S P Setia Bhd
(Nov 14, RM1.41)
Upgrade to buy with a lower target price (TP) of RM1.68: S P Setia Bhd’s headline net profit for the third quarter of financial year 2019 (3QFY19) was boosted by a realised foreign exchange gain of RM37.8 million from the redemption of a Green Bond Principles-denominated loan during the quarter. The sequential decline in revenue and earnings stemmed from the RM449 million sale of the former British High Commission land in Kuala Lumpur in the second quarter of 2019 (2Q19), which netted an estimated net gain of about RM100 million for the company. Unsold completed inventory inched up slightly to RM1.44 billion, from RM1.4 billion in the previous quarter. Net gearing remained relatively unchanged at 0.56 times.

New property sales were at RM1.09 billion versus RM1.26 billion in 2QFY19, bringing the total for the nine months of FY19 to RM3.07 billion, inclusive of a RM87 million land sale. Key contributors for 3QFY19 included Setia Alam (Shah Alam, Selangor), Setia Safiro (Cyberjaya, Selangor), Bandar Kinrara (Puchong, Selangor), Sky Ville (Jelutong, Penang) and the newly launched Phase 1 in Setia Fontaines (Bertam, Penang). Overseas projects contributed RM204 million, mainly driven by the UNO Melbourne project in Australia. However, sales for Daintree Residences in Singapore — launched a year ago — remained weak with a take-up rate of below 20%.

The management is maintaining its RM4.55 billion sales target for the year, which we think is within reach as there is still RM2.17 billion worth of new launches in 4Q19, as well as RM1.4 billion in unsold inventory. Sales should pick up slightly before the end of the home ownership campaign in December. Pipeline launches will focus mainly on landed properties in established townships in the Klang Valley and Johor Baru, such as Setia Alam, Eco Hill, Eco Templer, Eco Garden and Setia Tropika. The company will also kick-start Setia Warisan Tropika in mid-November, which is the latest township project in Bandar Baru Salak Tinggi, Selangor.

We maintain our FY19-21 earnings forecasts. Unbilled sales — including the Battersea Power Station commercial plot in the UK that was sold en bloc — stood at RM10.52 billion (local: RM3.48 billion, international: RM7.04 billion) in 3Q19, versus RM10.665 billion as at 2Q19.

Our new TP, 24% upside with a 6% FY20 forecast yield, is based on a higher 70% discount to revised net asset value (from 65%), which was the same level as its trough valuation in 2009 during the US subprime crisis. While S P Setia’s outlook remains unexciting, the stock’s valuation should be supported by its net tangible asset of RM2.99 per share. — RHB Research Institute, Nov 14