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This article first appeared in The Edge Financial Daily on August 27, 2018

Amverton Bhd
(Aug 24, RM1.06)
Downgrade to underperform with an unchanged target price (TP) of RM1:
Amverton Bhd’s first half of financial year 2018 (1HFY18) core net profit (CNP) of RM7.8 million was disappointing, making up only 35% of our full-year estimates, stemming from: i) lower-than-expected operating margins for its development division, and ii) weaker-than-expected property sales (note that their products are usually near completion prior to launch or are inventories).

Its 1H18 property sales of RM26.1 million were weaker compared to our full-year target of RM90.4 million. No dividends declared as expected.

Its 1HFY18 CNP grew 14% year-on-year (y-o-y) underpinned by: 1) revenue growth of 2%, 2) lower effective tax rate of 24% (-2 percentage points [ppt]), and 3) improvements in operating margins by 1ppt to 16%. Its revenue growth is mainly driven by property and hotel division that registered growth of 8%-28%, while improvements in margins are mainly from its hotel division that saw profitability returning to the black from losses of RM0.9 million in 1HFY17.

Quarter-on-quarter (q-o-q), its second quarter (2QFY18) CNP growth of 16% was mainly backed by improvements in revenue (+7%), driven by growth in property revenue (+18%) which we believe was due to better property sales from its existing projects, that is Amverton Hills, and Amverton Links.

For the year, we expect minimal launches as we expect management to focus on clearing its inventories and unsold units from its ongoing projects, that is Amverton Hill which is on the higher-end segment as we expect this would be one of the major earnings contributors to the group.

That said, we are also looking forward to its potential launch of its serviced apartment (gross domstic value [GDV]: RM88 million) in Pulau Carey this year. Its unbilled sales of RM48 million would provide one-year visibility.

Post results, we further reduced our FY18-FY19E earnings by 21%-29% on the back of the cut in property sales by 46% and 13% to RM48.4 million and RM80.8 million, respectively, coupled with a lower margin assumption for its property development.

Since its share price has recently run up slightly, coupled with the disappointment in results, we downgrade Amverton to “underperform” (previously, “market perform”) with an unchanged sum-of-parts(SoP)-driven TP of RM1 (property revalued net asset valuation discount of 88%) implying 83% discount to its SoP per share of RM6.21 (partial GDV and partial land bank basis).

Our applied discount of 88%, which is already the steepest in our universe, is due to the slower pace in unlocking the value of its Pulau Carey land bank, which forms the bulk of the valuation.

Risks to our call include: A) higher-than-expected margins/property sales, and B) higher government spending on infrastructure projects, that is ports infrastructure. — Kenanga Research, Aug 24

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