Good news reflected in S P Setia’s share price

S P Setia Bhd (May 13, RM3.21)

Downgrade to hold with an unchanged target price (TP) of RM3.46: S P Setia Bhd’s net profit rose by 22% year-on-year (y-o-y) to RM123.4 million.

Although revenue eased mildly by 2%, the commendable performance in the quarter’s bottom line was partly attributable to the group’s overall profit margins improving from 15.5% in the first quarter of 2015 (1Q15) to 19.8% in 1Q16.

We estimate that the bulk of the revenue and profit was mainly driven by township projects in Setia Eco Hill, Semenyih in Selangor.

We remain positive on the group’s prospects going forward with total unbilled sales of RM8.6 billion as of 1Q16, hence we maintain our financial year 2016/2017 estimates (FY16/FY17E) earnings forecasts.

We downgrade our recommendation to “hold” from “buy”. The downgrade reflects the recent appreciation of its share price towards our RM3.46 target, which now leaves an upside potential of only 8% from the current price.

We also believe that a significant amount of good news for this year has already been reflected in its share price. 

The central region continues to spearhead the group’s sales.

For 1Q, the group secured total sales of RM306 million with 57% contributed by the central region, while international sales contributed RM41 million or 14%.

For the quarter, the group had only launched three landed residential projects located in Setia Alam with a total gross development value (GDV) of RM128 million under the 10:90 scheme.

These launches achieved an encouraging take-up rate of 86%, indicating that the underlying demand is still strong, particularly for township projects.

Moving forward, the group has identified approximately 13 phases with a potential GDV of RM3 billion to be rolled out under the 10:90 scheme as part of initiatives to drive sales for FY16.

The upcoming major launches are namely Setia Eco Templer (Selayang, GDV RM269 million); Setia Eco Hill 2 (Semenyih, GDV RM512 million); and KL Eco City (Bangsar, GDV RM444 million).  

The scheme is part of the group’s initiative to boost sales for FY16 whereby buyers are only required to pay 10% of the house now, while the  balance of 90% is to be paid after completion.

We understand that the group is the pioneer for this scheme coming from a big-scale developer in Malaysia.

We are positive on this move as this will further solidify S P Setia’s robust balance sheet, as during the construction period, the cost is fully financed by the group.

Meanwhile, the monthly instalments will only begin upon the completion of the houses.

The scheme had been introduced since 2010 in the international market. 

We downgrade our call on S P Setia to “hold” as its valuation of 10.6 times FY16 price-earnings ratio (PER) is no longer attractive, in our view.

Our TP of RM3.46 is premised on the sector’s historical five-year average blended average of FY16 PER and price-to-book value of 12 times and 1.5 times respectively.

Despite the downgrade, we continue to see sales in the group to remain consistent supported by strong unbilled sales of RM8.6 billion and upcoming new launches worth RM4.7 billion. — BIMB Securities Research, May 13

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