SP  Setia’s  2QFY14  results  were  below  expectations,  as  it  made provisions for the financial impact of the GST for ongoing projects. New sales were at MYR3.2bn, and are on track to meet its MYR5bn target. We believe  current  valuations  have  priced  in  the  worst  and  any  M&A exercise or news flow on its new  management team could lead to a rerating for the stock. Maintain Trading BUY and our MYR3.54 FV.

• Below expectations. SP Setia’s 2QFY14 results came in below our and market  expectations, with core earnings making up only 26% of  full-year estimates.  The key factor  behind the disappointing performance was the provisions  made  for  the  financial  impact  of  the  upcoming  goods  and services tax (GST), which amounted to about MYR21m net of tax, on the ongoing  projects  that  will  be  completed  after  1 April  2015  –  being  the date  that  GST  takes  effect.  The  balance  of the  GST’s  financial  impact will  be  reflected  in  the  upcoming  quarters  according  to  the  completion stage. A 4 sen single-tier dividend was declared for the quarter, similar to same period last year.
• New  sales  of  MYR3.2bn  as  at  May.  Seven  months  into  the  financial year, new property sales were at MYR3.2bn, which puts the company on track to meet its  target of MYR5bn for the year.  Key contributors are still Setia Alam, Eco Hill and  residential Phase 2 of the  Battersea project in London. However, sales in Johor, in particular, slowed by a considerable 41% as at May, signaling the challenging market conditions in Iskandar .
• Forecast.  We  cut  our  FY14-15  earnings  forecasts  by  14-18%  as  the impact  of the GST  will be recurring.  Meanwhile, unbilled sales remained healthy at MYR11.2bn (MYR6.3bn excluding overseas projects).
• Maintain  Trading  BUY.  We  maintain  our  Trading  BUY  rating  on  the stock  based  on  an  unchanged  FV  of  MYR3.54,  at  a  20%  discount  to RNAV.  We  believe  current  valuations  have  priced  in  the  worst,  ie  the departure of  former CEO  Tan Sri Liew Kee Sin,  the  exodus of  staff  and subdued  earnings  since 1Q.  We expect major shareholder Permodalan Nasional to restrategise the direction of the company in the medium term given  the  prolonged  undervaluations  –  either  by  engaging  in  M&As  or bringing in a new group leader. Note that its current acting president and CEO, Dato’ Voon Tin Yow, will only stay until 30 April 2015.

Source: RHB