1H19 CNP of RM125.3m is below our (37%) and consensus (35%) expectations on weaker-than-expected PBT margins, while 1H19 sales of RM1.98b also came below our estimate (at 37%) given the challenging property market outlook. We lower our sales target to RM4.55b (from RM5.40b) in line with management’s new target (prev. RM5.65b). Furthermore, lowered FY19-20E CNP by 22-18% to RM265- 387m on lower sales and margins. Downgrade to MP (from OP) on a lower TP of RM1.85 (from RM2.45).

1H19 CNP* of RM125.3m came in below our and consensus expectations at 37% and 35%, respectively. Top-line came in slightly above (at 57%) on the sale of British Embassy land making this quarter’s top-line lumpy (note that land sales are part of our CNP assumptions). However, bottom-line was dragged down by lower-than expected PBT margins of 15% (vs. our expectation of 20%) due to a weaker product margin mix as a result of the challenging property market conditions. Additionally, 1H19 sales of RM1.98b was also below management’s target at 35% (RM5.65b) and our expectations at 37% (RM5.40b) underpinned by weak property market conditions as investors adopted a wait-and-see approach on fears of a sluggish market outlook. 1H19 sales were driven by local sales from the central (60%) and southern (20%) regions. No dividends for now.

Results’ highlights. YoY-Ytd, top-line was up 39% on increased recognitions from existing developments as well as the sale of British Embassy land. PBT margin was down to 15% (vs. 40%) on the back of higher operating cost and a weaker product mix in 1H19. Note that the weaker PBT margin is also on the back of a high base in 1H18 due to a RM343m fair value gain from Setia Federal Hill Sdn Bhd. This coupled with higher effective tax rates of 30.9% (vs. 9.2%) caused CNP to increase by only 3%. QoQ, top-line was up by 54% due to similar reasons mentioned above, driving 2Q19 CNP up by 37% albeit higher cost of sales (+55%) and higher interest expense (+9%), and offset by lower effective tax rates of 26% (vs. 38%). Positively, inventories eased slightly YoY to RM1.4b (from RM1.5b).

Outlook. Management is lowering its FY19 sales target to RM4.55b (from RM5.65b), which includes land sales, backed by lower targeted launches of RM4.88b (vs.RM6.8b). Upcoming launches will be focused on landed residentials, located in; (i) Klang Valley on projects such as Setia Alam, Setia Eco Park, Setia Safiro, Setia Alamsari, Setia Ecohill 1 & 2, Setia Warisan Tropika and Bandar Kinrara, (ii) Johor projects, namely Setia Tropika, Setia Eco Gardens, Bukit Indah Johor and Taman Industri Jaya, (iii) Penang, Setia Fontaines, comprising mostly landed properties. Apart from inventory clearing efforts, the group has earmarked RM1.2b worth of non-core assets for disposal over FY19- 20.

Lowered FY19-20E CNP by 22-18% to RM265-387m. This is on lower sales of RM4.55-4.67b in FY19-20 (from RM5.40-5.41b) on the back of lower PBT margins of 17% each (from 20-18%), closer to recent quarters. Unbilled sales of RM10.67b provide c.3 years earnings visibility. At current levels, FY19-20E dividend yields are decent at 4.0-5.7%.

Downgrade to MARKET PERFORM (from OP) on a lower Target Price of RM1.85 (from RM2.45) based on a wider SoP discount of 76% (from 68%) to FD SoP of RM7.75 as we priced in more downside risk to earnings and valuations. Our applied discount is pegged closer to the -2.0SD levels (from between -1.5 to -2.0SD) which is also in line with our universe of -1SD to -2SD (trough valuations) given disappointments seen over FY18. We also remain bearish on the sector for now given the lackluster demand, in line with the slower market outlook, while its relatively high net gearing with low FY19-20E ROE of 1.9%-2.7%, implies that earnings have to play catch-up to normalize (to low teens).

Source: Kenanga Research - 15 Aug 2019