SP Setia’s 1H18 result was above market and our expectations. Oneoff fair value gain of RM344m on re-measurement of its Setia Federal Hill project boosted net profit by 39% yoy to RM504m in 1H18. Core earnings of RM120m (-58% yoy) were disappointing due to a few major projects at early stage of construction. We cut core EPS forecasts by 29-40% and TP to RM2.84 (based on 35% discount to reduced RNAV) to reflect lower progress billings and sales. Maintain HOLD.

Exceptional Gain

SP Setia reported a 1H18 net profit of RM504m which comprised 81% of full-year consensus forecast of RM618m and 71% of our previous estimate of RM707m. We were surprised by the RM344m fair value gain on remeasurement of its stake in the Setia Federal Hill project following the acquisition of the remaining 50% stake. This led us to raise FY18E EPS by 11%. EBIT margin improved to 19.6% in 1H18 from 18.9% in 1H17 due to the sale of inventories and higher margin product mix. Revenue fell 17% yoy to RM1.58bn in 1H18 as Setia Eco Templer Phase 1 in Rawang, Trio by Setia in Klang, and Setia Ecohill 2 in Semenyih, are still at early stages.

Encouraging Pre-sales

SP Setia achieved pre-sales of RM2.11bn in 1H18, 2/3 from domestic projects and 1/3 from international projects. Political uncertainties during the recent general election led to buyers holding back on buying properties. But attractive promotions and rebranding of some I&P projects helped reduce inventories to RM1.47bn as at end-June from RM1.7bn as at 31 December 2018. Management maintained its RM5bn pre-sales target for FY18 supported by new launches such as the RM13bn GDV Setia Fontaines township development project in mainland Penang. We expect a better 2H18 performance as the company ramps up progress billings and launch new property projects. On average, 1H earnings contribute only 34% of fullyear core earnings over the last 4 years.

Still a HOLD

Current Price/book of 1x is reasonable but core FY18-20E PER of 17-23x is not attractive. We believe it will be a challenge for SP Setia to maintain the aggressive sales momentum given the challenges faced in its key markets. We cut of RNAV/share estimate to RM4.37 from RM4.46 to reflect higher net debt and lower project DCF valuations given lower sales expected. We reiterate our HOLD call with RM2.84 TP, based on 35% discount to RNAV.

This Note Marks a Transfer of Coverage.

Source: Affin Hwang Research - 24 Aug 2018