August 1, 2016 SP Setia (SPSB MK) BUY Share Price MYR 3.05 Sales may fall short Company Description S12mP Setia PriceBhd Targetis involved MYRin the 3.63real (+19%)estate businesses. ItsPreviousreputable Price Targetprojects includingMYR 3.86Setia Alam and Setia Eco Park. A defensive offering; maintain BUY Statistics Shariah status Yes Based on launches in the pipeline and weak buying sentiment in both 52w high/low (MYR) 3.40/2.80 Malaysia and UK, the latter post-Brexit, SPSB’s internal sales target of 3m avg turnover (USDm) 0.5 MYR4b for FY16 seems challenging. We adjust our FY16/17/18 earnings Free float (%) 22.0 forecasts by -1% to +7% and our TP to MYR3.63 (-6%; on unchanged 30% Issued shares (m) 2,628 discount to RNAV). Despite a lower TP, the implied capital upside is >10%. Market capitalisation MYR8.0B The stock also offers a 12M forward net yield of 6.3%. Maintain BUY. USD2.0B Major shareholders: More new launches in 2H Bumiputra Investment Foundation 51.0% Kumpulan Wang Persaraan 9.4% Management is keeping its MYR4b sales target for 2016 despite weak Employees Provident Fund 6.0% Real Estate sales in 4M16 (MYR696m) on the lack of new launches. It intends to Price Performance intensify its property launches in 2H16 and has lined up MYR3b worth of new launches. In view of the weak buying sentiment and tight lending 3.70 135 requirements in Malaysia and potentially slower sales in Battersea Power 3.60 130 Station (BPS) phase 3A post-Brexit, we think SPSB’s sales target for 2016 3.50 125 is a big challenge. Our revised sales assumption is MYR3.6b (-3%). 3.40 120 3.30 115 3.20 110 Brexit uncertainties 3.10 105 Malaysia Sales have been slow at BPS3A (GBP962m GDV, GBP1,600psf, 60%-sold) 3.00 100 post-Brexit. In addition, there is the impact of the weaker GBP, which 2.90 95 2.80 90 coincides with BPS’s phase 1 delivery soon. Every 5% decline in the GBP Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 from our base case of MYR5.30/GBP negatively impact our FY16/17 SP Setia - (LHS, MYR) SP Setia / Kuala Lumpur Composite Index - (RHS, %) earnings forecasts by -0.3%/-2%. Elsewhere, construction of BPS1 (GBP846m; 99% sold) and BPS2 (GBP779m; 90% sold) are on track. Lump -1M -3M -12M sum profit recognition from BPS1 should come in between 4Q16-2Q17. Absolute (%) 5 (5) 0 Relative to index (%) 5 (4) 4 Earnings adjustments Source: FactSet We fine-tune our FY16/17/18 earnings forecasts by +7%/-3%/-1% to factor in: 1) stronger progress billings at the Malaysia township projects, 2) lower sales assumptions by -3%/-11% for FY16/17, and 3) the issuance of 1.1m new RCPS-i. For our RNAV estimate, we now factor in higher discount rates for high-rise projects and BPS’ subsequent phases. All in, our RNAV/shr is lowered to MYR5.18 (-6%) resulting in a lower TP of MYR3.63 (-6%) based on an unchanged 30% discount. FYE Dec (MYR m) FY14A FY15A FY16E FY17E FY18E Revenue 3,810 6,746 5,494 6,244 4,649 EBITDA 1,108 2,063 1,209 1,374 1,023 Core net profit 376 918 705 909 542 Core EPS (sen) 14.9 35.7 26.6 34.3 20.5 Core EPS growth (%) (17.2) 140.1 (25.4) 28.8 (40.4) Net DPS (sen) 9.7 23.0 15.6 19.0 10.7 Core P/E (x) 20.5 8.6 11.5 8.9 14.9 P/BV (x) 1.0 0.8 0.7 0.7 0.6 Net dividend yield (%) 3.2 7.5 5.1 6.2 3.5 ROAE (%) 6.6 13.9 8.7 10.1 5.8 ROAA (%) 2.9 6.2 4.0 4.6 2.6 EV/EBITDA (x) 10.1 4.9 9.1 8.1 11.5 Net debt/equity (%) 32.5 19.5 17.0 18.0 24.0 Consensus net profit - - 669 763 642 MKE vs. Consensus (%) - - 5.5 19.1 (15.6) Wong Wei Sum, CFA [email protected] (603) 2297 8679 THIS REPORT HAS BEEN PREPARED BY MAYBANK INVESTMENT BANK BERHAD PP16832/01/2013 (031128) SEE PAGE 10 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS SP Setia Intensifying property launches Launching MYR3b new properties in 2H16 After a slow start to the year (4M16 sales was MYR696m), SPSB has intensified its new property launches from June 2016 onwards. It targets to launch MYR3b worth in GDV in 2H16. Major new launches includes: 1) new phases at the mature Setia Alam township project, 2) Setia Ecohill and Ecohill 2 (MYR734m GDV; terraces, superlink, semi-D and affordable apartments), 3) KL Eco City’s ViiA Residences (MYR444m GDV; service apartments), 4) Sky Seputeh (MYR406m GDV; luxury condominium) and 5) Setia Sky Ville (MYR477m GDV; condominium). Property launches in 2016 Project To be launched product type GDV (MYRm) Remarks Setia Alam, Selangor Service apartments, Rumah 839 From MYR560k/unit onwards Selangorku, terraces except for Rumah Selangorku (MYR170k/unit); so far, the properties are well-received with an average take-up rate of 95%. Setia Ecohill, Selangor Superlink, affordable 222 Average take-up rate is more apartments than 90% so far. Setia Ecohill 2, Selangor Terraces, Semi-D 512 MYR580k/unit onwards; Ecohill was launched on 24-25 June 2016. Take-up rate is about 40-50%. Setia Eco Park, Selangor Semi-D, bungalows 184 Setia Eco Glades, Selangor Low rise apartments 90 Setia Eco Templer, Superlink, Semi-D, bungalow, 270 The new launch was well- Selangor apartments, shop lots received with 100% sold. Kl Eco City, KL Service apartments 444 MYR1,555 psf ASP (semi- furnished). Setia Trio, Klang Service apartments 351 Setia Putrajaya Condominium 231 Sky Seputeh, KL Luxury condominium 406 MYR1,300 psf targeting high- end market. Setia Eco Gardens, Rumah Mampu Milik 47 Iskandar M’sia Setia Tropika, Iskandar Cluster home 94 M’sia Setia Business Park II, Rumah Mampu Milik 127 Social housing for the Iskandar M’sia community of Business Park II and surrounding area. Isle of Palm Semi-D 71 Setia Sky Ville, Penang Condominium 477 MYR800psf ASP, catering mid- to high-end markets. Pansa Puri Rimbun Low cost flat 23 Aeropod, Sabah Office, boutique hotel 302 Carnegie, Melbourne Apartments 95 AUD31m in GDV; 48 units of apartments. Eco Xuan, Vietnam Villa 3 USD0.65m in GDV Total: 4,788 Source: Company August 1, 2016 2 SP Setia Mixed outlook We are less bullish on high-rise Among the new projects, we are less bullish on the high-rise especially a) KL Eco City’s ViiA Residences (MYR444m GDV; MYR1,550psf ASP), b) Sky Seputeh (MYR406m GDV; MYR1,300psf ASP) and c) Setia Sky Ville (MYR477m GDV; from MYR800psf) in view of the huge incoming supply of high-rise in the Klang Valley and Penang as well as the projects’ relatively premium pricing (>MYR1m/unit in absolute pricing). Incoming supply and overhang in the high-rise segment (service apartments and condominiums) have jumped tremendously by +34% YoY and +38% YoY in 4Q15, respectively, nationwide. To entice buyers and to provide more time for buyers to secure financing, the Setia 10:90 package (10% to be billed at the point of signing SPA, remaining 90% to be invoiced upon delivery of vacant possession) will be offered to these three projects, we understand. Landed properties still receive good take-ups SPSB’s landed property offerings at strategic locations and mature areas however continue to garner good demand. Thus far, new launches (landed properties) at existing and new township projects have been well received. All landed property launches at Eco Templer (Selayang), Setia Ecohill (Semenyih) and Setia Alam (Klang) were >95% sold thanks to the strong upgrader markets there while Ecohill 2, which was launched in end-June 2016, also receive commendable take-up of 40-50% in just over 1.5 months. This is despite the strong competition from a nearby project - Eco Majestic by Eco World (ECW MK; BUY). Brexit uncertainties Sales have been slow at Battersea Power Station (BPS) 3A (GBP962m GDV, GBP1,600psf, 60% sold; to be completed by 4Q19) post-Brexit. Management is currently seeking approvals to convert the larger units at BPS 3B and BPS 4 into smaller units so that the absolute pricing per unit would be more affordable to buyers. The two phases are slated to be launched by 4Q20 and 2019, respectively. Elsewhere, construction works at BPS1 (GBP846m; 99% sold) and BPS2 (GBP779m; 90% sold; to be completed by 2Q20) are on track. Lump sum profit recognition from BPS1 should come in between 4Q16- 2Q17. Our FX assumption is MYR5.30/GBP. The weaker GBP post-Brexit will result in lower translated profits. Every 5% depreciation in the GBP vis-à-vis the MYR will negatively impact our FY16/17 earnings forecasts by -0.3%/-2%. August 1, 2016 3 SP Setia Challenging MYR4b sales target Management is keeping its 2016 sales target of MYR4b for now despite weak sales of MYR696m (17% of sales target) in 4M16 (versus MYR4.3b in 2015). Based on the products to be launched (mostly high-rise) and the current climate in the Malaysia property market – weak buying sentiment and tight lending criteria - as well as uncertainties at the UK property market post-Brexit, we think SPSB’s MYR4b sales target for 2016 is a big challenge. Our estimated sales for 2016 is 10% below management guidance Project GDV (MYRm) Take-up rate** Estimated sales (%) (MYRm) Actual sales in end-4M16 696 Setia Alam* 711 95% 675 Setia Ecohill 222 95% 211 Setia Ecohill 2 512 75% 384 Setia Eco Park 185 50% 93 Setia Eco Glades 90 50% 45 Setia Eco Templer 270 100% 270 Kl Eco City 444 20% 89 Setia Trio 351 30% 105 Setia Putrajaya 231 50% 116 Sky Seputeh 406 20% 81 Setia Eco Gardens 47 90% 42 Setia Tropika 94 75% 71 Setia Business Park II 127 90% 114 Isle of Palm 71 50% 36 Setia Sky Ville 477 20% 93 Pangsa Puri Rimbun 23 90% 21 Aeropod 302 20% 59 Carnegie, Melbourne 95 70% 66 Eco Xuan 3 100% 3 Inventories as at Mar 2016 832 40% 329 Total: 3,597 * Excluding Edulis (terraces)0 and Retusa (semi-D) worth MYR128m in GDV, which is already reflected in 4M16 sales ** Our assumption Source: Company, Maybank KE August 1, 2016 4 SP Setia Valuation and recommendation We fine-tune our FY16/17/18 earnings forecasts by +6.9%/-3.4%/-1.1% to factor in: 1) Stronger progress billings and take up rates at its township projects namely Setia Ecohill and Eco Templer.