SP Setia’ 1Q18 core PATAMI of RM62m (-78% QoQ; -44% YoY) was within expectations as 1Q numbers are typically weak and we are expecting stronger quarters ahead. The lower results QoQ and YoY were mainly due to 1) lower progressive billings from ongoing projects; 2) minimal contribution from Parque Melbourne; 3) no contribution from Battersea Power Station; and 4) higher finance cost. Unbilled sales remained strong at 1.9x cover and new sales of RM1.1bn is on course to meet full year target of RM5bn. We maintain forecast, BUY rating and RNAV-based TP (35% discount) of RM4.08.

Within expectations. 1Q18 revenue of RM655.5m translated into a core PATAMI of RM61.5m, accounting for 9.5% and 8.8% of HLIB and consensus full year forecasts, respectively. We deem the results in line as 1Q numbers are typically weak and we are expecting stronger quarters ahead with better property sales and significantly recognition from newly commence projects.

Dividend. None (1QFY17: None).

QoQ. 1Q18 revenue declined by 54.9% as there were lower progressive billings from ongoing projects. At the meantime, core PATAMI dropped by 78.1% due to higher finance cost and the absence of contribution from Battersea Power Station.

YoY. Revenue dropped by 36.1% mainly due to marginal recognition from Parque Melbourne project as compared to 1Q17 when more than RM200m was booked upon project completion. As a result, core PATAMI declined by 44.2% on the back higher finance cost in line with the borrowings drawdown for acquisitions.

Outlook. The company is encouraged by the strong take-up of township launches such as Setia Alam and Setia Tropika as well as expecting improved market sentiments post-GE. Earnings prospects remain intact supported by total unbilled sales of RM8.0bn (cover ratio of 1.9x) which will sustain its earnings visibility for the next two years.

New sales of RM1.1bn achieved in 1Q18 with 42% from international sales, largely contributed from UNO Melbourne (RM447.9m). For FY18, the group is targeting sales of RM5.0bn with 80% (up from 63% in FY17) from local developments, underpinned by some notable launches such as Setia Fontaines in Penang and Daintree Residence in Singapore.

Forecast. Unchanged.

Maintain BUY, TP: RM4.08. Our TP is based on 35% discount to RNAV of RM6.27. We believe the completion of RNAV accretive acquisition of I&P Group will provide the earnings cushion in FY18 and is synergistic to Setia as a whole in its bid to retain as the largest pure property player in the market. Consistent high dividend yield (~4%) is another positive point.

Source: Hong Leong Investment Bank Research - 15 May 2018