Period  3Q13 / 9M13

Actual vs. Expectations  9M13 net profit of RM291m was below expectations, accounting for 64% of both street and our FY13E earnings estimates. This was due to overly aggressive estimates as we found out that 9M13 billings were skewed towards high-rises which typically mean slower billings at initial stages.

 Positively, 10M13 sales hit a new high of RM6.3b (+48% YoY) which has exceeded both our and the company’s full-year target of RM5.5b on account of higher-than-expected overseas project sales. Local sales of RM3.7b grew slightly at 5% YoY compared to the overseas projects which surged 4x to RM2.5b, making it the growth driver for SP SETIA.

Dividends  None, as expected

Key Results Highlights  QoQ, 3Q13 pretax profit was up 11% to RM145m on the back of +1.5ppt improvement in gross margins driven mainly by its Johor projects.

 YoY, 3Q13 earnings was flat at RM102m although revenue enjoyed a 16% growth due to higher billings. The quarter saw higher expenses of RM11.5m arising from the LTIP (alternative to ESOS), while group pretax margins eased 3.3ppt to 19.0%, particularly as the lower margin 18 Woodsville@Singapore commenced contributions and drag down overall profitability. Also, 3Q12 included land sales.

 YTD, 9M13 earnings growth would have been higher than 12% YoY given: (i) 23% rise in revenue and (ii) 53% increase in other income (higher interest income, Setia City Mall and Convention Center). However, the group has been landbanking aggressively and has more BTS projects (e.g. UK, Australia) resulting in a surge of interest expense to RM38m (+691%).

Outlook  Upcoming launches include Parque Melbourne (GDV: RM0.8b). It was reported in The Edge Weekly that PNB is looking to unlock its property assets in I&P Group S/B via SP SETIA. While the company may be enlarged after asset injection causing some near-term excitement, the question of leadership will continue to weigh on SP SETIA share price. Tan Sri Liew’s last put option expiration is in Mar-14, which also marks the end of his 3-yr management agreement.

Change to Forecasts  Lowering FY14E-FY15E estimates by 8% each. Unbilled sales are at an all time high at RM10b or 3 years visibility. (Refer overleaf for explanation).

Rating Maintain MARKET PERFORM

 We maintain our TP of RM3.60 based on 34% discount to its FD RNAV of RM5.46. We may look to widen our discount factor, pending our sector update which will address Budget-2014 concerns.

Risks to Our Call  Sector risks. Changes in management/leadership.

Source: Kenanga