SP Setia’s 2019 results were above market expectations but below our forecasts. Net profit fell 48% yoy to RM344m in 2019, mainly due to lower exceptional gains. Core net profit increased 18% yoy to RM272m in 2019, driven by higher progress billings. We keep our 2020-21E core EPS unchanged. Its current core 2020E PER of 16x is not attractive but valuation is supported by a Price/book of 0.4x. We maintain our HOLD call with a lower TP of RM1.35, based on an unchanged 50% discount to our revised RNAV of RM2.70.

Below Our Expectation

Net profit of RM344m (-48% yoy) in 2019 was 9% above consensus forecast of RM316m but 7% below our estimate of RM369m. We were surprised by the lower net exceptional gains (mostly land sale gains) of RM87m as we had expected about RM100m. However, core net profit of RM272m in 2019 was close to our forecast of RM269m.

Boost From Land Sales and Forex Gains

Revenue increased by 9% yoy to RM3.93bn in 2019, mainly driven by land sale revenue of RM0.54bn. Excluding land sales, revenue fell 6% yoy to RM3.39bn for its core property development operation. PBT fell 39% yoy to RM598m in 2019 due to the lower exceptional and unrealised forex loss. The unrealised forex loss of RM16m in 2019 (gain of RM61m in 2018) resulted from the translation of GBP-denominated loans into Ringgit. There was a fair-value gain of RM0.34bn in 9M19 from the remeasurement of its original 50% stake in the Setia Federal Hill project. Land and investment sale gains contributed RM59m of net exceptional gains in 9M19.

Sequentially Weak Operating Performance

Core net profit grew 18% yoy to RM272m in 2019, mainly driven by higher progress billings for its ongoing projects and lower share of joint-venture (JV) earnings (Battersea project). Core net profit grew 84% qoq and 95% yoy to RM88m in 4Q19, mainly due to higher JV earnings and interest income.

Maintain HOLD Call

Prospects for SP Setia remain challenging due to the slow property market recovery. We cut our RNAV/share estimate to RM2.70 from RM2.96 previously to reflect a lower DCF value for its property projects (assuming lower profit margins). Based on an unchanged 50% discount to RNAV, we reduce our TP to RM1.35 from RM1.48 previously.

Source: Affin Hwang Research - 27 Feb 2020