• Expect 2QFY17 earnings to be stronger qoq and yoy

• Sales should improve as well in 2QFY17

• On track to achieve its sales target of RM4.0b

• I&P acquisition to fast track SPSETIA aspiration to join FBMKLCI

• Maintain BUY with Target Price of RM4.13

Expect 2QFY17 earnings to be stronger qoq and yoy. S P Setia Berhad is expected to release its 2QFY17 result by end of August. We expect the Company to register stronger earnings qoq and yoy due to bumpy recognition from Battersea Phase 1. Recall that SPSETIA only recognised RM518m of sales from Battersea Phase 1 in 1QFY17 with the remaining RM1.0b of unbilled sales to be recognised in 2QFY17 and 3QFY17.

Sales should improve as well in 2QFY17. We believe that 2QFY17 sales should increase qoq and yoy mainly due to good take up rate for its Sapphire By The Gardens project in Melbourne, Australia. According to media report, the project has achieved 70% take up rate during its simultaneous launch in four cities (Kuala Lumpur, Jakarta, Sydney and Melbourne). Recall that the project has GDV of AUD480m (or RM1.65b) and this is the biggest project launch by value among all the projects planned for FY17 by SPSETIA.

On track to achieve its sales target of RM4.0b. Recall that SPSETIA has achieved RM427m of sales in the 4MFY17 out of which 82% is contributed by local projects. In view of the good take up rate seen in the Sapphire By The Gardens, we believe that there is high chance that SPSETIA will be able to meet its sales target of RM4.0b.

I&P acquisition to fast track SPSETIA aspiration to join FBMKLCI. We reiterate our view that the I&P acquisition is RNAV accretive as we estimate that the market value of its landbank is RM6.15b (against its purchase price of RM3.65b). Hence, we believe that the corporate exercise which is expected to raise in total RM3.6b should be viewed positively by the market. Recall that SPSETIA has propososed: i) rights issue, ii) rights issue of new class B Islamic Redeemable Convertible Preference Shares and iii) private placement. After the completion of I&P acquisition and corporate exercises, SPSETIA market cap should be boosted to RM14.0b to RM15.0b which we think is the right size to join FBMKLCI (assuming that the liquidity of the Company should improve from the private placement and higher market cap).

Maintain BUY with TP of RM4.13. Our earnings forecast are maintained for FY17 and FY18. Our Target Price is unchanged and it is based on 10% discount to RNAV. We continue to like SPSETIA due to i) its plan to achieve FBMKLCI status is now fast track to 2018 (from 2020), ii) attractive price for the I&P deal and iii) good dividend yield of 5.6%.

Source: MIDF Research - 2 Aug 2017