EUR 850.00 For Business Accounts Only

Morningstar | Sumitomo Realty's Residential Sales Drive Interim Results; Falling Contracted Sales

For the six-month period ended September 2018, Sumitomo Realty & Development reported in line results with revenue and net profit up 10% and 8% year on year to JPY 541 billion and JPY 80 billion, respectively. The growth was attributed to strong residential sales during the period, with segment revenue and operating income up 16% and 24% year on year, respectively. The six-month operating income accounted for 95% of the company's full-year target for the segment. The leasing business performed as expected, recording modest growth in the top line and operating income. Despite the strong run rate for the sales segment, the company kept its conservative guidance for fiscal year 2018 intact. We maintain our fair value estimate at JPY 3,800 per share and reaffirm our no-moat rating with stable moat trend.

For the residential sales business, total units sold and revenue were up by 13% and 16% year on year. Margin also expanded as costs remained constant, resulting in operating profit being up 24% year on year. Based on the company's full-year guidance, the residential sales business has achieved 77% and 95% of the full-year guidance in revenue and operating incomes. However, contracted units declined 37% from same period a year ago, an accelerating pace from first quarter. Contracted units were at the lowest level in two and half years, accounting for 41% of the fiscal year projection. Given the company guidance for the segment is very conservative with flat revenue and earnings as well as falling level of contracted sales, we expect sales pace and booking to slow considerably for the second half of the fiscal year.

The leasing business improved from the muted performance seen during first quarter. Operating income grew 3%, while the top line was up 7%. The office vacancy rate fell to 4.3% at end of the period, a big turnaround since the three-year high of 4.9% seen at end of March 2018. The segment is in line as the company guided low-single-digit growth for the fiscal year. Revenue and operating income run rates are slightly above 50% at the end of the period.

Net gearing dropped marginally lower during the period, now at 261%, compared with 288% at last fiscal year-end, and the peak of 440% five years earlier. Despite its still highly leveraged balance sheet, the company has continued to benefit from the low interest rate environment.