KEY INVESTMENT HIGHLIGHTS

• 9MFY20 earnings below our expectation

• Return to the black in 3QFY20

• Sales target of RM3.8b maintained

• Earnings estimates revised downwards

• Maintain BUY with a revised TP of RM0.84

9MFY20 earnings below our expectation. S P Setia 9MFY20 core net income of RM99.5m came in within consensus expectation but below ours, making 60% of our full year estimate. The negative earnings deviation could be attributed to the higher-than-expected cost of sales in 3QFY20.

Return to the black in 3QFY20. S P Setia returned to the black in 3QFY20 after recording core net profit of RM73.4m against core net loss of RM1.6m in 2QFY20. Note that we have excluded impairment provisions of RM336m on its Battersea Power Station project as a result of soft property market in London. Earnings in 3QFY20 improved as construction works resumed in 3QFY20 post MCO in 2QFY20. Meanwhile, cumulative earnings were lower at RM99.5m (-54.5%yoy) as earnings were dragged by construction works stoppage during MCO. Besides, higher cost of sales has also dragged earnings in 9MFY20 due to higher sales of product mix with lower margin in 3QFY20. On the other hand, unbilled sales increased marginally to RM9.82b in 3QFY20 from RM9.68b in 2QFY20, providing earnings visibility of 2.5years.

Sales target of RM3.8b maintained. S P Setia registered higher new property sales of RM1.38b in 3QFY20 as compared to new sales of RM405m in 2QFY20 as sales momentum improved post MCO. Local projects contributed 82% to new sales whilst international projects contributed 18% to new sales. Going forward, S P Setia is maintaining its new sales target of RM3.8b for FY20 as its new sales as at October 2020 stood at RM2.86b while sales momentum should support by secured bookings of RM1.67b.

Maintain BUY with a revised TP of RM0.84. We revise our FY20/FY21F earnings forecasts by -22.5%/-3% to factor in higher cost of sales. Our TP is revised downward to RM0.84 from RM0.89 as we widen our RNAV discount marginally to 81% from 80%. We maintain Buy call on S P Setia due to its attractive valuation as it is trading at steep discount of 79% to its NTA per share of RM3.41. Besides, sales outlook for S P Setia is stable as it is on track to meet its sales target.

Source: MIDF Research - 16 Nov 2020