SP Setia’s 1Q20 results were below market and our expectations. Net profit plunged 46% yoy to RM28m in 1Q20, mainly due to lower revenue. Core net profit saw a sharper drop of 67% yoy to RM28m in 1Q20. We cut our 2020-21E core EPS by 4-27% to reflect weaker property sales and progress billings. Its current core 2021E PER of 17x is not attractive but valuation is supported by a Price/book of 0.26x. We maintain our HOLD call with a lower TP of RM0.86, based on an unchanged 60% discount to our revised RNAV of RM2.17.

Below Our Expectation

Net profit of RM28m (-46% yoy) in 1Q20 comprises only 16% of our previous full-year forecast of RM180m and 8% of the market consensus estimate of RM331m. We were surprised by the low revenue, as SP Setia’s property sales and progress billings were adversely affected by the closure of its show galleries and most of its construction sites under the government’s Movement Control Order (MCO). Revenue fell 19% yoy and 12% qoq to RM703m in 1Q20.

Weak Sales

SP Setia secured RM470m sales in 1Q20, compared to RM718m in 1Q19. We believe the weaker sales were due to the weak property market sentiment due to the pandemic and the closure of show galleries when the MCO went into force.

Earnings Decline

PBT fell 18% yoy and 11% qoq to RM104m in 1Q20, mainly due to weaker revenue. Gross profit margin was stable at 30% in 1Q20 compared to 30.5% in 4Q19 and 28.4% in 1Q19. Net profit saw a sharper 46% yoy decline due to the high effective tax rate of 46% in 1Q20. We believe prospects for SP Setia remain challenging amidst the weak property market despite its operations resuming slowly with the opening of its sales galleries since 13 May 2020 and construction works re-started for some of its projects.

Maintain HOLD Call

We cut our RNAV/share estimate to RM2.17 from RM2.26 previously to reflect a lower DCF value for its property projects (assuming lower sales and slower progress billings), partly offset by the positive impact of rolling forward the DCF base year to 2021E. Based on an unchanged 60% discount to RNAV, we reduce our TP to RM0.86 from RM0.92 previously. Maintain our HOLD call.

Source: Affin Hwang Research - 22 May 2020