Period 3Q14/9M14

Actual vs. Expectations 9M14 core earnings of RM239m came below expectations, making up 63% and 51% of our full-year forecast and street’s estimates, respectively. Besides weaker-than-expected billings as 9M14 topline only accounted for 68% of our FY14E revenue estimate, the group suffered higher-than-expected costs associated with GST provisioning and LTIPs. This is the 3^rd consecutive disappointing quarter for the group.

 The group registered RM3.8b sales for 10M14, which is considered broadly within expectation as it made up 76% of estimates. For 3Q14, sales were RM1.4b which was largely driven by Battersea Power Station, UK Phase 2 residential launch.

Dividends  Already paid out single-tier interim dividend of 4.0 sen, which makes up 35% of our FY14E NDPS of 11.5 sen (3.5%). Typically, final dividends are higher than interims.

Key Results Highlights QoQ, core earnings rose by 39% albeit the 5% decline in topline because the preceding quarter incurred much higher GST provisions and LTIP expenses of RM33m vs. the current quarter’s RM20m. Also, PBT margins improved by 3.4ppt to 20.8% due to certain project completions which tends to push up margins.

 Ytd-YoY, 9M14 revenue rose by 19% on higher billings given stellar sales in previous years. But core earnings slid by 18% due to the full 9M impact of the LTIP and commencement of GST provisioning from 2Q14 onwards. Additionally, the group is chalking up more interest expense arising from the Perpetual Bond issuance.

Outlook  Acting President/CEO Dato’ Voon Tin Yow has given notice of his intention to resign from his current position

and as a member of the Board, by 1 Jan 2015. We were taken by surprise as we had expected Dato’ Voon to serve up to May-2015. Dato’ Khor Chap Jen (previously Acting Deputy President & COO) and Datuk Wong Tuck Wai (previously Exec. VP) has been elected by the Board to assume positions as Acting President/CEO and Acting Deputy President/COO, respectively. We believe that this may cause more uncertainties with regards to the direction of SPSETIA, which explains the recent sharp selldown. Going forward, the re-rating catalyst for the group lies with clarity of management’s direction and potential newsflow involving SIME DARBY, as speculated by the media.

Change to Forecasts Lowering FY14-15E core earnings by 15%-4% as we impute for higher LTIP and GST provisioning costs. Note that dividends have also been adjusted lower following the earnings downgrade. The group has unbilled sales of RM11.8b which provides 3 years visibility, largely derived from the UK and Australian projects.

Rating Maintain MARKET PERFORM

Valuation  No changes to TP of RM3.30 based on 40% discount to its FD RNAV of RM5.46. We reckon fundamentals are no longer the main driving force of SPSETIA’s share price and believe that investors would like more clarity on its future leadership and clarity on the newsflow involving SIME DARBY. Investors should adopt a trading stance.

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

Source: Kenanga