Weak 1H for Amcorp Properties within expectations

Amcorp Properties Bhd (Nov 9, RM0.78)

Maintain hold but at a lower target price (TP) of 80 sen: Amcorp Properties’ (AmProp) first half ended Sept 30, 2016 of financial year 2017 (1HFY17) weaker net profit of RM11 million (down 86% year-on-year [y-o-y]) was within expectations. Earnings should remain lacklustre for another quarter until the completion of the Campden Hill project in London. Leading to the run-up of Brexit, weaker London property demand and softer prices remain risks.

AmProp’s second quarter ended Sept 30, 2016 (2QFY17) core earnings declined 68% year-on-year (y-o-y). Sequentially, 2QFY17 earnings, however, rose 52% to RM6.8 million due to the low base effect in 1QFY17 and the stronger contributions from sales of properties from its Japanese joint venture (JV). The JV contributions amounted to RM9.9 million following property sales at Westminster Nanpeidai and Conciera Shinjuku. This contributed the bulk of the 2QFY17 earnings.

Cumulatively, 1HFY17 core earnings of RM11 million fell 86% y-o-y. This was, however, unsurprising and in line with our expectations (15% of our FY17 full-year estimate) as there was a major asset disposal (4B Merchant Square in London) in 1QFY16, followed by the recognition of forex gains in 2QFY16. We expect earnings to remain relatively small for the coming 3QFY17 before the recognition of earnings from the partial completion of the Campden Hill London project. Our FY17 net profit of RM77 million is predominantly underpinned by this project, which is slated for completion by February 2017.

The stock price has underperformed after the announcement of Brexit and concerns over weaker demand for London property sales as multinational corporations (MNCs) deliberate on relocating their headquarters back to Europe. Any slowdown in demand would affect property sales and prices, which could negatively affect our earnings forecasts.

We maintain our “hold” rating as we see deep value in AmProp, given its strong project pipeline and mid-term earnings delivery. But we cut our 12-month TP to 80 sen from 89 sen after assigning a larger 65% discount (previously 60%) to the property segment’s revalued net asset valuation to account for the increased risks that Brexit poses.

Key upside risks include better-than-expected property sales and a pickup in London property prices, while downside risk would be further depreciation in the British pound which could negatively affect our earnings per share. — Affin Hwang Investment Bank Bhd, Nov 9

This article first appeared in The Edge Financial Daily, on Nov 10, 2016. Subscribe to The Edge Financial Daily here.