SP Setia’s 1Q21 core PATMI of RM40.3m was below expectation as we note that Battersea project is expected to contribute minimally to earnings upon its completion this year. Overall, local development project remains healthy with RM1.2bn worth of sales was achieved in 1Q21, representing 32% of their full year target of RM3.8bn. However, we remain cautious of SP Setia’s exposure on Battersea as the property market over there remains challenging in the near term with the ongoing impact of Covid-19. As such, we cut our share of JVs and associate estimates, which in turn brings down our earnings forecast by c.50% for FY21-FY22. Maintain HOLD rating with a lower TP of RM0.95 (from RM0.98) on an unchanged discount at 80% to RNAV of RM4.74 (from RM4.90).

Below expectations. 1Q21 core PATMI of RM40.3m (4Q20: RM15.3m (+163% QoQ), 1Q20: -RM42.7m), represented 11% of our full year forecast and 15% of consensus expectations. We deemed the results as below expectation as we note that Battersea project is expected to contribute minimally to earnings upon its completion this year. 1Q21 core PATMI was derived after we excluded the payment to RCPS holder amounting RM66m and subsequently we added back net EIs of RM31.1m (mostly from net foreign exchange loss).

QoQ. Top-line decreased by 5.5% largely from the handover of Australian project, Marques Residences in 4Q20. Nonetheless, core PATAMI showed an improvement by >100% contributed by lower COGS (-9%), lower other expenses (-21.5%) and lower share of JV and associate losses (-88.8%).

YoY. Higher revenue by 49.8% attributable to better-than-expected sales take-up from local development especially at Setia Alam and Bandar Kinrara. As such, core PATAMI registered a profit of RM40.3m vs a loss of -RM42.7m in 1Q20.

Sales and launches. RM1.2bn worth of sales was achieved in 1Q21, representing 32% of their full year target of RM3.8bn. Sales from the domestic market constitutes: (i) Central Region: RM705m; Northern, Southern & Eastern Region: RM218m and; (iii) International Region: RM265m. Of total sales, completed inventories consisted of RM206m while sales from HOC consisted of RM534m (58% of local sales). Unbilled sales stood at RM10.1bn as of 1Q21, representing a cover ratio of 3.1x.

Outlook. SP Setia’s local development projects saw a strong momentum where its Setia Alam double-storey terrace Bywater series homes, registered an impressive 100% take-up within one hour of launch via its online platform. Encouragingly, its current booking stood at RM1.3bn with a conversion rate of c.50% booking to sales. However, we remain cautious on its international project development over in Battersea as we understand that the sales has not been picking up as what we expected.

Forecast. After further clarification with management, we note that Battersea project is expected to contribute minimally to earnings upon its completion this year. As such, we cut our share of JVs and associate estimates which in turn brings down earnings forecast by c.50% for FY21-FY22. Introduced FY23 forecast at RM352m. Maintain HOLD rating with a lower TP of RM0.95 (from RM0.98) on an unchanged discount at 80% to RNAV of RM4.74 (from RM4.90) as we imputed changes to our earnings. Despite encouraging sales momentum seen in local development, we remain cautious of SP Setia’s exposure on Battersea as the property market over there to remains challenging in the near term with the ongoing impact of Covid-19.

Source: Hong Leong Investment Bank Research - 27 May 2021