9M18 CNP of RM189m is below expectations, for the second consecutive quarter, owing to weak margins and billings. Corresponding sales of RM3.22b also came weaker than expected. No dividends as expected. Management keep the RM5.0b sales target intact while they expect Battersea Commercial Ph 2 deal to be concluded by year- end. Lowered FY18-19E CNPs by 23-26%. Maintain OUTPERFORM but with a lower TP of RM2.45.

Earnings came below expectations. 9M18 CNP* of RM189m came below expectations, accounting for 53% of ours and 38% of street’s FY18 estimates, and is the second consecutive quarter of earnings disappointments. Development margins were much weaker than expected due to lower margin product mix and inventory clearing efforts, which carry discounts/rebates, while billings were also slightly weaker than expected. 9M18 sales of RM3.22b only made up 64% of management’s and our FY18E targets of RM5.0b each; notably, 72% of sales were locally driven while the remaining were international. Although the group has demonstrated its ability to ramp up sales in 4Qs over the last two years, we reckon that Budget 2019 announcements may pose further challenges, and hence we deem this as below expectations. No dividend, as expected.

Lacking overseas bullet contributions. QoQ, 3Q18 CNP increased by 4% to RM65.2m on the back of stable revenue (+7%). Although GP margin compressed by 6.4ppt to 28.2% while its associates/JCE contributions dipped into the red (-RM8.8m) as there were no Battersea sales for the quarter plus a higher effective tax rate of 37% due to non- deductible expenses, this quarter enjoyed the absence of the iRCPS-A dividends payment. YoY, 9M18 CNP slid 67% due to: (i) lack of overseas bullet contributions at both the subsidiary and JCE/associate levels, (ii) a sharp 88% rise in financing cost on borrowings related to I&P acquisition where interest costs could not be capitalized, and (iii) margin compression as mentioned above. Net gearing remained stable at 0.44x compared to last quarter. We also note that completed inventories rose to RM1.69b from last quarter’s RM1.47b (stated at cost).

SPSETIA is sticking to its RM5.0b sales target this year, backed by RM6.24b worth of new launches this year (including RM1.60b for the remaining part of the year). Management is also confident that the sale of Battersea Phase 2 Commercial project to EPF and PNB (estimated value of GBP1.6b) is expected to be concluded before year-end which would certainly alleviate cash-call concerns; positively, this could allow for progressive recognition of the project; note that we have yet to impute for this into our estimates pending finalization of the deal. SPSETIA is still actively clearing its inventories and will look to dispose non-strategic landbanks, which will help alleviate its net gearing levels. Nonetheless, we prefer to be conservative and have lowered FY18- 19E CNPs by 23-26% (refer overleaf).

Maintain OUTPERFORM with a lower TP of RM2.45 (from RM2.60). We widened our SoP discount to 68% (from 66%) which is now pegged closer to the -2.0SD levels, given the earnings disappointments, to our unchanged FD SoP of RM7.69. Valuations have made new lows at these levels as its Fwd. PBV is trading at trough levels of 0.6x, while the current share price seems to suggest that the I&P acquisition has not been properly reflected in SPSETIA’s valuations. Dividend yields at current levels are also attractive at 7.7%. We think the stock has been overly sold down due to concerns about the Battersea commercial deal, which should see a resolution soon. However, considering investors’ aversion towards property stocks, a longer-term view is required on the stock, particularly as trading liquidity remains relative tighter compared to other peers.

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 Nov 2018