Investment Highlights

• We upgrade S P Setia to BUY from HOLD recommendation with an unchanged fair value of RM2.39 based on a conservative 45% discount to RNAV (Exhibit 2). We made no changes to our FY19–FY21 numbers. Our BUY recommendation upgrade is to reflect the recent downtrend in ITS share price which currently offers potential upside of more than 10% while fundamentals remain intact.

• S P Setia registered a 1QFY19 net profit of RM77.7mil (- 3.4% YoY). Excluding exceptional gains, its core net profit of RM90.7mil came in within our expectation but below consensus, making up 25% and 20% of our and consensus full-year estimates respectively. Revenue grew by 30% YoY, contributed by projects in the central and southern regions, such as Alam Setia Eco Park, Alam Impian and Temasya Glenmarie in Shah Alam, Setia EcoHill and others.

• S P Setia recorded new sales of RM718mil in 1QFY19 (1QFY18 –RM1.11bil), whereby 94% were derived from local projects. The group has set a sales target of RM5.65bil for FY19 (FY18 – RM5.12bil).

• During the 1Q of FY19, S P Setia launched projects of approximately RM339mil in GDV, comprising mainly landed properties. Management believes the demand for landed residential properties remained strong. The launch of Clarino, double-storey terrace houses priced from RM649,000, in the mature township of Alam Impian in March 2019 achieved a strong take-up rate of 98% within a month.

• For the rest of FY19, S P Setia has planned a total of RM6.47bil worth of launches, focusing on Klang Valley (RM4.65bil) and Johor (RM1.12 bil).

• We expect core net profit to grow by 43% to RM352.9mil in FY19, driven by higher sales due to the stamp duty waiver, inventory clearing efforts and lower interest expenses as a result of repayment of borrowings from the sale of Battersea Phase 2 commercial assets. We expect FY20 earnings rise to RM402.8mil with additional earnings recognition from Battersea Phase 2 residential properties at the end of FY20.

• We believe the outlook for S P Setia remains stable premised on its strong unbilsled sales of RM10.95bil and overseas contribution beginning 2020. Upgrade to BUY.

Source: AmInvest Research - 10 May 2019