SP Setia’s 9M21 of RM40.3m (+32% YoY) were below expectations due to lower than-expected progressive billings contribution amidst lockdown. Overall, sales remain strong with RM3.38bn achieved in 9M21 (89% of RM3.8bn target). Management noted that booking and sales has been encouraging for the month of Oct and Nov, and we understand that sales for 4Q could come in as much as c.RM1bn, thus may exceed their sales target for the year. We cut our earnings by 53% in FY21 to account for the lower progressive billings contribution as well as lower margin but maintain our FY22-23 forecast. Maintain HOLD rating with a higher TP of RM1.26 (from RM0.95) on a lower discount at 75% (from 80%) to RNAV of RM4.93.

Below expectations. 3Q21 core losses of -RM73.5m (2Q21 profit of RM73.5m; 3Q20 profit of RM70.3m), dragged 9M21’s sum to RM40.3m (+32% YoY). The results were below our (16%) and consensus expectation (15%) due to lower-than-expected progress billings contribution amidst lockdown. 9M21 core PATMI was derived after we excluded the payment to RCPS holder amounting to RM132m and subsequently we exclude EIs of RM11.3m (from net foreign exchange loss).

QoQ/YoY. 3Q21 recorded losses of -RM73.5m (vs profit of RM73.5m in 2Q21 and profit of RM70.3m in 3Q20) attributable to decline in revenue (-45.1% QoQ; -45.0% YoY) from the slower progress billing recognition following longer number of days of lockdown measures during the period.

YTD. Despite higher revenue by 29%, gross profit declined by 22% due to low margin products (we understand from discounts given to unsold units’ sales). Nevertheless, core earnings were higher by 32% as share of JVs and associate recorded lower losses during the period.

Sales and launches. RM671m worth of sales was achieved in 3Q21, bringing 9M21 sales to RM3.38bn (includes RM218m of land sales), representing 89% of RM3.8bn full year target. 9M21 sales came from: (i) Central Region: RM2.06bn; other domestic region RM621m and; (iii) International Region: RM728m. Of the total sales, completed inventories consisted of RM585m while sales from HOC consisted RM1.5bn (55% of local sales). Unbilled sales stood at RM9.8bn as of 3Q21, representing a cover ratio of 3.2x. SP Setia has launched a total GDV of RM1.5bn in 9M21 largely comprising of landed properties, mainly at established townships. The group plans to launch RM1.2bn properties in its various townships in 4Q21 (bringing total launches for the year of RM2.7bn, a revision from RM3.8bn launches initially).

Outlook. Management noted that booking and sales has been encouraging for the month of Oct and Nov (bookings stand at RM770m as of 3Q21). We understand that sales for 4Q could come in as much as c.RM1bn, bringing the total sales for the entire year to c.RM4.4bn (c.RM4.2bn if we were to exclude the land sales), exceeding its sales target of RM3.8bn. Nevertheless, we remain cautious with the margins generated by SP Setia for the ongoing discounts given for its unsold units, as management are pushing to sell their inventories.

Forecast. We cut our earnings by 53% in FY21 to account for the lower progressive billings contribution as well as lower margin. Maintain our FY22-23 forecast.

Maintain HOLD rating with a higher TP of RM1.26 (from RM0.95) on a lower discount at 75% (from 80%) to RNAV of RM4.93 to reflect the recovery in property sales. Nevertheless, we remain cautious with the margins generated by SP Setia from the ongoing discounts given as mentioned above. Furthermore, SP Setia’s high gearing of 0.66x (0.95x including RCPS) remains a concern.

Source: Hong Leong Investment Bank Research - 24 Nov 2021