FY18 CNP of RM208m was sharply below expectations while corresponding sales exceeded estimates at RM5.12b thanks to land sales. Full-year dividends of 8.55 sen also fell short of our estimates. Management sets higher FY19E sales target of RM5.65b (includes land sales). FY19E CNP is tweaked slightly higher (+4%). Downgrade to MARKET PERFORM with an unchanged TP of RM2.45 after recent rebound and absence of fresh catalyst.

FY18 CNP* of RM208m was sharply below expectations, accounting for 48% of street’s FY18E estimates and 75% of ours. FY18 PBT of RM991m was spot-on with our estimates (RM985m), but the negative deviation to CNP stemmed from higher than expect MI contributions and effective tax rates. This is the third consecutive quarter of earnings disappointment. FY18E sales of RM5.12b exceeded management’s target of RM5.0b (+4% YoY) and our more conservative target of RM4.72b, thanks to a land sale (Jln Ampang land sale: RM449m). Note that the management did not indicate that land sales will be part of its sales target and neither did we reflect this in our forecasts; if we strip this out, property sales amounted to RM4.68b which is close to our initial estimates. Final dividend of 4.55 sen brings full-year dividends to 8.55 sen which falls short of our FY18E DPS of 15.5 sen.

iRCPS interests eats into profits. QoQ, 4Q18 revenue was marginally higher (+3%) while PBT rose sharply by 30% thanks to an 88% reduction in finance cost and narrower losses arising from associate/JCE contributions. However, this was eroded due to iRCPS A & B interest payment which happens semi-annually and higher MI due to more recognition of I&P projects, which are not 100% owned. YoY, FY18 CNP was sharply lower by 76% due to absence of overseas contributions (e.g. Battersea) and maiden iRCPS A & B interest payments amounting to RM68m. Net gearing has increased to 0.54x (3Q18: 0.44x) which is close to our comfort levels of 0.5-0.6x. Positively, inventories have eased YoY (refer overleaf).

Management sets a higher FY19E sales target of RM5.65b, which includes land sales (amount not specified). This is backed by new launches worth RM6.8b with the bulk of it being in Klang Valley; new project launches include Setia Mayuri, Setia Safiro, Setia Alaman and Setia Tropicale while the rest are new phases of on-going projects. We also do not expect any major landbanking has SETIA has its hands full with I&P while net gearing has exceeded 0.5x. Besides aggressive inventory clearing efforts, the group has earmarked RM1.18b worth of non-core assets for disposal over FY19-20E.

Tweaking FY19E CNP slightly higher (+4%) post house-keeping and us raising FY19E sales by 12% to RM5.65b (inclusive of RM450m land sales). We also introduce FY20E estimates and sales of RM5.71b. Unbilled sales is at a record-high of RM12.32b thanks to the addition of the Battersea Phase 2 commercial portion. This provides c. 3 years earnings visibility.

Downgrade to MARKET PERFORM (from OP) with an unchanged TP of RM2.45 based on SoP discount to 68% to our FD SoP of RM7.69. Our discount is pegged closer to the -2.0SD levels given the earnings disappointments, weaker than expected dividends and relatively high net gearing. Although sales have been stellar while we laud the management for quick integration and monetization of I&P projects, we note that FY19-20E ROEs remains very low at 2.5%-3.8%, implying that earnings have to significantly catch-up to normalize (low teens). Share price has rebounded by 11% YTD, in-line with the KLPRP index, and in the absence of clear earnings catalysts, we believe our downgrade is warranted.

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

Source: Kenanga Research - 28 Feb 2019