SP Setia’s 1H19 result was above market and our expectations. Unrealised forex gain and land sale gain recognised in 2Q19 were not assumed in our FY19E earnings. Core net profit jumped 27% yoy to RM153m in 1H19, mainly driven by higher revenue. We raise FY19E core EPS by 2% to reflect forex and land sale gains. But we cut FY20-21E core EPS by 3-15% to reflect weaker sales. We reiterate our HOLD call with a reduced TP of RM1.94, based on the same 40% discount to RNAV.

Above Expectations

SP Setia’s 1H19 net profit of RM192m (+62% yoy) comprise 54% of the consensus full-year forecast of RM358m and 60% of our previous estimate of RM319m. We were surprised by the unrealised forex gain of RM35m in 2Q19, which offset the loss recognised in 1Q19. This is mainly due to the weakening of the £ against the Ringgit, which led to translation gain on its £ debt. It also completed the former British Embassy land sale in 2Q19, generating RM449m revenue and net gain of RM36m. Core net profit excluding one-off gains increased 27% yoy to RM153m in 1H19.

Sequential Weakness

Revenue jumped 54% qoq and 44% yoy to RM1.34bn in 2Q19, mainly due to land sale revenue (+3% qoq and -4% yoy excluding land sale). Net profit surged 163% qoq to RM139m in 2Q19 due to unrealised forex gain vs loss in 1Q19 and the land sale gain. Core net profit was down 20% qoq and 3% yoy to RM68m in 2Q19. Further land sale worth RM87m will support earnings in 2H19. We lift our 2019E EPS by 2% to reflect the land sale gains and lower administration expenses.

Maintain HOLD Call

SP Setia achieved RM1.98bn sales in 1H19, which was below our expectation and lagging its previous target 2019 target of RM5.65bn. Hence, management reduced its target 2019 sales to RM4.55bn in view of the weak property market conditions. It remains focused on launching landed homes in its township projects below RM1m with higher planned launches of RM3.33bn in 2H19 compared to 1H19 launches of RM1.55bn. We cut our core EPS by 2-15% in 2020-21E to reflect lower sales. We reduce our RNAV/share to RM3.23 from RM3.84 to reflect higher net debt and lower sales impact. Based on the same 40% discount to RNAV, we cut our target price to RM1.94 from RM2.30 previously. Maintain our HOLD call.

Source: Affin Hwang Research - 15 Aug 2019