9MFY21 CNP of RM38.1m missed expectations stemming from larger-than-expected losses incurred in 3QFY21 due to FMCO and in Battersea JV. That said, 9MFY21 sales of RM3.4b is above our/management’s target of RM3.8b in anticipation of a strong 4Q on last-minute property buying before the HOC ends in Dec 2021. Hence, we raise FY21E sales target to RM4.3b (from RM3.8b). However, FY21E earnings are cut by 33% on lower margins and Battersea JV contributions. With its share price performing lately despite the lack of re-rating catalyst, downgrade to UP (from MP) with an unchanged TP of RM1.19 (0.4x PBV).

Below expectations. 3QFY21 core net loss (CNL) of RM76.1m dragged 9MFY21 CNP to RM38.1m – below our/consensus expectations at 20%/15% of full-year estimates. While a loss was anticipated in 3QFY21 stemming from the Full Movement Control Order (FMCO) which started in 1st June 2021 spanning till mid-August; the quantum of loss was larger than expected as: (i) operating margins were compressed due to operating leverage effect (i.e. low revenue on the back of fixed costs), and (ii) losses incurred from its 40%-owned Battersea JV due to aggressive marketing. No dividends, as expected.

3QFY21 sales of RM0.67b led 9MFY21 sales to RM3.38b – above our/management’s RM3.8b target (89%). We anticipate 4QFY21 sales to come in strong as property buyers seize the opportunity to purchase properties before the Home Ownership Campaign (HOC) ends by Dec 2021. Management has earmarked RM1.2b worth of launches in 4QFY21 (9MFY21 - launched RM1.5b). Consequently, we raise FY21 sales target to RM4.3b. Unbilled sales of RM9.8b provide two years coverage.

Highlights. QoQ, 3QFY21 core loss (CNL) of RM76.1m plunged 203% mainly because it was weighed down by: (i) weaker revenue of 45% stemming from the full movement control order (FMCO) which only allowed 1.5 months of works at sub-optimal operating capacity, and (ii) the semi-annual RCPS dividend distribution* of RM66m. YoY, 9MFY21 CNP of RM38.1m swung back into the black from a loss position of RM44.7m, attributable to stronger top-line contribution (+29%) as 9MFY20’s productivity was severely impacted by the first MCO back in March 2020.

*RCPS distribution occur every 1Q and 3Q.

Downgrade FY21E earnings by 33% to RM130m on weaker OP margins and lower Battersea JV contributions. However, we keep FY22 estimates unchanged. Note, FY22E bumper earnings estimate of RM509m is mainly from: (i) two Melbourne projects (Uno and Sapphire) which recognise earnings upon completion, and (ii) completion of RM236m land sale at Johor Bahru (to Scientx).

With share price rallying in recent months despite the lack of convincing re-rating catalyst i.e. indication of stronger demand data wise, we choose to downgrade SP SETIA to Underperform (from Market Perform) with an unchanged Target Price of RM1.19 based on an unchanged FY22E PBV of 0.40x (-1.5SD). Being one of the largest developers in the country, we view SP SETIA as a proxy for the sector’s outlook which appears challenging in the near-to-medium term, plagued by affordability, oversupply and policy issues.

Risks to our call include: (i) lower-than-expected property sales, (ii) margin fluctuations, (iii) changes in real estate policies and lending environment, (iv) cash-calls, and (v) timing of overseas/local billings

Source: Kenanga Research - 24 Nov 2021