Investment Highlights

• We keep our HOLD recommendation on S P Setia with a lower fair value of RM0.85 (from RM0.88) based on a 50% discount to its RNAV (Exhibit 2). We cut our FY21–22 net profit forecasts by 31% and 16% to reflect the timing of recognition while introducing FY23 net profit forecast at RM282.9mil.

• S P Setia registered an FY20 net loss of 453mil. Stripping off exceptional items i.e. impairment of completed inventories worth and impairment of work in progress (WIP) development of Battersea project amounting to RM476mil, FY20 core net profit of RM22.8mil (-89.6%) came in below expectations. The weaker performance was mainly due to impact of the various movement control orders (MCO) and Covid-19 pandemic.

• In view of the challenges resulted from the Covid-19 pandemic in London and specifically, the impact on the delivery of the Battersea project, S P Setia’s 40%-owned JV company BPHC Group had resolved to recognise an impairment of its WIP and inventories under development.

• On a positive note, S P Setia recorded new sales of RM3.8bil in FY20 (FY19 RM4.56bil), whereby 81% were derived from local projects, mainly in the central region. Meanwhile, overseas sales were contributed by Marque Residences in Australia as well as Daintree Residence in Singapore. Additionally, the company has RM1.45bil bookings in the pipeline as at December 2020 and will remain focused on converting these bookings into sales. S P Setia is maintaining its sales target at RM3.8bil for FY21. The company’s unbilled sales are higher at RM10.05bil as compared with QoQ’s RM9.82bil.

• Moving forward, S P Setia will remain prudent with limited new launches, concentrating mainly on mid-range landed units in established townships in view of the challenging environment. The company has also put in place several cost rationalization initiatives for better operational efficiency.

• We believe the outlook for FY21 will remain bright, supported by strong unbilled sales of RM10.05bil, overseas contribution and inventory clearing efforts. S P Setia’s gearing has decreased slightly to 64.8% from 65.3% QoQ with an interest coverage ratio of 3.1x.

Source: AmInvest Research - 26 Feb 2021