Sales activity remains challenging as some have started withdrawing their previous bookings. With regards to launches, management now targets RM3.3bn, depending on the market’s appetite. We see potential downside risks in both sales and GDV launch targets. Focus will continue to be placed on clearing completed inventories with higher discounts given. On Battersea UK, combined take-up rates for the Phase 2 and 3a now hovers around the 70% range (from 91% and 71%, respectively as of FY19). We lower our FY20/21/22 forecasts by -28.5%/-17.3%/-7.3% and maintain our HOLD rating with a lower TP of RM0.87 as we impute a higher discount at 80% to RNAV of RM4.33 to reflect downside risk towards sales and GDV launch figures given the company’s high base targets.

We Organised a Virtual Meeting With SP Setia. Below Are the Key Takeaways.

Sales. With the ongoing economic impact of Covid-19, sales activity remains challenging as some have started withdrawing their previous bookings. Nonetheless, the sales target of RM3.8bn is maintained for now and any changes will only be reflected during the forthcoming results release (2QFY20 results targeted for mid Aug). The non-strategic land sales initially planned for FY20 have also been affected as potential buyers now bid at much lower prices as they plan to take advantage of desperate sellers. When asked about potential land banking activities, management will only be open towards lands that are able to have a quick turnover.

Launches. Management now targets to launch products worth closer to RM3.3bn (from RM4.4bn set previously), depending on the market’s appetite as management will be monitoring the take-up in the upcoming launches. Given that only RM478m was launched in 1QFY20 and minimal in 2QFY20, we believe the actual FY20 launches to potentially register below its target.

Inventory clearing. Focus will continue to be placed on clearing completed inventories with bigger discounts to be given as seen in the ongoing Setia NOW Campaign which is giving rebates of up to 48% on over 1.6k homes, varying from product to product (achieved c.10% sales so far). FY20 will experience margin compressions given the challenging operating environment with increased discounts provided. Completed inventories stand at c.RM1.4bn whereby 6 completed projects accounted for over 60% of the inventories (mostly from high-rise projects).

Battersea, UK. As the UK economy was also hit by Covid-19, combined take-up rates for the Phase 2 and 3a now hovers around the 70% range (from 91% and 71%, respectively as of FY19) with buyers withdrawing their bookings. Management has yet to confirm any delays in handovers of the projects and maintain its target for now. We note that the construction progress is ongoing at c.75% with social distancing measures in place. To recap, Phase 2 is expected to be delivered in 2QFY21 and Phase 3a in 3QFY21.

Forecast. We lower our FY20/21/22 forecasts by -28.5%/-17.3%/-7.3%, respectively, as we impute lower progressive billings recognition and margin assumptions amidst the challenging operating environment. Maintain HOLD rating with a lower TP of RM0.87 (from RM1.00) with a higher discount at 80% (from 75%) to RNAV of RM4.33 to reflect downside risk towards sales and GDV launch figures given the company’s high base targets. Nonetheless, we are hopeful that FY20 will be a bottom year as both FY21 and FY22 will be supported by the recognition of foreign projects. Our discount rate will be revisited upon signs of the recovery in sentiments.

Source: Hong Leong Investment Bank Research - 10 Jul 2020