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 make no changes to our FY20–22 estimates.
• S P Setia registered a 9MFY20 net loss of RM376.5mil. Stripping off exceptional items i.e. impairment of completed inventories worth RM145.9mil (2QFY20) and impairment of work in progress (WIP) development of Battersea project of RM336.3mil (3QFY20), 9MFY20 core net profit of RM101.2mil (-59.8%) came in within expectations, making up 76% and 73% of our and consensus full-year estimates respectively. In view of the challenges resulted from the Covid-19 pandemic in London and specifically, the impact on the delivery of the Battersea project, S P Setia’s 40%-owned JV company BPHC Group had resolved to recognise an impairment of its WIP and inventories under development.
• On a positive note, S P Setia recorded new sales of RM2.86bil in 9MFY20 (9MFY19: RM3.07bil), whereby 82% 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 RM1.67bil bookings in the pipeline as at October 2020 and will remain focused on converting these bookings into sales. S P Setia is maintaining its sales target at RM3.8bil. The company’s unbilled are is higher at RM9.82bil as compared with QoQ’s RM9.68bil.
• Meanwhile, demand for local properties remains steady whereby the 2-storey terrace houses in Alam Impian priced from RM730K onwards recorded a 92% take-up rate while 2- storey terrace houses priced from RM768K in Setia Alam saw a 90% secured bookings rate.
• 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.
• We believe FY20 will remain profitable, supported by strong unbilled sales of RM9.82bil, overseas contribution and inventory clearing efforts. S P Setia’s gearing has increased to 65.3% from 63.5% QoQ with an interest coverage ratio of 1.5x. We make no changes to our FY20–22 numbers. Our fair value is unchanged at RM0.70 per share. Maintain HOLD.

Source: AmInvest Research - 16 Nov 2020