Divesting Non-core Lands

SP Setia’s 9M19 results were above market expectations but below ours. Net profit fell 47% yoy to RM301m in 9M19, mainly due to lower exceptional gains. Core net profit increased 9% yoy to RM201m in 9M19, driven by higher progress billings. We cut our core 2019-21E EPS by 17- 31% to reflect a slower sales recovery and higher operating and tax expenses. Its current core 2020E PER of 17x is not attractive but valuation is supported by a Price/book of 0.5x. We reiterate our HOLD call with a lower TP of RM1.48, based on a higher 50% discount to our revised RNAV of RM2.96.

Below Our Expectation

Net profit of RM301m (-47% yoy) in 9M19 comprised 91% of the consensus full-year forecast of RM330m and 78% of our previous estimate of RM388m. However, core net profit of RM201m in 9M19 was only 62% of our previous full-year forecast of RM325m. We were surprised by the high operating and tax expenses.

Boost From Land Sales and Forex Gains

Revenue jumped 22% yoy to RM3.13bn in 9M19, mainly driven by land sale revenue of RM0.54bn. Excluding land sales, we estimate revenue increased 9% yoy for its core property development operation. PBT fell 35% yoy to RM0.51bn in 9M19 due to the lower exceptional and unrealised forex gains. The unrealised forex gain of RM41m (+58% yoy) in 9M19 resulted from the translation of GBP-denominated loans. There was a fair-value gain of RM0.34bn in 9M19 from the re-measurement of its original 50% stake in the Setia Federal Hill project. Land and investment sale gains contributed RM59m of net exceptional gains in 9M19.

Sequentially Weak Operating Performance

Core net profit grew 9% yoy to RM201m in 9M19, mainly driven by higher progress billings for its ongoing projects and lower interest expense. Core net profit fell 29% qoq and 37% yoy to RM48m in 3Q19, mainly due to lower revenue and higher minorities.

Maintain HOLD Call

Prospects for SP Setia remain challenging due to the slow property market recovery. We cut our RNAV/share estimate to RM2.96 from RM3.23 previously to reflect a lower DCF value for its property projects. Based on a higher 50% discount (increased from 40% previously) to RNAV, we reduce our TP to RM1.48 from RM1.94 previously. The higher discount reflects the elevated earnings forecasts risk.

Source: Affin Hwang Research - 14 Nov 2019