SP Setia’s 2018 result was above market expectations but in line with ours. Net profit fell 26% yoy to RM671m in 2018 due to lower overseas earnings contribution. Excluding exceptional and unrealised forex gains of RM435m, core net profit fell a sharper 74% yoy to RM236m in 2018. Despite a difficult year, it achieved pre-sales of RM5.12bn, surpassing its RM5bn target. We believe robust sales and high unbilled sales will support core EPS growth of 31% yoy in 2019E. Maintain HOLD with lifted TP of RM2.72, based on 30% discount to RNAV.

Within Expectation

SP Setia’s headline net profit of RM671m (-26% yoy) in 2018 was above market consensus forecast of RM434m but close to our estimate of 655m. There was an exceptional gain of RM312m from the remeasurement of retained equity interest in the former joint venture for Setia Federal Hill project and unrealised forex gain of RM60m, which boosted the bottom line. Revenue fell 16% yoy to RM3.59bn in 2018 as some major projects were still at their early stage of construction.

Lower Overseas Earnings Contribution

The completion of Battersea Power Station (BPP) Phase 1 and Parque Melbourne projects contributed substantially to group earnings in 2017. But there was no major overseas project completion in 2018, leading to core net profit declining 74% yoy to RM236m. But BPP Phase 2 unbilled sales of about RM1.1-1.2bn, slated for completion in late-2020 or early-2021 will boost longterm earnings. The scheduled completion of its Melbourne projects, ie, Sapphire by the Gardens and UNO condominium projects will also contribute lumpy earnings in 2021E.

Sustained Sales Momentum

SP Setia achieved sales of RM5.12bn in 2018, 80% from the local market and 20% from overseas, mainly in Vietnam. This is comparable to sales of RM4.92bn in 2017. The management set a 10% higher target sales of RM5.65bn in 2019 compared to RM5bn in 2018. This is on the back of planned launches worth RM6.8bn in 2019 and the clearing of inventories worth RM1.6bn. In addition, it has also identified 7 parcels of non-strategic lands measuring 441.8 acres with GDV of RM1.18bn for disposal. Unbilled sales of RM12.32bn will support its core earnings growth trajectory. Maintain our HOLD call PER remains unattractive.

Source: Affin Hwang Research - 28 Feb 2019