FY17 CNP of RM766m includes I&P’s full-year earnings; stripping-out I&P, SPSETIA FY17 CNP of RM639m came below expectations. Enlarged sales achieved were RM4.92b of which RM4.06b is from SPSETIA, in-line with management’s and our target. Final dividend of 11.5 sen declared (FY17: 15.5 sen). Reduce FY18 CNP by 7%. Maintain OUTPERFORM with an unchanged TP of RM4.10.

I&P boosted earnings. The group reported FY17 CNP of RM766m, which included I&P’s FY17 earnings (refer overleaf). Stripping-out I&P, SPSETIA FY17 CNP was at RM639m which came below expectations at 85% and 84% of street’s and our full-year estimates, respectively. The disappointment is mainly due to our aggressive billings and margin assumptions. Enlarged sales was at RM4.92b, of which RM4.06b is from SPSETIA, which is within our and management’s initial targets of RM4.00b. Final dividend of 11.5 sen was declared, bringing FY17 dividends to 15.5 sen which exceeded our estimates of 13.1 sen; we think this is largely due to additional earnings from I&P as pay-out are still at 60%.

YoY, FY17 CNP fell by 25% (using restated FY16) on weaker billings as top-line slid by 21%, even though EBIT margin was stable at 25% while Battersea Ph 1 saw its main earnings delivery this year. Based on just SPSETIA’s figures, its FY17 CNP did decline by 21% on similar reasons. Note there is no QoQ comparison available due to I&P’s inclusion. Post the proceeds from the rights issuance, net gearing has reduced to 0.11x (3Q17: 0.37x).

Management sets RM5.0b sales target for FY18 on the back of RM7.07b worth of launches (61% local, 39% international); this includes Setia Fontaines (Seberang Perai Utara), Temasya Putra (next to Setia Alam), Daintree Residence (Toh Tuck Road, Sg) and UNO Melbourne while the others will be from on-going townships and realization of its inventories. Local launches emphasis will be on “urban affordable”. In terms of land banking, SPSETIA is not actively seeking new landbanks but is open if the land is attractive.

Reducing FY18E CNP by 7%. Although we have upped our FY18E sales to RM5.01b from RM4.54b, we rejigged our launch pipelines and margins, which have resulted in a downward revision in earnings. We also introduce FY19E estimates and target sales of RM5.03b. Unbilled sales of RM7.72b provide 2-year of earnings visibility.

Maintain OUTPERFORM with an unchanged TP of RM4.10 based on an implied 44% discount on our FD SoP of RM7.31. 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. We also hope the recent placement will help alleviate the tight trading liquidity.

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 - 28 Feb 2018