This article first appeared in The Edge Financial Daily on June 29, 2017

Selangor Properties Bhd
(June 28, RM4.82)
Maintain hold with an unchanged target price of RM5.12: Excluding earnings impact arising from foreign exchange movements, asset disposals and mark-to-market of financial assets, Selangor Properties Bhd’s core net profit for the second quarter ended April 30, 2017 (2QFY17) fell 17% year-on-year (y-o-y) due mainly to a bigger loss from its property development division, where minimal revenue was recognised but marketing expenses were incurred to promote Aira Residence — its only ongoing property development project. Investment income (including rental) from other divisions was stable as its revenue rose 3% y-o-y.

Despite the decline in earnings, the results beat our forecast because of lower-than-expected effective tax rate as we had expected more non-tax-deductible expenses.  Its interest income was also higher than expected, which might have led to the lower-than-expected tax rate as interest income is not taxable in Malaysia. While we raise our forecast financial year 2017 (FY17) earnings per share by a sharp 87%, this is not an indication that 2QFY17 was a major positive surprise as we expect the group’s return on equity (ROE) to remain low, at just 1.8% for FY17.

Counter-intuitively, the bigger loss at its property development division could be a positive development for the group.  In 2QFY17, its property development pre-tax loss widened 45% quarter-on-quarter and 116% y-o-y to RM4.8 million. We suspect that more development planning activities might have been undertaken during the quarter as the group prepares for the redevelopment of Wisma Damansara, an old vacant building that sits on an eight-acre (3.2ha) site within the highly sought-after Damansara Heights area in Kuala Lumpur.

We continue to value the stock based on a 50% discount to its realised net asset value with the large discount reflecting the uncertainty about its land bank development time frame and low trading liquidity. — CIMB Research, June 27