Glomac’s earnings dragged down by weak property market

Glomac Bhd (March 24, 83.5 sen)
Downgrade to hold with a lower target price (TP) of 86 sen: Glomac Bhd’s nine-month financial year 2016 (9MFY16) core net income (CNI) of RM63.6 million was below our expectations as it makes up of only 68% of our FY16 full-year estimate, but it was within consensus expectations, accounting for 75% of street estimate. 

The lower-than-expected earnings were attributed to lower margins, impacted by a higher interest cost, which rose 63.7% year-on-year to RM15.09 million in 9MFY16.

Glomac’s profit before tax margin in the period slipped to 23.1%, against 23.6% in 9MFY15. It declared a two sen dividend, which is within our expectations of a 33% payout for the full year. 

9MFY16 CNI grew by 82% year-on-year to RM63.3 million. The growth in 9MFY16’s CNI was higher versus 9MFY15, as CNI in the previous financial period was impacted by a higher effective tax rate after the sale of its Australian investment.

Also, revenue growth was higher at 41% year-on-year for 9MFY16 due to the recognition of its ongoing projects such as Puchong Lakeside Residences, Saujana Rawang, Saujana KLIA, Glomac Centro and Reflection Residences.

Glomac’s 9MFY16’s sales of RM131 million make up only 24% of our original target of RM544 million for FY16. The sales recorded was at 26% of management’s target of RM500 million. This was mainly dragged down by the slower-than-expected launch of properties under Glomac Centro V.

We are cutting FY16 sales target to RM400 million in view of the softer-than-expected property market. We expect the launches of Saujana KLIA, Saujana Jaya, Saujana Aman and Saujana Utama 5 to make up for the shortfall in its sales target. Collectively, these projects’ gross development value (GDV) is RM364 million and we expect an 80% take-up rate as these are landed and affordable projects.

Glomac’s FY16 forecast earnings are cut by 11% to RM82.7 million. FY17 forecast earnings were also reduced by 22% to RM77 million. The earnings forecast was cut due to a lower profit before tax margin assumption, and lower sales as mentioned previously.

We have downgraded Glomac to “hold” with a reduced TP of 86 sen (from RM1.08), and revised its revised net asset value (RNAV) discount from 20% previously to 35% to better reflect the overall softness in the property market. We have also assumed a lower profit before tax margin for ongoing projects in our RNAV valuation. — MIDF Research, March 24

Do not ask your auntie about the value of your home. Click here at The Edge Reference Price to find out.

This article first appeared in The Edge Financial Daily, on March 25, 2016. Subscribe to The Edge Financial Daily here.