SP Setia’s 1QFY15 (Oct) results were within our but below consensus expectations. Maintain BUY with a MYR4.08 TP (21% upside), mainly underpinned by the potential M&A angle. Monthly sales updates have shown weakness in the overall property market, and 1QFY15 sales from the Johor region plunged by another 82% YoY. 75% of its 1QFY15 sales of MYR1bn were largely from projects in the UK and Australia.

Within our expectations. SP Setia’s 1QFY15 results came in line with our estimate but below market expectations. The weaker QoQ growth in earnings was not unexpected, as this was in line with the historical trend – the progress of construction works is typically slower during the year-end festive season. During the quarter, its PBT margin contracted to 16.6% from 19% in FY14, mainly due to higher marketing expenses incurred from the global launch of Battersea Power Station Phase 3A, the mismatch in expenses and revenue recognition for its UK and Australia projects, as well as a MYR22.7m GST financial impact.  

Latest sales updates show weakness in the local property market. The company chalked up MYR1bn of sales in 1QFY15 (or MYR1.2bn up to Feb 2015). Of this, its overseas projects contributed a material 75% (breakdown in FY14 was 61:39 for local/overseas contributions). Although it could partly be due to the seasonal factor, SP Setia’s monthly sales updates have shown weakness in the local property market. There were no new launches in the Johor region in 1QFY15, which pointed to challenging market conditions in Iskandar, while Setia Vista in Penang, which was launched in end 2014 only saw 85 units being booked out of a total of 426. Its key sales drivers are still the projects in the Klang Valley, such as Setia Alam and Setia EcoHill. Nevertheless, we think management’s MYR4.6bn sales target for FY15 still seems viable, given the encouraging response to the company’s projects abroad thus far.

Forecasts. We make no changes to our earnings forecasts. Unbilled sales inched up higher to MYR11.5bn, vs MYR10.88bn in 4QFY14.  

Maintain BUY. We maintain our BUY rating and MYR4.08 TP, based on a 10% discount to RNAV. In our view, the M&A angle will continue to underpin the valuations of the stock, and we expect the developer’s turnaround plans to be tabled in 2H15.

Financial Exhibits

Financial Exhibits

SWOT Analysis

Company Profile

SP Setia has been the property sector bellwether over the years. The company has a large presence in many key areas in Malaysia. Last year, it ventured into London via a joint MYR40bn project with the Employees Provident Fund and Sime Darby.

Recommendation Chart

Source: RHB