1Q18 CNP of RM61.5m is deemed broadly within (9%/10% of market/our estimates) as future quarters will be driven by inventory-led sales, which have immediate earnings impact. New sales of RM1.11b are on track to meeting FY18E target of RM5.0b. Maintain earnings estimates. However, we may look to reduce earnings next quarter if inventory sales are not evident. Reiterate OUTPERFORM with an unchanged TP of RM3.50.

Broadly in-line. Even though 1Q18 CNP of RM61.5m only made-up 9% and 10% of street consensus and our FY18E estimate, respectively, we deemed this as broadly in-line. This year, the group is focused on clearing inventories, which may involve some potential en- bloc deals. Thus, revenue recognitions could be lumpy. To date, the group has RM1.61b inventories (at cost) in its books to clear. Positively, new sales of RM1.11b was achieved in 1Q18, making up 22% each of our and management’s FY18E targets of RM5.0b each, which is a very commendable as 1Qs are typically weak. The boost was from overseas projects, especially Australia, which makes-up 42% of 1Q18 sales. No dividends, as expected.

Sharp drop in property billings from ‘high base’ effects. QoQ, 1Q18 CNP fell by 81% on the back of: (i) revenue dropping 55% due to fewer project completions, and (ii) a 113% drop in contributions from associates/JCE as bulk of Battersea Ph 1 delivery took place last quarter. YoY, 1Q18 CNP declined by 45% because of: (i) 1Q17 enjoyed bullet contributions from Parque Melbourne, (ii) the current quarter sees weaker I&P billings (recall that I&P acquisition was completed last quarter), (iii) a significant increase in administrative & general expenses by 40% to RM92.0m largely driven by the acquisition costs of I&P. Net gearing has increased to 0.32x (4Q17: 0.11x) but remains at a comfortable level.

Earnings to be driven by more inventory sales. Management is still committed to its FY18E sales target of RM5.0b. Upcoming launches include new phases from the on-going projects (e.g. Setia Alam, Setia Ecohill, etc) and I&P’s projects (Setia Alamsari, Alam Impian, Taman Pelangi Indah). Internationally, Daintree Residence (Tok Tuck Road, Singapore) (GDV SGD480m) will be launched in 3Q18. As mentioned earlier, the group will also be looking to clear inventories, which should go straight to the bottom-line on recognition. However, we caution investors that if 2Q18 does not see sufficient inventory sales, which cause earnings to miss our expectations again, we will look to reduce estimates with implications on ratings.

No changes to earnings. Unbilled sales of RM7.95 provide 2-year visibility.

Reiterate OUTPERFORM with an unchanged TP of RM3.50 based on discount of 54% (-1.0 SD levels) to its FD SoP of RM7.67. We believe this is unjustified as the valuation of I&P has yet to be reflected in SPSETIA’s current share price. However, in light of investors’ aversion towards property stocks, investors may need to take a longer- term view on the stock for value to be reflected in its share price.

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 - 15 May 2018