1H17 CNP of RM241.5m came broadly within expectation given anticipation of stronger Battersea Ph1 contributions in 2H17. 1H17 sales of RM2.07b is also on track with management’s and our target of RM4.0b. Interim dividend of 4.0 sen proposed with DRP is also largely within expectations. Anticipating completion of I&P acquisition by year-end. Maintain earnings. Reiterate OUTPERFORM with an ex-all TP of RM4.08.

1H17 CNP of RM241.5m is broadly within expectations. Although it only made-up 32% each of street’s and our full-year estimates, we expect lumpier Battersea Ph 1 contribution, which will be mainly felt in 3Q17, which will also be a peak-earnings quarter. Sales over 1H17 of RM2.07b is in-line with expectations at 52% each of management’s and our FY17E sales target of RM4.0b. It was driven by 52% local and 48% overseas sales – notably, the group launched its Sapphire By The Gardens, Melbourne (GDV: RM1.24b) which saw strong take-ups of 70% since the launch in Jun 2015. Interim dividend of 4.0 sen was proposed, with the Dividend Reinvestment Plan (up to entire interim portion), which we consider on track at 30% of our FY17E NDPS of 13.2 sen as final dividends tend to be lumpier.

More contributions from Battersea Ph1. QoQ, 2Q17 CNP rose by 30%. Revenue was down by 15% due to timing of recognition but was more than compensated by Battersea Ph 1 which saw another c. 20% of deliveries, resulting in a sharp net increase of JCE/associates earnings to RM69.9m from last quarter where it was in the red. YtdYoY, 1H17 CNP was slightly lower by 3% as local billings recognition has been slower this year as: (i) last year saw major project completions, including initial phases of KLEC and Eco Sanctuary, Singapore, (ii) timing of local projects billings will be felt later on as the bulk of launches took place in 4Q16. Net gearing remains comfortable at 0.23x.

Pending completion of I&P acquisition by year-end, which includes a rights issue of up to RM1.2b, iRCPS rights issue of RM1.2b, and bank borrowings of up to RM1.65b – after which the company will pursue up to RM1.2b placement to improve shareholding spread and liquidity while pumping up working capital. Post the acquisition, it will take time to derive the true potential of I&P’s land banks which are in similar areas as SPSETIA; our preliminary estimates are RM50b GDV for I&P*. Hence, going forward, management is likely to tone down its land banking momentum and concentrate on execution .To date, the group has launched RM2.53b worth of new projects and intends to launch another RM2.94b in 2H17 which will be largely local projects (Klang Valley) which emphasis on landed and/or affordable housings.

No changes to earnings. Unbilled sales of RM8.0b provides slightly over 2-year visibility. Note that we have built-in for I&P’s acquisition and funding in our estimates**.

Maintain OUTPERFORM with an ex-rights TP of RM4.08 based on 45% property RNAV discount or an implied 46% FD SoP discount on our FD SoP of RM7.59. Our applied discount is narrower than sizeable listed developers with vast land banks (e.g. UEMS and IOIPG, which are pegged at 66% and 57% discount, respectively) due to SPSETIA’s significantly stronger sales base. However, we qualify that investors will need to take a long-term view on the stock as earnings (particularly from I&P) will need to catch-up for share price to properly re-rate.

Risks include: (i) weaker property sales, (ii) margin fluctuations, (iii) changes in real estate policies and lending environment, (iv) timing of overseas/local billings.

Source: Kenanga Research - 18 Aug 2017