Investment Highlights

• We downgrade S P Setia (Setia) to HOLD from BUY with an unchanged fair value of RM1.26/share following the 3-month share price appreciation of 13% which provides limited future upside. Our fair value is based on a 40% discount to its RNAV and a neutral ESG rating of 3 stars (Exhibits 3 & 4).

• Setia’s 3QFY21 results are due to be announced next month. For now, our forecasts are unchanged although we expect a weaker 3QFY21 net profit which could potentially mean a QoQ decline of up to 25%. This translates to 9MFY21 accounting for 70%–73% of our FY21F forecast, which may not be comparable to its FY19–FY20 results that were skewed by losses in 4QFY19 and 9MFY20.

• Our expectations of a 3QFY21 net profit QoQ contraction stems from a property sales decline during the quarter (July to September) despite various promotional campaigns and slower progress billings due to constrained construction activities due to the Covid-19 pandemic.

• We estimate that 3Q21 local sales momentum has slowed down as a result of movement restrictions. For international projects (which consisted of 24% of 1HFY21 total group sales), the segment’s main contributor, Daintree Residence in Singapore, could register lower sales due to lesser available units left.

• On the local front, visitor footfalls remain soft despite sales galleries gradually reopening in mid-August and September. We believe consumers are still cautious on physical visits given that non-fully vaccinated individuals are still subjected to restrictions.

• We think that the factors that are holding back consumers on big ticket purchases are mainly uncertain job security and tight bank lending policies. The unemployment rate is still elevated at 4.8% in July (Exhibit 1) which implies weak home buying ability.

• Banks continued to be prudent in residential property lending. According to the latest Bank Negara monthly statistics, we assume that there were fewer transactions in the property market in July and August as reflected in the declining loan application trend (Exhibit 2) while the loans applied/loans approved ratio fell to 35% in August (from 40% in July).

• Even with the weak start in 2H21, we believe that sales could pick up again in 4Q21 on the back of brightening buyer sentiment and easing movement restrictions supported by rising vaccination rates. We also like the group’s digital marketing initiatives to secure new sales.

• The group’s unbilled sales of RM10.3bil as at 30 June 2021, which translates to 2.4x FY21F sales, provided adequate nearterm earnings visibility. The stock currently trades at a fair FY21F PE of 15x, its 5-year average.

Source: AmInvest Research - 8 Oct 2021