KEY INVESTMENT HIGHLIGHTS

• 9MFY19 earnings below expectations

• Higher earnings in 9MFY19 on strong sales of completed units and contribution from on-going projects

• 9MFY19 new sales at RM3.07b

• Earnings estimates reduced

• Maintain BUY with a revised TP of RM1.86

9MFY19 earnings below expectations. S P Setia 9MFY19 core net income of RM218.7m came in below expectations, meeting only 70% and 66% of our and consensus full year estimates respectively. The negative deviation could be attributed to the lower than expected progress billing. Note that we have excluded mainly land sales and forex gains in our core net income calculations.

Higher earnings in 9MFY19. 3QFY19 core net income was lower at RM66.1m (-13.2%yoy) as earnings in 3QFY18 were supported by profit recognition of Australian project which was on completion basis. That brought cumulative earnings in 9MFY19 to RM218.7m (+18.5%yoy). The higher earnings in 9MFY19 were mainly contributed by strong sales of completed units and earnings recognition of on-going projects. Nevertheless, 9MFY19 earnings were lower than expected which we think could be attributed to the lower than expected progress billing of on-going projects. Meanwhile, unbilled sales declined marginally to RM10.52b in 3QFY19 from RM10.67b in 2QFY19, providing 3 years earnings visibility.

9MFY19 new sales at RM3.07b. S P Setia achieved new sales of RM1.09b in 3QFY19, lower than new sales of RM1.26b in 2QFY19. That brought cumulative new sales to RM3.07b in 9MFY19 which makes up 67% of management new sales target of RM4.55b. Notably, 45% of new property sales form local projects were derived from the Home Ownership Campaign (HOC). Looking forward, S P Setia plans to launch project with GDV of RM2.17b for the remaining months of FY19, mainly landed properties in Klang Valley and Johor Bahru. As such, management is maintaining its new sales target of RM4.55b for FY19. New property sales outlook is tepid as new sales in FY19 is likely to be lower than new sales of RM5.1b achieved in FY18.

Maintain BUY with a revised TP of RM1.86. We cut our earnings forecasts for FY19/20F by 3.1%/2.8% to factor in the lower than expected progress billing. Correspondingly, our TP is revised to RM1.86 from RM2.53 as we widened our RNAV discount from 43% to 58% in view of the earnings miss and tepid new sales outlook. Nevertheless, we maintain our BUY call on S P Setia as valuation is attractive following steep decline of 42% in share price year-to-date. S P Setia is trading at 63% discount to its latest NTA of RM3.55 per share.

Source: MIDF Research - 14 Nov 2019