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SP Setia: 1QFY10 : A slow quarter

Below expectation

1QFY10 results came in below expectations. Net profit only achieved 18.9% and 19.3% of house and consensus full year estimates due to seasonally slower construction progress in 1QFY10, and lower thanmexpected margin. As expected, no dividends were declared for the quarter.

Slow progress while margin still suppressed
1QFY10 revenue was 7.6% lower q-o-q as 1st quarter of the financial year has typically slower construction progress. However, net profit fell by larger quantum of 32.8% q-o-q due to (1) higher selling and marketing expenses as a result of easy financing scheme introduced since Jan 2009 to boost sales, (2) gain on land sale to Lend Lease recognised in
4QFY09, and (3) lower effective tax rate in 4QFY09. Property EBIT margin fell back to the 15% level, dampening our earlier expectation of margin recovery albeit a gradual one.

• Property sales continued to be strong Property sales continued to be strong in 1QFY10 at RM608m, which was a record. Another RM152m sales were added in Feb 2010, bringing 4MFY10 sales to RM760m. Management is now guiding RM2bn sales for FY2010 (previously RM1.65bn).

Earnings revision
We revised our EPS estimates for FY10 (-3.4%), FY11 (+0.6%) and FY12 (-1.3%) after taking into account higher sales (Figure 3), which was largely negated by (1) lower net profit margin by 60-140bps, and (2) effect of the recent termination of JV for the development of Setia View.

Downgrade to HOLD, TP raised to RM4.46
Although sentiments remain buoyant, further upside on SP Setia seems limited (7% based on new target price) as a slower than expected margin recovery has dampened our hope of earnings upgrade in the near term. The only catalyst is likely to come from the launch of KL Eco City which is pending formalisation of privatisation agreement with DBKL.

We downgrade our call from buy to hold, but raise our target price from RM4.05 to RM4.46 by rolling over to FY11 and continue tagging an upper-end P/E valuation of 20x. RNAV has been revised to RM4.32 (previously RM4.06) after adjusting for land value of Setia City.
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