S P Setia sees challenges in Malaysia, London markets

S P Setia Bhd (Sept 9, RM3.32)

Downgrade to hold call with a lower target price of RM3.40: Management has revised down the financial year ending Dec 31, 2016 (FY16) sales target to RM3.5 billion from RM4 billion previously, given the tough operating environment in its key markets in Malaysia and London.

This is set to be S P Setia Bhd’s lowest sales since FY12. Also, sales of the Battersea Power Station project in London, which contributes 49% of its RM8.2 billion unbilled sales, have slowed down considerably in the aftermath of Brexit.

Despite S P Setia’s diversified product offerings to cater to various target markets, the weak sentiment in the Malaysia and London property markets continues to weigh on its new property sales.

We believe slow property sales are the new norm going forward which will result in subdued earnings growth prospects. We downgrade S P Setia to “hold” in view of the lack of catalysts.

We estimate that RM2.7 billion worth of overseas projects in the UK, Singapore and Australia will be recognised by the first quarter of FY17, representing 33% of total unbilled sales (as at end-June 2016) or 52% of overseas unbilled sales. Weaker sales replenishment thereafter could pose earnings downside risk.

S P Setia’s sales will be mainly driven by township developments in Malaysia which remain well-received as the group focuses on launching more affordable and mid-range housing. — AllianceDBS Research, Sept 9

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This article first appeared in The Edge Financial Daily, on Sept 13, 2016. Subscribe to The Edge Financial Daily here.