• Maintain BUY, TP rises to MYR1.72 from MYR1.56, 12% upside with 1% FY24F yield. SP Setia’s 1Q24 earnings are within expectations. Its disposals of land lifted earnings, and should continue to drive this metric for the remaining quarters of FY24 – a total of MYR731m in land sales are expected to be recognised in 2Q and 3Q this year. Its 1Q24 property sales of MYR1.42bn also includes MYR731m chalked from sales of land. Meanwhile, its net gearing has improved to 0.49x, from 0.53x in FY23. We raised our TP to be in line with the overall sector re-rating.

• 1Q24 results. The higher sequential growth in revenue was largely driven by the recognition of land disposals – these are mainly related to the Glengowrie land in Semenyih which is worth MYR392m. However, despite the land sale, EBIT margin decreased QoQ to 18.9% (4Q23: 26.5%) on the lower margin eked from the land disposal during the quarter. Its land sales gain of MYR63m made up 35% of the total PBT of MYR181m. SP Setia’s profit was also hit by a higher effective tax rate. Meanwhile, unsold completed inventory fell to MYR1.66bn, from MYR1.77bn as at 4Q23. The unsold stocks are mainly from Aspire Tower in KL Eco City and the UNO project in Melbourne.

• Land disposals lifted total property sales in 1Q24. 1Q24 property sales amounted to MYR1.42bn (vs MYR1.21bn in 4Q23), of which land sales accounted for MYR731m. During the quarter, SP Setia sold 930 acres of land in Taman Pelangi Indah 2 in Johor for MYR564m, and 6.5 acres in Taman Pelangi in Johor for MYR167m. The sales, which are expected to be recognised in 2Q24 and 3Q24, are estimated to yield gains (at the PAT level) of MYR333m and MYR47m. After these sales, there is no more planned monetisation of its land in the pipeline, apart from some potential JVs for industrial park developments.

• Minimal launches in 1Q24. Excluding land sales, sales from SP Setia’s ongoing property projects have been weak, while new launches were minimal. That said, management plans to roll out projects valued at MYR4.5bn this year. Including the land sales, we believe the company should be able to hit its MYR4.4bn sales target by year end.

• Forecasts. We raise FY24F earnings by 15% to reflect the land disposal gains. Unbilled sales stood at MYR5.38bn vs MYR5.6bn as at 4Q23.

• Higher TP. In line with the overall sector re-rating, we raise our TP to MYR1.72, based on 45% discount to RNAV with a 0% discount/premium for ESG imputed, as our ESG score of 3 out of 4 is in line with the country median.

Source: RHB Research - 17 May 2024