Investment Highlights

• We upgrade S P Setia (Setia) to BUY from HOLD with a higher fair value of RM1.26/share (from RM0.92/share), based on a 40% discount to its RNAV and a neutral ESG rating of 3 stars (Exhibits 4 & 5).

• We raise our FY21F–FY23F earnings by 67%, 59% and 71% respectively on higher progress recognition and 20% reduction in finance charges. Setia’s 1QFY21 core net profit of RM106mil, excluding forex loss of RM32mil net of impairment write-backs of RM1mil, was above expectations, accounting for half of our earlier FY21F net profit and 39% of street’s FY21F earnings.

• YoY, the group’s bottom line returned to the black (vs. RM39mil loss in 1QFY20), supported by: 1) 53% increase in progress billings; and 2) 153% surge in sales from its low base in 1QFY20 (Exhibit 3). Setia chalked up new sales of RM1.2bil (vs. RM0.5bil in 1QFY20), attaining 31% of its unchanged FY21F sales target of RM3.8bil.

• This impressive performance was propelled by local projects which secured 78% of 1QFY21 new sales. Klang Valley accounted for 59% of local sales, in which townships in Setia Alam and Bandar Kinrara contributed 32% to central region sales while the remaining came from southern region. For international projects, which consisted of 22% of total group sales, Daintree Residence, Singapore was the main contributor.

• QoQ, Setia’s core net profit inched up by 3.9% helped by sharply lower losses in its construction and investment properties segments, which were partly cushioned by lower property development pretax profit.

• Moving forward, Setia will concentrate on clearing stocks (which decreased 20% YoY), optimise capex by delaying the construction of hospitality assets amidst travel bans and continue deploying the industrialised building system (IBS) for property development. The company will also expand its existing township in Setia Alam which could garner strong demand from bumiputra buyers. Additionally, the company has secured RM1.3bil bookings as at 31 March 2021 and remain focused on converting these bookings into sales.

• We expect the group’s FY21F–23F earnings to be well supported by its strong unbilled sales of RM10.1bil (vs. RM9.8bil YoY), translating to 3x FY21F sales, together with improving overseas contribution and inventory clearing efforts. Currently trading at a FY22F PE of only 9x vs. a 4- year average of 16x, we believe that Setia is well positioned to ride on the sector recovery together with seasonally higher 2H sales.

Source: AmInvest Research - 27 May 2021