S P Setia surpasses RM4 bil sales target

S P Setia Bhd (Feb 26, RM3)

Maintain neutral with a lower target price (TP) of RM3.10: Sales of the Battersea project may remain slow, given the upcoming supply in the Nine Elms area and the stamp duty hike in the UK last year.

While S P Setia Bhd’s debt exposure in foreign currency terms is minimal, its cash flow may be tight for this project due to the scale of the development. We maintain “neutral”, with a TP of RM3.10 (from RM3.50), as property markets in Malaysia and London continue to stay weak.

Fourteen months ended Dec 31, 2015 (14MFY15) sales reached RM4.3 billion, beating management’s RM4 billion estimate. The improvement in sales in November and December was mainly driven by projects in the Klang Valley, such as Setia Alam, EcoHill and Eco Glades. Overseas sales made up 33% of the total. Sales of Battersea Power Station (BPS) Phase 3A remained subdued at 59% (from 57% in October).

S P Setia has set a RM4 billion sales target, and will roll out two township projects in financial year 2016 (FY16), including Eco Templer and EcoHill 2. The medium-density Setia Sky Seputeh serviced apartments will also enter the market, for which we think sales may be slower due to higher pricing.

We raise our FY16 and FY17 earnings forecasts by 14% to 15%, in view of several completed projects such as Setia Alam, EcoHill, Eco Park and Eco Glades (worth a combined RM1 billion), as well as the handover of the Eco City strata titles (RM306 million) and Eco Sanctuary Singapore (S$473 million or RM1.41 billion) in the second half ending Dec 31, 2016. Parque Melbourne (A$247 million or RM738.54 milion) and BPS Phase 1 (£846 million or RM4.92 billion) could also be completed by year end. Unbilled sales were at RM9.2 billion (versus RM9.5 billion in the fourth quarter of FY15 [4QFY15]). Key risks include delays in launches and worse-than-expected market conditions.

We maintain our “neutral” rating, but cut our TP to RM3.10 from RM3.50, based on a larger 35% (from 20%) discount to our updated revalued net asset value estimate. This is to reflect potential risk of the Battersea project and the weak property market in Malaysia.

S P Setia’s 5QFY15 results, which only covered two months — November and December 2015 — beat our and market expectations. Full-year earnings were largely boosted by the completion of Fulton Lane in 3QFY15/4QFY15. Meanwhile, a single-tier final dividend per share of 19 sen was declared. — RHB Research, Feb 26

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This article first appeared in The Edge Financial Daily, on Feb 29, 2016. Subscribe to The Edge Financial Daily here.