We gather that SP Setia is on track to hit its FY20 sales target of RM3.8bn with 76% achieved as of Oct alongside booking pipeline of RM1.7bn. For FY21, management is looking to set a flattish sales target. With regards to planned launches, FY21 is targeting RM3.64bn worth of GDV mostly in the Central Region. Overall, given the low base impact of FY20, we reckon FY21 should potentially see improved earnings when pandemic headwinds subside. Forecast unchanged and maintain HOLD rating with unchanged TP of RM1.00 (80% discount to RNAV).

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

MCO2.0 impact. With MCO2.0 now implemented across the entire Malaysia (ex. Sarawak), all sales galleries are closed. To cushion this, management implemented an online platform (Setia Virtual X) that allows online booking and queries. While for their construction site (which have a more controlled environment) will be carried on as usual as they have permission to operate from MITI. Hence, progress billings will still continue during MCO, albeit potentially at a slower pace given tight SOPs.

Updates on sales in 4Q. To recap, SP Setia chalked in RM2.3bn worth of sales in 9MFY20 and management shared that total sales stood at RM2.9bn as of 31 Oct, representing 76% of full year target of RM3.8bn. Management guided that Nov and Dec sales displayed good momentum especially on closing its pipeline bookings, likely allowing it to hit its FY20 target. Management shared that in the last 5 years, pipeline bookings hovered around RM700m but this has recently risen to RM1.7bn (as of 3Q) with an estimated conversion rate of 50%.

Inventory. SP Setia’s inventory level has dropped to RM1bn as of Sept 2020 (from RM1.4bn in early Jan 2020). Management clarified that because of Covid-19 and restricted movements, the group has held back some launches while focusing on selling completed units. SP Setia is targeting to clear inventory levels by 10-15% annually. During FY20, management shared that a 10-15% discount (historically was about 5-10%) was given to expedite sales and help clear inventory.

Battersea, UK. Management has yet to confirm any delays in handovers of the project and maintain its target for now. We note that the construction progress is ongoing at c.80% with social distancing measures in place. To recap, Phase 2 is expected to be delivered in 2QFY21 and Phase 3a in 3QFY21. Management assured that it is not an issue if the projects were to delayed by 1-2 months as it still falls within contract period. In term of sales, it’s been quiet in London. However, the group's focus now is to complete the properties as completed units will help entice interest.

Other project updates. In Melbourne, Sapphire and Uno project has achieved above 90% take up rate and on track to be completed on time. While in Singapore, Daintree project saw pent up demand and increase in sales. Management shared that the take up rate has increased to 90% by end Dec 2020 (from 30% on early Jan 2020).

Outlook. Management is looking to set a flattish sales target for FY21. With regards to planned launches, FY21 is targets for RM3.64bn worth of GDV mostly located in the Central Region coming from established areas such as Setia Alam, Setia Ecohill, Setia Ecopark, Bandar Kinrara and Alam Impian. Since Jan and Feb are usually quiet months because of Chinese New Year, the group is expecting the launches to start mainly from 2QFY21 onwards. Unbilled sales stood at RM9.8bn as of 3QFY20, representing a strong cover ratio of 2.7x. However the group’s high gearing of 0.62x remains a concern. Overall, given the low base impact of FY20, we reckon FY21 should potentially see improved earnings once pandemic headwinds subside.

Forecast. Maintained.

Transfer of coverage; maintain HOLD. With the transfer of coverage to our new property analyst, we maintain HOLD rating with an unchanged TP of RM1.00 with unchanged discount at 80% to RNAV of RM5.01, reflecting that the broader property market remains soft amid the pandemic. 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.

Source: Hong Leong Investment Bank Research - 25 Jan 2021