SP Setia’ 9M18 core PATAMI of RM226m (-64% YoY) was below expectations due to lower-than-expected progressive billings coupled with higher-than expected interest cost. Unbilled sales remained at 1.9x cover and RM3.2bn new sales were achieved. Our FY18/19/20 earnings forecasts are adjusted by -14%/- 6%/-1% after revising our revenue recognition and financing cost assumptions. Upgrade to BUY with lower TP of RM3.03 (was RM3.05) as we believe the slump in share price has priced in the subdued earnings in FY18. At current trough valuation of (67% discount to RNAV and 0.7x P/B), it is attractive to collect on the backdrop of better earnings trajectory and growth expectation in FY19.

Below expectations. 9M18 revenue of RM2.57bn translated into a core PATMI of RM225.6m (-63.7%), accounting for 55.9% and 44.8% 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. None as dividend is usually declared on semi-annual basis.

QoQ. 3Q18 revenue rose 7.2% mainly due to monetisation of inventory and higher progressive billings from ongoing projects. Core PATAMI was down by 34.1% due to lower-margin product mix coupled with higher finance cost; after excluding the one-off fair value gain of RM343.8m from the re-measurement of its stake in 2Q18.

YoY. Revenue declined by -6.1% attributed to lower progressive billings for ongoing developments. However, core PATAMI plunged by 81.3% due to high base effect in the absence of Battersea Power Station contribution coupled with higher finance cost.

YTD. Revenue contracted 12.8% on the back of lower progressive billings as large development phases such as Trio by Setia and Setia EcoHill 2 are still at early stage of constructions. However, core PATAMI declined (-63.7%) 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. We expect better earnings in 4Q where sales number usually peaks supported by the efforts of inventory monetisation and normalization of cost. Forward earnings visibility continues to be well supported by the total unbilled sales of RM7.9bn (was RM8.1bn in 2Q18), representing a cover ratio of 1.8x. We understand that there could be non-strategic land disposal exercise in the near term to bring down the net gearing, which now stands at 0.38x (was 0.09x in FY17).

New sales of RM3.2bn achieved in 9M18 (28% from international sales) despite the weak buyer sentiments due to the uncertainty of housing policies and measures. Management is still confident to meet its sales target of RM5.0bn for FY18 as 4Q is usually the strongest in terms of new sales.

Forecast. We lower than our earnings forecasts for FY18/19/20 by -14%/-6%/-1%, respectively after revising our revenue recognition and financing cost assumptions.

Upgrade to BUY (from Hold) with lower TP of RM3.03 (from RM3.05), based on unchanged discount of 50% to RNAV of RM6.05. We believe the recent slump in share price (YTD: -41%) has priced the subdued earnings in FY18. The earnings trajectory should rebound from a bottom after current quarter with cost expected to normalize moving forward along with better progression for newer projects. At current trough valuation (67% discount to RNAV and 0.7x P/B), it is attractive for investors to collect on the backdrop of better earnings trajectory and growth expectation in FY19.

Source: Hong Leong Investment Bank Research - 15 Nov 2018