Review

• SP Setia delivered another set of astounding results that beat expectations. FY16 net profit of RM808.0mn came in at 127% of our and 121% of consensus’ full-year earnings projections. The outperformance was largely due to 1) stronger-than-expected progress billing from it local projects, 2) partly handover of Battersea Power Station Phase 1 and 3) wider margin from Parque Project in Melbourne.

• The board has proposed a final dividend of 16sen/share, bringing the YTD proposed dividend to 20sen/share. This also came in significantly higher than our dividend projections of 13sen/share. The payment translates to a payout ratio of 70.5% and a yield of 5.9% based on yesterday’s close.

• The group reported FY16 revenue and net profit of RM4.95bn and RM808.0mn respectively. Key on-going flagship projects that contributed to FY16 revenue are Setia Alam, Setia EcoHill, Setia Eco Park, Setia Eco Glades and KL Eco City as well as Battersea Power Station and Parque Melbourne. YoY comparisons are not reflective due to changes in FYE from October to December last year.

• Sequentially, the group reported more than 3x QoQ jump in net profit to RM424.8mn in 4Q16. The record net profit was largely boosted by timely handover of Battersea Power Station Phase 1 (Circus West) and Parque Project in Melbourne, resulting in lumpy profit recognition with the use of completion method. It has successfully handed over 2 out 12 blocks of Circus West Apartment as at Dec-16, and completed Parque Melbourne in Nov-16. We understand that Circus West and Parque Melbourne contributed RM84mn and RM80mn net profit respectively in 2016. This accounted for 39% of total net profit in 4Q16.

• Property sales performance was impressive, as the group locked-in new sales of RM1.8bn in 4Q16 alone. This brought its 2016 full-year new sales to RM3.8bn, which has exceeded management’s and our sales assumptions of RM3.5bn and RM3.4bn respectively.

• Central region remained as SP Setia’s stronghold, contributing RM2.6bn sales (or 69% of total FY16 sales). Specifically, its flagship township, i.e. Setia Alam, Setia Ecohill and Setia Eco Park, continued to drive the company’s sales. We believe this is underpinned by consistent demand for landed homes. In addition, the maiden launch of Setia Eco Templer in Rawang, Setia Eco Hill 2, ViiA Residence in KL Eco City and Setia Sky Seputeh also collectively contributed about RM734mn in sales in FY16. The group’s total unbilled sales stood at RM8.43n, providing c. 2 years of earnings visibility.

Impact

• We tweak our FY17- 18 earnings higher by 3-4% after incorporating the latest FY16 results

Outlook

• Despite the challenging market environment, the group introduces a new sales target of RM4.0bn for FY17 and aims to retain its position as the top developer in Malaysia in terms of sales. To achieve this, the group has lined up RM5.4bn worth of new launches (or total 7,355 units of properties) for FY17. About 44% of the upcoming launches (in units) are affordable housing (i.e priced below RM300k/unit.) – see Figure 1. In terms of sales target breakdown, management expects 77% of the sales to be derived from projects in Malaysia.

• In Malaysia, the group will continue launching more phases of its on-going townships such as Setia Alam, Setia Eco Park and Setia Ecohill and Ecohill 2, and Setia Eco Templer. Meanwhile, SP Setia is expected to unveil 3 new highrise residences in 2017, namely, Trio by Setia in Klang (GDV: RM214mn), Condominium in KL Eco City (GDV: RM615mn) and Setia Seraya Residences in Putrajaya (GDV: RM278mn).

• On the overseas front, the Australia market will be the key focus. Two projects in Australia will be unveiled in 2016. First, the group will launch 47 unit low rise apartment in Prahran Melbourne, which has a total GDV of AUD37mn (or RM120mn) in 1Q17. Next, the group will unveil an exciting mixed development in Melbourne CBD in 2H16, featuring 500 unit of luxury apartment. This CBD development is expected to generate GDV of AUD640mn (or RM1.6bn).

Valuation

• SP Setia has delivered strong sets of results that beat market expectations for two consecutive years amid challenging market environment. We think SP Setia deserves higher valuation multiples given its strong execution capabilities and decent dividend yields of >5%. As such, we ascribe a higher target P/E of 15x on CY17 EPS (from 13x previously) and arrive at a new target price of RM3.82/share (from RM3.45/share previously). The group is currently trading at 13x and 1.1x CY17 EPS and BPS respectively, as compared to its 5-year average P/E and P/B multiple of 18x and 1.6x respectively. We maintain SP Setia as a Buy.

Source: TA Research - 24 Feb 2017