SP Setia’ 1H18 core PATAMI of RM160.4m (-41% YoY) was below expectations, mainly due to lower-than-expected progressive billings coupled with higher than-expected interest cost. Unbilled sales remained at 1.9x cover and new sales of RM2.1bn are on course to meet target. FY18/19/20 earnings are lowered by -37%/-29%/-26% after we revise our revenue recognition and financing cost assumptions. Downgrade to HOLD with lower TP of RM3.05 (from RM3.76) given the limited upside in the near term due to subdued earnings, high P/E and up trending net gearing.

Below expectations. 1H18 revenue of RM1.58bn translated into a core PATMI of RM160.4m (-41.3%), accounting for 24.9% and 26.0% of HLIB and consensus full year forecasts, respectively. The deviations were mainly due to lower-than-expected progressive billings coupled with higher-than-expected interest cost.

Dividend. Declared an interim dividend of 4 sen per share (flat YoY).

QoQ. 2Q18 revenue rose 41.3% mainly due monetisation of inventory and higher progressive billings from ongoing projects. Core PATAMI improved by 60.9% in tandem with higher revenue despite the higher finance cost, after excluding the one off fair value gain of RM343.8m from the re-measurement of its stake in Setia Federal Hill.

YoY. Revenue increased by 6.9% mainly due higher sales from completed projects. However, core PATAMI declined by 39.3% in the absence of contribution from Battersea Power Station, higher opex due to the integration with I&P coupled with higher finance cost.

YTD. Revenue contracted 16.5% on the back of lower progressive billings as large development phases such as Setia Eco Templer, Trio by Setia and Setia EcoHill 2 are still at early stage of constructions. However, core PATAMI declined (-41.3%) at a greater magnitude in the absence of contribution from Battersea Power Station along with higher opex due to the integration with I&P and higher finance cost.

Outlook. The company is encouraged by the strong take-up of township launches as well as improving market sentiments post-GE. Earnings visibility is supported by total unbilled sales of RM8.2bn (cover ratio of 1.9x). However, net gearing has inched up to 0.39x from 0.09x in FY17 and we understand that there could be non-strategic land disposal exercise in the near term to cushion the cash flow needs.

New sales of RM2.1bn achieved in 1H18 (33% from international sales) despite the general wait-and-see approach due to GE14 factors, on course to meet its sales target of RM5.0bn with RM4.2bn worth of launches are expected in 2H18. Besides, Setia is venturing into Osaka, Japan with a proposed mixed-development with a GDV of RM1.88bn on 4.9 acres of land, targeted to launch in 2019 at the earliest.

Forecast. We lower than our earnings forecasts for FY18/19/20 by -37%/-29%/-26%, respectively after revising our revenue recognition and financing cost assumptions.

Downgrade to HOLD (from BUY) with lower TP of RM3.05 (from RM3.76), based on enlarged discount of 50% (from 40%) to RNAV of RM6.10. Earnings will remain subdued in the near term given majority of projects are still in the early stages and cost of integration with I&P. As such, with a P/E of over 20x and 1x P/B, we believe there could be limited upside in the near term, in addition to the up trending net gearing, which now stands at 0.39x (from 0.09x in 2017).

Source: Hong Leong Investment Bank Research - 24 Aug 2018