1Q19 CNP of RM52.8m is broadly within our (15%) and consensus (12%) expectations, while 1Q19 sales of RM718m is also broadly within as we expect stronger contributions in coming quarters. No dividends, as expected. Maintain FY19-20E CNP of RM357-549m on the back of FY19-20E sales of RM5.65-5.71b while unbilled sales of RM10.95b provide around three years earnings visibility. Maintain OP with an unchanged TP of RM2.45.

1Q19 CNP* of RM52.8m is broadly within our and consensus expectations at 15% and 12%, respectively. We expect stronger quarters ahead as the product margin mix is expected to normalise in coming quarters. 1Q19 sales of RM718m are also deemed broadly within at 13% of managements and our FY19E sales target of RM5.65b, as we are banking on a strong 2H; note that the final quarter sales usually makes up 37-46% of full-year sales. 1Q19 sales were mostly from the central and southern regions from projects such as Bandar Kinrara and Alam Impian, and Setia Business Park II. No dividends, as expected.

Results’ highlights. YoY, top-line was up 32% on stronger recognitions. However, higher operating cost (+29%) in line with top- line growth, and lower other income (-29%) which tends to fluctuate on a quarterly basis, caused EBIT margin to contract by 2.6ppt. This coupled with; (i) higher financing cost (+6%), (ii) higher effective tax rate of 38.4% (vs. 14.8%), and (iii) higher MI due to higher contributions from I&P and other JV’s, caused CNP to decline by 7%. QoQ, top-line was down by 15% due to lower recognitions this quarter, on the back of flattish EBIT margin of 21%. However, CNP was up by 142%, mainly due to the absence of; (i) iRCPS interest cost, which is incurred semi-annually, and (ii) perpetual bond financing cost, which has been redeemed. Net gearing increased to 0.59x (4Q18: 0.54x) which is on the higher-end of our comfort levels of 0.5-0.6x. Positively, inventories eased slightly YoY to RM1.5b (from RM1.6b).

Outlook. Management is maintaining its FY19E sales target of RM5.65b, which includes land sales, backed by new launches worth RM6.5b. Upcoming launches will be focused on landed residentials, located in; (i) Klang Valley on projects such as Setia Alam, Bandar Kinrara, Alam Impian, Setia Alamsari, Temasya Glenmarie, Setia Tropicale, Setia Ecohill 2, KL Eco City and Setia Sky Seputeh – Tower B, and, (ii) Johor projects, namely Setia Tropika, Bukit Indah Johor, Setia Eco Gardens and Taman Industri Jaya and . Besides inventory clearing efforts, the group has earmarked RM1.18b worth of non-core assets for disposal over FY19-20.

Maintain FY19-20E CNP of RM357-549m on the back of FY19-20E sales of RM5.65-5.71b. Unbilled sales of RM10.95b provide c.3 years earnings visibility. At current levels, FY19-20E dividend yields are decent at 3.3-4.8%.

Maintain OUTPERFORM with an unchanged Target Price of RM2.45 based on SoP discount of 68% to FD SoP of RM7.75. We believe we have priced in most downside risk to earnings and valuations for now, and as such are comfortable with our OP call given steep sell downs YTD (-10% vs. large cap developers under our coverage gaining an average of 6%). Our applied discount is pegged closer to the -2.0SD level (which is also in line with our universe -1SD trough valuations) given disappointments seen over FY18, including weak earnings delivery, softer-than-expected dividends, relatively high net gearing with low FY19-20E ROEs of 2.5%-3.8%, implying that earnings have to play catch-up to normalize (low teens).

* Note our CNP is based on profit attributable to ordinary shareholders i.e. have deducted Perpetual Bonds and iRCPS (A & B) interest costs. Note that consensus’ estimates have defined their CNP as before iRCPS interest costs, resulting in much higher estimates.

Source: Kenanga Research - 10 May 2019