9M17 CNP of RM459m is broadly within expectation as we are expecting a stronger 4Q17 on lumpy billings. Sales for the period of RM2.82b are on track to meet management’s and our FY17E sales targets. No dividends as expected. Maintain earnings. Reiterate OUTPERFORM with an ex- rights TP of RM4.08.

Broadly within expectations. 9M17 CNP of RM459m is broadly within expectations at 61% and 60% of street and our FY17 estimates, respectively. We are expecting a stronger 4Q17 as we expect some lumpy recognition. SPSETIA chalked up RM2.82b sales over 9M17 (59% local, 41% overseas) which is on track at 71% of management’s and our FY17 sales target of RM4.00b each. No dividends, as expected.

Boosted by Battersea Ph 1 delivery. QoQ, 3Q17 CNP leaped by 60% primarily due to: (i) a 97% increase in associate/JCE contributions as Battersea completed 8 out of 12 blocks delivery, (ii) 6.9ppt expansion in EBIT margins on higher project margin mix recognition. YoY, 9M17 grew 20% because of Battersea Ph 1 lumpy deliveries and lower effective tax rate of 16.9% (-16.7ppt YoY) as the UK has a lower corporate tax rate.

Management is confident of achieving FY17E sales target of RM4.0b. Over 4Q17, SPSETIA will roll out more mid-range landed residential projects in Klang Valley (Setia Alam, Setia Eco Hill, Setia Eco Templer), Setia Sky Seputeh Tower B and more KL Eco City components with a total launch value of RM2.03b. Earnings-wise, we look forward to a strong 4Q17 as we expect: (i) the final 2 blocks recognition of Battersea Ph 1 (completed in Oct 2017), (ii) higher billings from lumpy sales from projects with very advanced progress completion as the company is focused on clearing its WIPs/inventories. Pending completion is the acquisition of I&P, which should be concluded by year-end (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. Note that shareholders’ approvals will be sought from the upcoming EGM (16-Nov).

No changes to earnings. Unbilled sales of RM7.05b provide c. 2-year visibility. Note that we have built in I&P’s acquisition and funding into our estimates**.

Maintain OUTPERFORM with an ex-rights TP of RM4.08 based on 45% property RNAV discount or an implied 46% 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 70% and 59% 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, and (iv) timing of overseas/local billings.

Source: Kenanga Research - 10 Nov 2017