Investment Highlights

• We keep our HOLD recommendation on S P Setia with an unchanged fair value of RM0.70 based on a 70% discount to its RNAV (Exhibit 2). We cut our FY20 net earnings forecast by 30% to reflect the timing of recognition while making no changes to FY21–22 numbers.

• S P Setia registered a 1HFY20 net loss of RM28.4mil (- 159.8% YoY). Stripping off exceptional items i.e. impairment of completed inventories worth RM145.9mil, 1HFY20 core net profit of RM32.8mil came in below expectations, making up 17% of our and consensus fullyear estimates. The RM145.9mil impairment of completed properties comprises Setia Sky 88 in Johor Baru and Setia Sky Vista in Penang. 1HFY20 revenue and core net earnings plunge by 53.0% and 80.3% YoY respectively, mainly due to the movement control order (MCO) which resulted in the closure of sales offices, construction sites and social activities, hence lower recognition.

• On a positive note, S P Setia recorded new sales of RM875mil in 1HFY20 (1HFY19: RM1.98bil), whereby 80% were derived from local projects, mainly in the central region. Meanwhile, overseas sales were contributed by UNO Melbourne, Sapphire by the Gardens and Marque Residences in Australia as well as Daintree Residence in Singapore. Additionally, the company has RM1.42bil bookings in the pipeline as at July 2020 and will remain focused on converting these bookings into sales. S P Setia is maintaining its sales target at RM3.8bil.

• Moving forward, S P Setia will remain prudent with limited new launches, concentrating mainly on mid-range landed units in established townships in view of the challenging environment. In addition to that, the company has also put in place several cost rationalization initiatives for better operational efficiency going forward.

• We believe FY20 will remain profitable, supported by strong unbilled sales of RM9.68bil, overseas contribution and inventory clearing efforts. S P Setia’s gearing has increased to 63.5% from 60% QoQ with an interest coverage ratio of 1.1x. We cut our FY20 net earnings forecast by 30% to reflect the timing of recognition while making no changes to FY21–22 numbers. Our fair value is unchanged at RM0.70 per share. Maintain HOLD.

Source: AmInvest Research - 14 Aug 2020