• SP Setia (SPSB) reported a net profit of RM55m in 4Q20 compared to a net loss of RM263m in 3Q20 with the absence of exceptional losses. Core earnings were up 11% qoq to RM81m in 4Q20 on a sustained recovery from a loss in 2Q20.
• It achieved among the highest sales in the industry at RM3.82bn in 2020, meeting its target for the year. SPSB has set a sales target of RM3.8bn in 2021 by focusing on inventory sales and selective launches for its existing projects.
• Core earnings of RM181m (-33% yoy) were above our expectation. We lift our core EPS forecasts by 12-16% for 2021-22E to reflect higher sales and progress billings. Maintain HOLD with higher TP of RM0.98, based on a lower 50% discount to RNAV.

Core Earnings Above Our Expectation

SPSB reported a net loss of RM321m in 2020, mainly due to the RM140m impairment of inventories and RM336m impairment of its Battersea Project joint venture. Core net profit of RM181m in 2020 was well above the consensus forecast of RM68m and our estimate of RM143m. We were surprised by the ramp-up in revenue (+3% qoq) as progress billings accelerated in 4Q20 despite the imposition of the Conditional Movement Control Order (CMCO). Revenue fell 18% yoy to RM3.23bn in 2020 due to the disruptions caused by the pandemic and MCO, while EBIT declined 24% to RM507m on a margin squeeze.

Strong Sales Achieved

SPSB achieved sales of RM3.82bn in 2020, including RM695m from sales of completed inventories. Overseas sales contributed 19% of total sales and the central region in Malaysia contributed the bulk of the sales at 62%. High unbilled sales of RM10.1bn will likely support earnings recovery in 2021-23E. SPSB has set a sales target of RM3.8bn in 2021 to match the level in 2020.

Earnings Upgrade

We lift the core EPS forecasts by 12-16% in 2021-22E to reflect higher sales and progress billings as property demand recovers gradually with the roll-out of Covid-19 vaccines and easing of lockdowns. The lumpy recognition of earnings from its London and Melbourne projects on completion will also lift 2021E earnings. We introduce our 2023E earnings (+15% yoy) assuming earnings growth accelerates as the market recovers. We reiterate our HOLD call on SP Setia as prospects remain challenging in Malaysia and property demand is expected to see a gradual recovery. We lift our TP to RM0.98 from RM0.80 as we lift our RNAV/share and apply a narrower 50% discount (60% previously). Key upside/downside risks are faster/slower property demand recovery.

Source: Affin Hwang Research - 26 Feb 2021