9M16 CNP was broadly within expectations. 10M16 sales of RM2.40b made up 77% of our and 69% of management’s FY16E target of RM3.5b. We upgrade our FY16E sales target to RM3.5b (from RM3.1b), resulting in earnings upgrade by 4.8% in FY17E. Upgrade to OUTPERFORM (from MP) and increase TP of RM3.53 (from RM3.40) on a lower discount to FD RNAV.

9M16 CNP of RM383m was broadly within expectations, at 57% of consensus FY16 estimate and 55% of ours as we expect lumpy contributions from Parque@Melbourne and Battersea Ph1 in 4Q16. 10M16 sales of RM2.4b is also deemed within our estimate, at 77% of our FY16 target of RM3.1b, and broadly within management’s target (69%) of RM3.5b. No dividends, as expected.

Result Highlights. 3Q16 CNP improved only slightly (+7% QoQ) to RM134.1m despite high top line growth (+25%) from locally driven projects due to: (i) higher marketing and fixed cost which resulted in flattish PBT margins, and (ii) higher effective tax rates on certain one-off non-tax deductible expenses. YoY comparable is not available due to changes in year-end. Net gearing has increased to 0.40x from 0.37x

Upgrading our FY16E sales target to RM3.5b (from RM3.1b) while the Group’s sales target is maintained at RM3.5b. SPSETIA is delaying some of its apartment launches and bringing forward the launches of more mid-priced range landed properties. The Group has recently launched RM910m worth of projects in Oct 2016 from: (i) ViiA Residence (GDV: RM450m) and (ii) Setia Sky Seputeh (GDV: RM460m) which has not been recognized in 3Q16. On top of that, they have another RM1.0b new launches for 4Q16, i.e. a total of RM1.9b worth of new launches to drive 4Q16 sales. Assuming a conservative take-up of 60%, we believe the group can generate just over RM1.0b sales in 4Q16, assuming no delays in launches. We gather that 40%-50% of FY16 sales will be driven by the ’10-90’ scheme, as none of the remaining RM1.0b launches will be on the ‘10-90’ scheme. Note that SPSETIA is allowed to recognize its local ’10-90’ sales on the typical stages of progress billings instead of ‘on completion’ basis. The iRCPS issuance of RM1.1b is expected to be completed by 4Q16 and given the bullet deliveries from Parque and Battersea, we expect net gearing of 0.27x by year-end. All in, we expect stronger sales in 4Q16 and thus revise our FY16 sales target upwards to RM3.5b (from RM3.1b).

Increasing FY17E by 4.8%. In line with slightly higher sales estimates in FY16 (to RM3.5b from RM3.1b) we are increasing FY17E earnings by 4.8% on higher earnings recognition in FY17 as the bulk of the launches will be towards the tail-end of FY16. As such, we leave FY16E earnings unchanged.

Upgrade to OUTPERFORM from MP with a higher TP of RM3.53 (from RM3.40) based on a narrower discount of 38% (slightly above mean levels) from 40% to our FD RNAV of RM5.70. Recall that in our recent note on its Penang acquisition, we mentioned that we may narrow our RNAV discount should 9M16 sales meet at least 75% of its FY16 target and considering the lumpy launches in 4Q16, sales should meet expectations. Share price has also taken a beating recently due to market sell-downs, providing an opportunity to take advantage of its attractive FY16-17E yields of 5.3-4.6%.

Risks include: (i) weaker property sales, (ii) margin issues, and (iii) changes in real estate policies and lending environment

Source: Kenanga Research - 16 Nov 2016