S P Setia on track to meet RM5b sales target

S P Setia Bhd
(June 12, RM2.99)
Maintain outperform with target price of RM3.85: S P Setia posted lower-than-expected earnings in the second quarter of financial year 2014 (2QFY14), primarily due to goods and services tax (GST) costs and share-based incentive payment expense (the long-term incentive plan or LTIP). In 2QFY14, net profit of RM74.3 million (-20.3% year-on-year [y-o-y], -23.3% quarter-on-quarter [q-o-q]) was hit by RM21 million provisions for GST and about RM11 million for LTIP expense. Year-to-date (YTD), the group’s net profit of RM171 million (-8.7% y-o-y) only constituted 38% and 34% of our and consensus full-year estimates. Ex-LTIP and GST provisions, the 2Q and YTD net profit would have increased 14.3% (RM84.9 million) and 15.6% (RM197.7 million) respectively, which were within our and consensus expectations. New sales recorded for the first seven months totalled RM3.2 billion — on track to meet its RM5 billion FY14 sales target. An interim single-tier dividend of four sen was proposed, which is higher than the net dividend of 3.6 sen for the first half of FY13.

Key projects driving the earnings include townships (Setia Alam and Setia Eco-Park in Shah Alam; Setia Ecohill in Semenyih; Setia Eco Glades in Cyberjaya, Selangor; Bukit Indah, Setia Eco Gardens, Setia Indah and Setia Tropika in Johor) high-rises Setia Sky Residences in Jalan Tun Razak, Kuala Lumpur, KL Eco City in Jalan Bangsar and Setia Sky 88 in Johor), mixed developments (Setia Walk in Puchong, Selangor, Aeropod in Kota Kinabalu, Sabah) and overseas projects (18 Woodsville and Eco Sanctuary in Singapore). As expected, 2Q new sales were slower (only RM715 million registered against RM1.63 billion in 1Q) due to the festive season, dearth of launches and cautious property market post the banning of developer interest bearing schemes and the hike in real property gains tax effective from Jan 1 this year.

With RM3.2 billion new sales secured in seven months, we believe S P Setia should be able to meet the RM5 billion sales target set for FY14. We reckon its local projects should be averaging at least RM3 billion to RM4 billion, with another RM1 billion to RM2 billion coming from overseas. We understand that the key projects that have performed well in this financial year include Setia Ecohill (RM734 million new sales) and Battersea Power Station, London (RM558 million new sales from Phase 2). We believe another RM1 billion would be recognised from Battersea, given 95% of its residential units in Phase 2 were taken up at the launch on May 1.

Maintain “outperform” and RM3.85 target price with a 20% discount to realisable net asset value of RM4.80. We understand that GST provisions will continue until those projects that were launched pre-GST are completed, and hence will squeeze the margins for the next few quarters. We have adjusted our FY14/FY15 forecast earnings downwards by 9% to 13% to factor in these costs. — PublicInvest Research, June 12

This article first appeared in The Edge Financial Daily, on June 13, 2014.