SP Setia’s 1Q18 core net profit of RM51m (-55% yoy) was below market and our expectations. The weak earnings were due to: (i) lower progress billings / absence of major project completion (1Q18 revenue was the lowest since 3Q2012) and; (ii) low EBITDA margin of 17.4% (versus 3-year average of 21.7%). Elsewhere, 1Q18 new property sales grew by 159% yoy to RM1.1bn, on track to achieving management’s FY18 target of RM5bn. We cut our FY18-20E net profit forecasts by 7- 13%, maintain HOLD with a revised TP of RM2.90 (from RM3.35).

Weak 1Q18 Earnings Due to Lower Revenue, Below Expectations

SP Setia’s 1Q18 core net profit fell by 55% yoy to RM51m due to lower revenue of RM656m (-36% yoy), lower EBITDA margin and higher finance cost (undertaking of new borrowings to fund the I&P acquisition). The sharp decline in revenue was partly due to absence of major project completion. In 1Q17, the Parque Melbourne project was a substantial revenue contributor – many units were delivered and earnings were recognised based in the completion method. All in, the results were below both market and our expectations – 1Q18 core net profit only accounted for 6-7% of consensus and our full year earnings forecasts.

Sequentially, Core Profit Was Substantially Weaker

Sequentially, SP Setia’ 1Q18 core net profit was 80% weaker (4Q17: RM258m). The substantial earnings decline qoq was due to seasonality and lack of project completions. To recap, SP Setia completed and handed over several major projects in 4Q17, such as Parque Melbourne in Australia, the boutique offices and Vouge Suite One residential tower of KL Eco City, Eco Sanctuary luxury condominium in Singapore and our Perumahan Penjawat Awam 1Malaysia (PPA1M) project in Putrajaya.

Robust Property Sales of RM1.1bn, on Track to Hit RM5bn Sales Target

Notwithstanding the weak financial results, SP Setia reported robust property sales of RM1.1bn in 1Q18 (compared to RM427m in 1Q17). 1Q18 sales breakdown: (i) The UNO Melbourne project launched in 1Q18 fetched RM397m of sales; (ii) Southern Region recorded RM330m, a substantially improvement from RM80m in 1Q17; (iii) the Central Region booked in RM279m, a 12% increased yoy. This note marks a transfer of coverage.

Cutting FY18-20E Profit Forecasts by 7-13%, Maintain HOLD

We cut our FY18-20E core net profit forecasts by 7-13%, incorporating: (i) the weak 1Q18 results; (ii) lower domestic property sales but higher oversea project launches (for the Australian projects, the earnings can only be recognised upon deliver in 2021-22); and (iii) a flattish EBITDA margin (vs our earlier expectation of margin recovery). In addition, we have also adjusted our share based following the completion of its rights issues and placement exercise, leading to a more substantial FY18-20E EPS cut of 30-35%.

Elsewhere, the recently concluded Malaysia 14th General Election may result in short-term uncertainties and potential buyers holding back on purchases, awaiting further clarification of the GST abolishment and update on infrastructure projects development. Geographically, certain markets (ie. Johor) may see temporary slowdown as the new administration review major projects. All in, we maintain our HOLD rating but lowered our price target to RM2.90 based on 35% discount to RNAV (from RM3.35 at 30% discount) after incorporating our earnings changes and the acquisition of I&P. We have increased our discount to account for the near-term market uncertainties as well as weaker than expected results.

Source: Affin Hwang Research - 15 May 2018