INVESTMENT HIGHLIGHTS

• 9MFY18 earnings below expectations

• Earnings dragged by low progress billing

• New sales of RM3.2b in 9MFY18

• Upgrade to BUY with a revised TP of RM2.66

9MFY18 earnings below expectations. S P Setia 9MFY18 core net income came in below expectations, meeting only 40% and 37% of our and consensus full year estimates. Earnings were below expectations in 3QFY18 as acceleration of local projects progress billing was weaker than expected in 3QFY18.

Earnings dragged by low progress billing. On sequential basis, 3QFY18 core net income inched up by 17.9%qoq to RM76.2m mainly due to acceleration of local projects billing. However, the momentum of acceleration was weaker than expected. That brought cumulative income to RM184.6m (-74.9%yoy) in 9MFY18. 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 in our core net income calculations. The weaker earnings in 9MFY18 were due to lower progress billing as substantial large development phases of local projects are still at early stage of construction. The lower earnings in 9MFY18 were also due to high base in 9MFY17 whereby earnings in 9MFY17 were boosted by significant contribution of Phase 1 of the Battersea Power Station. Meanwhile, unbilled sales decreased slightly to RM7.92b in 3QFY18 from RM8.12b in 2QFY18, providing earnings visibility for 1.7 years.

New sales of RM3.2b in 9MFY18. S P Setia registered new property sales of RM1.1b in 3QFY18, higher than new sales of RM1b in 2QFY18. That brought total new sales to RM3.2b in 9MFY18, making up 64% of management new sales target of RM5b for FY18. Local projects contributed 72% of total new sales in 9MFY18 while the remaining 28% new sales were from international projects. Looking ahead, S P Setia targets to launch projects with total GDV of RM1.6b in 4QFY18. Upcoming launches will continue to focus on mid-range landed properties in the Klang Valley. Hence, management remains committed to meet its sales target of RM5b.

Upgrade to BUY with a revised TP of RM2.66. We revise downwards our FY18/19F earnings forecast by 34%/24% to factor in the slower-than-expected progress billing of local projects. We also revise our TP for S P Setia to RM2.66 from RM3.10 as we widen our RNAV discount to 40% from 30%. Despite the weak earnings visibility in near-term, we upgrade our call on S P Setia to Buy from Neutral as we see value emerged following the recent decline in share price. Valuation of S P Setia is undemanding, trading at 45% discount to NTA per share of RM3.63. Besides, management expects the sale of commercial assets of Battersea Power Station – Phase 2 to PNB and EPF to be finalised imminently
 

Source: MIDF Research - 15 Nov 2018