KEY INVESTMENT HIGHLIGHTS

• 1HFY20 earnings below expectations
• Looking forward to a better 2HFY20
• Striving to meet new sales target of RM3.8b as new sales momentum picks up
• Earnings estimates revised downward
• Maintain BUY with a revised TP of RM1.24

1HFY20 earnings below expectations. S P Setia 1HFY20 core net income of RM26.1m came in below expectations, making up only 12% and 14% of our and consensus full year estimates due to the weaker-than-expected earnings in 2QFY20 as S P Setia slipped into the red.

Looking forward to a better 2HFY20. S P Setia slipped into the red in 2QFY20 by recording core net loss of RM1.6m. Note that we have excluded impairment loss of completed inventories in our core net income calculations. The weak earnings in 2QFY20 was mainly owing to Movement Control Order (MCO) whereby construction works of property projects came into standstill during MCO and Conditional MCO period in 2QFY20. That brought cumulative earnings in 1HFY20 lower at RM26.1m (-82.9%yoy). Looking forward, we expect earnings to recover in 2HFY20 as construction works resume. Nevertheless, progress billing is expected to improve gradually due to the Standard Operating Procedures (SOPs) at construction sites. Meanwhile, unbilled sales of RM9.68b provides earnings visibility of 2.5 years.

Striving to meet new sales target of RM3.8b. S P Setia registered new property sales of RM405m in 2QFY20 despite the disruption to business by MCO, bringing cumulative new sales to RM875m in 1HFY20. Local projects contributed 80% whilst international projects contributed 20% to new sales. Looking forward, S P Setia is striving to meet its sales target of RM3.8b despite 1HFY20 new sales made up only 23% of the new sales target. S P Setia will focus on clearing completed inventories and launching mid-range landed units in established townships to cater for demand of owner-occupiers. Meanwhile, sales momentum is encouraging in 3QFY20 whereby S P Setia secured new sales of RM579m during the first 40 days in 3QFY20 and has booking of RM1.5b in the pipeline.

Maintain BUY with a revised TP of RM1.24. We revise our FY20/FY21F earnings forecasts by -25.5%/-20.7% to factor in lower progress billing. Our TP is revised downward to RM1.24 from RM1.42 as we widen our RNAV discount to 72% from 68%. We maintain BUY call on S P Setia due to its attractive valuation and better sales outlook in 2HFY20. S P Setia is trading at a discount of 77% to its NTA per share of RM3.50.of RM3.50.

Source: MIDF Research - 14 Aug 2020