SP Setia reported 1Q19 earnings that were below market and our expectations. We were surprised by an unrealised forex loss of RM35m on foreign loans as the Ringgit had weakened, but core net profit of RM85m (+66% yoy) was within our expectation. Sales of RM718m in 1Q19 are lagging its full-year target of RM5.65bn on the weak property market sentiment. We cut our core EPS forecasts by 2% for new shares issued under its dividend reinvestment plan. We reiterate our HOLD call with a reduced TP of RM2.30, based on a 40% discount to RNAV.

Below Expectations

SP Setia’s 1Q19 net profit of RM53m (-48% qoq and 14% yoy) was only 12% of the consensus full-year forecast of RM443m and 17% of our estimate of RM319m. We cut our net profit by 10% to RM289m in 2019E to reflect the surprise unrealised forex loss. But core net profit of RM85m was within our expectation, comprising 27% of our full-year forecast of RM319m. We make no changes to our core net profit estimates. Revenue grew 32% yoy to RM865m in 1Q19 due to higher progress billings for its ongoing projects. Strong property sales of RM1.63bn in 4Q18 also contributed to the higher revenue in 1Q19. EBITDA jumped 73% yoy to RM198m in 1Q19 with the EBITDA margin improving to 22.8%, compared to 17.4% in 1Q18 and 14.9% in 4Q18. Higher revenue contribution from its matured townships led to the improved profit margin. Unbilled sales remained high at RM11bn.

Sales Below Target

Property sales of RM718m in 1Q19 were 35% yoy below the RM1,105m achieved in 1Q18. Of total sales, 94% came from its local projects. Its 1Q19 sales are lagging its 2019 target sales of RM5.65bn as buyers remained cautious due to weak market conditions. SP Setia launched new properties worth only RM339m in 1Q19 despite plans to launch RM6.47bn worth of new properties in 2019. We expect sales to improve with promotions and stamp duty waivers under the Home Ownership Campaign in 1H19.

Maintain HOLD

We reduce our RNAV/share to RM3.84 from RM3.89 previously to reflect a lower long-term margin assumption for its Battersea Power Plant (BPP) project, enlarged share base and rollover of our DCF base year to 2020E. Our new TP of RM2.30 (reduced from RM2.72 previously) is based on a higher 40% discount (30% previously) to RNAV. The higher RNAV discount reflects the weak local market conditions and Brexit uncertainties on its BPP project.

Source: Affin Hwang Research - 10 May 2019