Period

3Q15/9M15

Actual vs. Expectations

9M15 core earnings (CNP) of RM590m made up 84% and 96% of our and street’s 14MFY15E earnings, respectively. This is ahead of market but broadly within our expectation as we expect the remaining period to be weaker given lesser overseas bullet contributions. We reckon market may be overly conservative with its overseas earnings’momentum and margins.

Sales at RM2.54b for 9M15 is on track as it made up 64% of both our and management’s 14MFY15E target of RM4.0b. Key drivers remain the Klang Valley (45% of sales) and Battersea (37% of sales).

Dividends

None, as expected.

Key Results Highlights

QoQ, 3Q15 CNP was up by 15% due to significant group pretax margin expansions (+3.7ppt) given higher-thanexpected margins from Fulton Lane Tower 2 Australia delivery.

YoY, 9M15 CNP was higher by 157% largely due to the full project delivery of Fulton Lane (Tower 1 & 2) this year.

As a result of the bullet contributions, net gearing has fallen to 0.24x from 0.35x last quarter.

Outlook

Next year, we expect lumpy recognitions from the completion of Battersea Ph 1. Meanwhile, Battersea Ph 3 has picked-up momentum with c.60% take-up rate. Positively, the Northern Line extension has begun, which bodes well for the subsequent phases of Battersea. Going forward, the group will be launching affordable apartments in Jelutong, Penang and possibly Eco Templer by year-end while its sales will be mainly driven by on-going projects. The group is maintaining its FY15E sales target of RM4.0b.

Change to Forecasts

No changes to earnings. Unbilled sales have dropped by 15% YoY to RM9.9b due to delivery of Fulton Lane; but it still provides 2 years of earnings visibility vs. industry average of 1-1.5 years.

Rating

Maintain OUTPERFORM

Valuation

Maintain TP of RM3.95 (30% discount to its FD RNAV of RM5.61) or on par with the takeover offer price back in Jan-12. SPSETIA 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 longer earnings’ visibility is valued 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; however, investors will need to be patient as related newsflow has quietened down. Notably, 14MFY15E-FY16E dividend yield of 4.4%-5.0% is more attractive than big-cap developers’ (>RM3b mkt cap) average of 3.0% (excl. UOADEV). We reckon our current payout assumption of 50% could be conservative, considering the bullet recognition from Fulton Lane this year; but higher payouts hinge on whether they will continue with their overseas and local landbanking plans.

Risks to Our Call

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

Source: Kenanga Research - 11 Sep 2015