Period

2Q15/1H15

Actual vs. Expectations

1H15 core earnings (CNP)1 of RM328.5m was within our expectation, but slightly above market’s, making up 56% of street’s and 52% of our full-year estimate. Market may still be conservative with their overseas project margins.

The group registered RM1.97b sales over 7M15, which we deem as below expectation against management’s and our FY15E target of RM4.6b. Overseas projects (mainly Battersea) drove 48% of sales, while Klang Valley projects (42%) was the other driver.

Dividends

Proposed interim single-tier dividend of 4.0 sen, which makes up 32% of our FY15E NDPS of 12.4 sen, which is typical since final dividends tend to be much higher.

Key Results Highlights

QoQ, CNP ballooned by 124% to RM227.2m largely due to delivery of Fulton Lane (Tower 1) @ Melbourne; recall, their Australian projects are recognized on a completion basis. Fulton Lane’s margin pulled-up the overall group PBT margin by 4.5ppt to 21.1%.

YoY, 1H15 CNP also rose, by 160% due to similar reasons. Net gearing remains manageable at 0.35x.

Outlook

The group has changed its FYE to 31-Dec from 31-Oct. We opine that SETIA’s management is trying to signal to the market that it is independently run and to mark a new era for the company.

Management is trimming FY15E sales target by 13% to RM4.0b even though there is an additional two months in this financial year. We rather have the company remaining conservative with its guidance, considering the challenging property landscape (refer overleaf).

Expect the group to see another lumpy contribution from Fulton Lane Tower 2 in 2H15.

Change to Forecasts

Raised FY15E CNP higher by 12% but tweaked FY16E lower by 1%. Although we have trimmed FY15E sales to RM4.0b from RM4.6b, the main project affected is Battersea whose recognition is on completion, i.e. no impact to FY15-16E earnings. The main reason for our earnings adjustment is the change in FYE. Unbilled sales of RM11.0b provide more than two years visibility.

Rating

Maintain OUTPERFORM

Valuation

No change to TP of RM3.95 (30% discount to its FD RNAV of RM5.61) which is reflective of the takeover offer price back in Jan-12. The stock will be enjoying bullet recognitions from overseas projects, which will take earnings to new historical and industry highs; this is attractive in current market conditions where earnings certainty is appreciated by investors. The icing on the cake of course is M&A which may involve PNB property units, which will bring final resolution to the group’s long-term management team profile. Notably, 14MTH-FY15E dividend yield of 4.1% is more attractive than big-cap developers’ (>RM3b mkt cap) average of 2.7% (excl. UOADEV). We reckon our current payout assumption of 50% could be conservative, considering the bullet recognition from Fulton Lane this year; however, higher payouts hinge on whether they will continue with their overseas landbanking plan.

Risks to Our Call

Weaker-than-expected property sales. Higher-thanexpected sales and administrative costs. Negative real estate policies. Tighter lending environments. Absence of a long term management team.

Source: Kenanga Research - 16 Jun 2015