landed residential projects
- Our target price is revised lower to RM0.68/share from RM0.76/share previously, based on unchanged target PE of 8x and revised CY17 EPS. With industry headwinds are expected to persist in 2017, we see downside risks to Glomac’s future earnings given the declining unbilled sales – see Figure 2. Downgrade Glomac to Sell from Hold previously.