• SP Setia reported a surprise net loss of RM113m in 6M20, mainly due to impairment of inventories amounting to RM146m.
• Core net profit was RM26m in 6M20 after incurring net loss of RM2m in 2Q20 on lower progress billings during the Movement Control Order (MCO) period.
• We cut our core EPS by 7-23% in 2020-22E to reflect a slower recovery in progress billings and lower profit margins. We reiterate our HOLD call with reduced target price (TP) of RM0.86, based on 60% discount to RNAV.

Core Loss Incurred in 2Q20

Revenue fell 53% yoy to RM1.03bn in 6M20 due to works at project sites coming to a standstill during the MCO period and construction only restarted in July. There was also the absence of one-off land sale revenue of RM449m from the sale of the British Embassy land in 2Q19, contributing to the sharp fall in revenue. Excluding one-off gains, EBITDA fell 52% yoy to RM173m in 6M20 with stable profit margin as it managed to reduce operating cost by 53% yoy to RM0.86bn. Sales and marketing costs were cut given the soft market conditions. Pre-tax loss of RM58m was incurred in 6M20 after taking into account net exceptional and forex losses of RM139m and higher jointventure losses.

Weaker Sales Due to MCO

SP Setia secured property sales of RM405m (-14% qoq) in 2Q20, bringing total sales to RM875m in 6M20. It launched new landed residential properties with gross development value (GDV) of RM478m prior to the start of MCO in Alam Impian, Bandar Kinrara, Setia Alam and Setia Safiro. Take-up rates were encouraging for the new launches. Coupled with sales of inventories and unsold units, SP Setia achieved sales of RM1.45bn with bookings of RM1.54bn year-to-date 11 August 2020. SP Setia maintained its sales target of RM3.8bn and new launch target of RM2.8bn in 2020. High unbilled sales of RM9.8bn will support earnings over the next 2-3 years.

Reiterate HOLD Call With a Lower TP of RM0.86

Prospects remain challenging for the company due to the weak property market sentiment and tight bank lending conditions. We expect SP Setia to incur net loss of RM17m in 2020E after cutting core earnings by 7% and taking into account the net exceptional and forex losses of RM139m. We reduce our RNAV/share estimate to RM2.16 from RM2.29 previously to reflect a slower recovery in sales and lower profit margins. Based on the same 60% discount to RNAV, we cut our TP to RM0.86 from RM0.92 previously. We believe the current share price will be supported by its attractive Price/book of 0.3x. We reiterate our HOLD call on the stock.

Source: Affin Hwang Research - 14 Aug 2020