Brexit raises uncertainty over Amcorp’s sales

Amcorp Properties Bhd (July 8, 87 sen)

Downgrade to hold with a target price (TP) of 86 sen: With more than 90% of Amcorp Properties Bhd’s (AmProp) earnings derived from London, we believe Brexit would raise uncertainty over its sales, at least in the near term. Management guided that buyers had been more cautious. Commercial property demand could be uncertain should there be any relocation of headquarters of European banks or multinational corporations. But with London’s charm and offerings, any impact could be mitigated.

AmProp’s development at Campden Hill in Kensington has been delayed. The contractor has sought an extension of time and the project is now expected to be partially completed by February 2017 (from late-2016), with the remainder by March 2017. This means the recognition of profits will fall into the subsequent financial year, as the handover of keys for the second phase would likely happen only in April 2017.

As we had assumed in our earlier forecast full earnings recognition of the Campden Hill project in the financial year ending March 31, 2017 estimate (FY17E), we are cutting our FY17E earnings per share (EPS) by 28%. Our earnings downgrade also takes into account a weaker exchange rate assumption of RM5.50/sterling. Any 1% depreciation of the sterling against the ringgit from our revised assumption will reduce our FY17E to FY19E EPS by 0.7% to 0.8%. Based on an unchanged dividend per share (DPS) payout ratio of 40%, we also adjust our FY17E DPS downwards to 5.2 sen.

We trim our FY18E EPS by 6% — impacted by the weaker sterling assumption. FY18E should still be a significantly stronger year in terms of earnings (+91% EPS growth year-on-year) with the completion of two major projects (including the partial Campden Hill project). The Burlington Gate project in Mayfair is slated for completion by the first quarter of 2018, while its take-up rate has already exceeded 90%.

Beyond FY18E, there will be several new projects coming on stream. This includes the more recent acquisition and redevelopment of Kilmuir House in Belgravia, which will be joined by the Bankside Quarters development. Its project pipeline remains strong. We understand that management remains proactive in search for new investment assets and development opportunities.

While the long-term prospects remain intact, negative sentiment could weigh on the stock in the near term. As earnings are only realised upon project completion, earnings in the coming quarters will be absent and will only kick in in the final quarter of FY17E, which could stretch investors’ patience.

We raise our discount to revalued net asset value (RNAV) for the property segment from 30% to 60%, and cut our TP to 89 sen (from RM1.54). We estimate that the implied discount to the property segment’s RNAV is closer to 63% currently, and has ranged between 55% and 65% over the past year. We downgrade the stock to a “hold” from a “buy”.

Key downside risks include a sharp downturn in property prices, weak demand and further delays in completion. Stronger-than-expected demand and an improvement in property prices could improve its margins and earnings. — Affin Hwang Capital, July 5

Do not ask the taxi driver 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 July 11, 2016. Subscribe to The Edge Financial Daily here.