INVESTMENT HIGHLIGHTS

• 1HFY18 earnings below expectations

• Lower earnings in 1HFY18

• New sales of RM2.1b in 1HFY18

• Earnings forecast reduced

• Downgrade to Neutral with a revised TP of RM3.10

1HFY18 earnings below expectations. S P Setia 1HFY18 core net income of RM108.4m came in below expectations, meeting only 17% and 18% of our and consensus’ full year estimates respectively. The variance was mainly attributed to the slower-than-expected progress billing of local projects. Dividend of 4 sen per share was announced.

Lower earnings in 1HFY18. S P Setia recorded core net income of RM64.6m (-75.3%yoy) in 2QFY18, bringing cumulative core net income to RM108.4m (-71.1%yoy) in 1HFY18. Note that we have excluded mainly RM343.8m one-off provisional fair value gain arising from remeasurement of equity stake in Setia Federal Hill Sdn Bhd. Core net income in 1HFY18 fell by 71.1%yoy as substantial large development phases of local projects namely Setia Eco Templer, Trio by Setia and Setia EcoHill2 are still at early stage of construction. Meanwhile, unbilled sales increased to RM8.12b in 2QFY18 from RM7.95b in 1QFY18, providing earnings visibility for 1.8 years.

New sales of RM2.1b in 1HFY18. S P Setia recorded new sales of RM1b in 2QFY18, bringing total new sales to RM2.1b in 1HFY18. Local projects contributed 67% of total new sales in 1HFY18 while the remaining 33% new sales were from international project. New sales in 1HFY18 make up 42% of management FY18 new sales target of RM5b. Looking ahead, S P Setia targets to launch projects with total GDV of RM4.05b in 2HFY18. Launches in 2HFY18 will be continue on the local market with emphasis given to the launches of mid-range landed properties in the Klang Valley with combined GDV of RM2.23b. Hence, management remains positive of achieving its sales target of RM5b.

Downgrade to Neutral with a revised TP of RM3.10. We revise downwards our FY18/19F earnings forecast by 29%/14% to factor in the slower-than-expected progress billing of local projects. We revise our TP for S P Setia to RM3.10 from RM3.69 as we widen our RNAV discount to 30% from 20% in view of the weak earnings visibility in near-term. We downgrade our call on S P Setia to Neutral from Buy due to the weak earnings outlook and limited upside.

Source: MIDF Research - 24 Aug 2018