S P Setia Bhd
(Aug 24, RM2.80)
Downgrade to hold with a lower target price (TP) of RM3.05: S P Setia Bhd’s revenue for the first half of financial year 2018 (1HFY18) of RM1.58 billion translated into a core profit after tax and minority interest (Patmi) of RM160.4 million (-41.3%), accounting for 24.9% and 26% of our and consensus full-year forecasts respectively. The deviations were mainly due to lower-than-expected progressive billings, coupled with higher-than-expected interest cost.
The group declared an interim dividend of four sen per share (flat year-on-year [y-o-y]).
Quarter-on-quarter, second quarter of FY18 revenue rose 41.3%, mainly due to monetisation of inventory and higher progressive billings from ongoing projects. Core Patmi improved by 60.9%, in tandem with higher revenue despite higher finance cost, after excluding the one-off fair value gain of RM343.8 million from the remeasurement of its stake in Setia Federal Hill.
Y-o-y, revenue increased by 6.9% mainly due to higher sales from completed projects. However, core Patmi declined by 39.3% in the absence of contributions from the Battersea Power Station, coupled with higher operating expenditure due to the integration with I&P Group Sdn Bhd and higher finance cost.
Year to date, revenue has contracted 16.5% on the back of lower progressive billings as large development phases, such as Setia Eco Templer, Trio by Setia and Setia EcoHill 2, are still in early stages of construction.
The company is encouraged by strong take-up of township launches and improving market sentiments after the 14th general election (GE14). Earnings visibility is supported by total unbilled sales of RM8.2 billion (cover ratio of 1.9 times). However, net gearing inched up to 0.39 time from 0.09 time in FY17, and we understand that there could be non-strategic land disposal exercises in the near term to cushion cash flow needs.
New sales of RM2.1 billion were achieved in 1HFY18 (33% from international sales) despite the general wait-and-see approach due to GE14 factors; S P Setia is on course to meet its sales target of RM5 billion, with RM4.2 billion worth of launches to be expected in 2HFY18. Besides, it is venturing into Osaka, Japan, with a proposed mixed development with a gross development value of RM1.88 billion on 4.9 acres (1.98ha) of land, targeted to launch in 2019 at the earliest.
We have lowered our earnings forecasts for FY18/FY19/FY20 by -37%/-29%/-26% respectively, after revising our revenue recognition and financing cost assumptions. We downgrade our call to “hold” from “buy”, with a lower TP of RM3.05 (from RM3.76), based on an enlarged discount of 50% (from 40%) to revalued net asset valuation of RM6.10. Earnings will remain subdued in the near term, given that the majority of its projects are still in the early stages, coupled with the cost of integration with I&P. As such, with a price-earnings ratio of over 20 times and one time price-to-book value, we believe there could be limited upside in the near term, in addition to the uptrending net gearing. — Hong Leong Investment Bank Research, Aug 24