S P Setia seen committed to RM5b FY18 sales target

S P Setia Bhd (Nov 15, RM1.97)

Upgrade to buy with a lower target price (TP) of RM2.66: S P Setia Bhd’s nine months ended Sept 30, 2018 (9MFY18) core net income came in below expectations, meeting only 40% and 37% of our and consensus full-year estimates. Earnings were below expectations in the third quarter of FY18 (3QFY18) as acceleration of local projects progress billing was weaker than expected.

On a sequential basis, 3QFY18 core net income inched up by 17.9% quarter-on-quarter to RM76.2 million, mainly due to acceleration of local project billing. However, the momentum of acceleration was weaker than expected. That brought cumulative income to RM184.6 million in 9MFY18. 

Note that we have excluded mainly RM343.8 million one-off provisional fair value gain arising from remeasurement of the equity stake in Setia Federal Hill Sdn Bhd in our core net income calculations. The weaker earnings in 9MFY18 were due to lower progress billing as substantial large development phases of local projects are still at the early stage of construction. The lower earnings in 9MFY18 were also due to the high base in 9MFY17, whereby earnings in 9MFY17 were boosted by significant contribution of Phase 1 of the Battersea Power Station. Meanwhile, unbilled sales decreased slightly to RM7.92 billion in 3QFY18 from RM8.12 billion in 2QFY18, providing earnings visibility for 1.7 years.

S P Setia registered new property sales of RM1.1 billion in 3QFY18, higher than new sales of RM1 billion in 2QFY18. That brought total new sales to RM3.2 billion in 9MFY18, making up 64% of management’s new sales target of RM5 billion for FY18. Local projects contributed 72% of total new sales in 9MFY18 while the remaining 28% new sales were from international projects. Looking ahead, S P Setia targets to launch projects with total gross development value (GDV) of RM1.6 billion in 4QFY18. Upcoming launches will continue to focus on mid-range landed properties in the Klang Valley. Hence, management remains committed to meet its sales target of RM5 billion.

We revise downwards our FY18 and FY19 earnings forecast by 34% and 24% respectively to factor in the slower-than-expected progress billing of local projects. We also revise our TP for S P Setia to RM2.66 from RM3.10 as we widen our revalued net asset value discount to 40% from 30%. 

Despite the weak earnings visibility in the near term, we upgrade our call on S P Setia to “buy” from “neutral” as we see value emerged following the recent decline in share price. The valuation of S P Setia is undemanding, trading at 45% discount to net tangible assets per share of RM3.63. Besides, management expects the sale of commercial assets of Battersea Power Station — Phase 2 to Permodalan Nasional Bhd and the Employees Provident Fund to be finalised imminently. — MIDF Research, Nov 15

This article first appeared in The Edge Financial Daily, on Nov 16, 2018.

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