9MFY19 CNP of RM168.2m is below our (64%) and consensus (52%) expectations on higher- than-expected MI contributions and mildly weaker margins due to a less favourable product mix. 9MFY19 property sales of RM3.07b is broadly in-line (68%) as we anticipate stronger sequential sales in 4Q. We lower our FY19-20E CNP by 9-2% to RM241m-379m on lower margins assumptions. Maintain OUTPERFORM with a lower TP of RM1.80 (from RM1.85) as we switch to adjusted P/BV valuation method.

9MFY19 CNP* of RM168.2m came in below our and consensus expectations at 64% and 52%, respectively. Top-line came in slightly above (at 83%) on steady progress billings and the sale of British Embassy land (which was recognised in 2QFY19) (note that land sales are part of our CNP assumptions). However, bottom-line was dragged down by weaker-than-expected CNP margin of 5.4% (vs. our expectation of 7.0%) on less favourable product mix (1.2ppt below our expectations of 23.2% EBIT margins) and higher-than-expected minority interest. 9MFY19 property sales of RM3.07b is deemed broadly within both our as well as management’s target of RM4.55b at 68% as 4Q sales is expected to come in stronger. 9MFY19 sales were driven by local sales from the central (57%) and southern (17%) regions, while overseas sales made up 15%. No dividends have been declared.

Results’ highlights. YoY, 9MFY19 top-line was up 22% on recognitions of locked-in property sales as well as the sale of British Embassy land in 2Q (for RM449.2m). However, corresponding CNP declined by 10% on: (i) higher operating cost (+25%), (ii) higher effective tax rates of 28% vs. 14%, and (iii) higher minority interest and RCPS-i preferential dividends (+45%). QoQ, 3QFY19 top-line was down by 30% due to the lumpy land sale in 2QFY19, which cascaded into bottom-line and was also dragged by higher minority interest contributions (+24%), resulting in bottomline declining by 41%. Positively, inventories of completed properties eased slightly YoY to RM1.4b (from RM1.5b).

Outlook. We maintain our FY19 sales target of RM4.55b, in-line with management’s target as the Group tends to enjoy stronger sales in 4Q. Its upcoming launches in 4QFY19 worth RM2.17b will be focused on landed residential properties in established townships in Klang Valley and Johor, bringing FY19 total launches to RM4.88b.

Lowered FY19-20E CNP by 9-2% to RM241m-379m. This is on account of lower CNP margins of 6.3-8.1% in FY19-20E (from 7.0- 8.2%) arising from slightly weaker product mix and higher MI. Its unbilled sales of RM10.5b will provide c.3 years of earnings visibility. FY19-20E dividend yields are decent at 3.1-4.9%. FY20E strong topline and earnings is driven by strong recognitions from high FY18 sales of RM5.1b from local and overseas projects, and expectations of land sales of c.RM700m.

Maintain OUTPERFORM but on a lower Target Price of RM1.80 (from RM1.85). We are switching to the more conservative P/BV valuation method (from RNAV) as a gauge to ascertain the trough valuations of property stocks amid the prevailing market downcycle. Our TP is based on P/BV of 0.63x (@ -1.5SD of its 3-year historical band) on an adjusted BV/share of RM2.84 (after imputing a 40% discount to its latest available inventory level of completed properties). This also takes into account the Group’s relatively high net gearing of 0.56x and low ROE of 1.7-2.7% in FY19-20E. While the property sector outlook is expected to remain challenging, we reckon the stock (down 42% YTD) has been unjustifiably beaten down judging by its current P/BV valuations. SPSETIA remains an OP at current levels, backed by decent dividends, with our new TP representing a steep 77% discount to our FD-SoP RNAV of RM7.75.

* 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 higher estimates.

Source: Kenanga Research - 14 Nov 2019