SP Setia achieved a core net profit of RM850m (-5.5% yoy) in 2017, which was above consensus / our expectations by 8 / 17%. Lower progress billings and a high base in FY16 contributed to the earnings decline. Unbilled sales of RM7.7bn and property sales of RM4.1bn achieved in 2017 should sustain forward earnings. SP Setia declared a 15.5 sen dividend in 2017, giving a net yield of 4.7%. HOLD with a TP of RM3.35, based on 30% discount to RNAV.

Above Expectations

SP Setia’s 2017 core net profit of RM850m was 8% above our forecast of RM787m and 17% above consensus of RM726m. This is largely due to a higher earnings contribution from the London-based Battersea Power Station redevelopment project (SP Setia owns a 40% stake), which has bumped up the associate earnings by 3-fold to RM280m in 2017.

Lower Earnings

Revenue declined 21% yoy to RM4.5bn in 2017, mainly attributable to i) lower progress billings due to fewer property project completions in 2017; and ii) a high base effect given that more property projects were completed and handed over in 2016 (Parque Melbourne, KL Eco City and Eco Sanctuary). Incidentally, EBIT declined 23% yoy to RM995m in 2017. However, higher associate earnings from the Battersea project partly offset the lower EBIT, bringing core net profit to RM850m in 2017 (-5.5% yoy).

Sales Surpassed Targeted Sales in 2017

SP Setia achieved RM4.1bn (+17% yoy) in property sales in 2017, which was above its initial sales target of RM4bn. The sales were mainly driven by a strong take-up rate of 91% for Sapphire by the Gardens in Melbourne, Australia. International markets contributed RM1.5bn or 37% of the total sales, while higher sales were recorded on the domestic side (RM2.6bn), mainly contributed by Setia Alam. For 2018, the group plans to launch projects worth RM7.1bn (Uno Melbourne: GDV of RM1.2bn and Daintree Residence, Singapore: GDV of RM1.5bn) and continue to offer more midpriced landed properties domestically.

HOLD With a TP of RM3.35

Following our recent suspension of our recommendation on SP Setia given Affin Hwang Investment Bank’s role as the independent adviser for the proposed I&P and Bangi Estate acquisitions, we now reinitiate coverage on SP Setia with a HOLD call and TP of RM3.35, based on a 30% discount to RNAV, and introduce FY20E figures.

Source: Affin Hwang Research - 28 Feb 2018