SP Setia’s 9M18 results were below market and our expectations. High interest and marketing expenses led to a 75% yoy decline in core net profit to RM185m. It achieved sales of RM3.21bn in 9M18 and maintains its RM5bn target for FY18. Unbilled sales of RM7.92bn should support earnings. We cut our core EPS forecasts by 39-47% in FY18-20E to reflect higher costs and lower sales assumptions. We reiterate our HOLD call with a lower target price (TP) of RM2.12, based on 40% discount to RNAV.

Weak Core Earnings

SP Setia’s 9M18 core net profit of RM185m (-75% yoy) only comprise 37% of consensus full-year forecast of RM504m and 41% of our previous estimate of RM449m. We expected a strong ramp up in core earnings in 3Q18, which only grew 9% qoq to RM76m as progress billings remained slow due to several projects at early stages of implementation. Revenue declined 13% yoy to RM2.57bn in 9M18 as several projects were still at early stages of implementation. There was also the absence of lumpy revenue from the completion and delivery of units for its Battersea Power Plant Phase 1 project in 9M17.

Cost Remains High

Operating cost only declined 6% yoy as marketing expenses remained high due to setting up of new show galleries to launch new projects. SP Setia soft launched its new Setia Fontaines project in October with official launch by end-2018. Interest expense jumped 88% yoy due to the drawdown of additional long-term debt facilities. Net gearing increased to 0.39x in 3Q18 from 0.11x in 4Q17. Exceptional gain of RM342m from the remeasurement of its existing stake in Setia Federal Hill Sdn Bhd (acquired the balance 50% stake in 2Q18) boosted net profit to RM569m (- 20% yoy) in 9M18.

Maintain HOLD With Lower TP

Core FY18-20E PER of 21-34x following our EPS cut is not attractive. But current share price is supported by Price/book of 0.65x. We cut our RNAV/share estimate to RM3.54 from RM4.37 to reflect lower project DCF valuations given lower sales and profit margin assumptions, and roll forward our DCF base year to FY19E. We cut our TP to RM2.12 from RM2.84, based on a higher 40% discount (35% previously) to RNAV to reflect the higher earnings forecast risks. Maintain HOLD.

Key Risks

We believe it will be a challenge for SP Setia to maintain the aggressive sales momentum given the challenges faced in its key markets. Key upside risk is higher sales if the property demand rebounds, while downside risk is weaker sales and profit margin if the property slowdown persists in Malaysia.

Source: Affin Hwang Research - 15 Nov 2018