Investment Highlights

• We keep our HOLD recommendation on S P Setia with a higher fair value of RM0.92/share (from an earlier RM0.85/share) based on a 50% discount of an increased RNAV of RM8.2bil (+5%) and a neutral ESG rating of 3 stars (Exhibits 3 & 4).

• Our higher RNAV stems from the estimated substantive gains of RM300mil (1.5x FY21F net profit) arising from S P Setia’s conditional agreement to sell 8 parcels of freehold lands measuring 959.7 acres in Tebrau, Johor Bahru for RM518mil cash to Scientex’s wholly-owned Scientex Quatari Sdn Bhd.

• As the sale proceeds will be received over the next 3 years in phases (Exhibit 2), our forecasts are unchanged pending the completion of the first phase of the land sale for 4 parcels by 1Q2022.

• We view the selling price of RM12.39 psf as reasonable given the premium of RM37mil or 8% to City Valuers & Consultants Sdn Bhd’s valuation of RM481mil or RM11.50 psf.

• The land parcels, registered for agricultural use and currently planted with matured oil palm, are located 28km away from Johor Bahru city centre and 18km away from the Senai International Airports (Exhibit 1). Accessibility is limited via the Pasir Gudang Highway or Tebrau Highway.

• S P Setia would be using the RM518mil proceeds in other project developments for immediate launches and repay its borrowings. This should help reduce the group’s FY22–24F net gearing by 1%–3% to 0.48x–0.50x.

• We are positive on this development which would monetise its undeveloped landbank while allowing the group to focus on existing projects, in line with its cost rationalisation initiatives for better operational efficiency.

• Upon the completion of the disposal, the group’s total remaining landbank will contract by 11% to 7,569 acres from 8,528 acres as at 31 December 2020. There are 48 ongoing projects, of which 11 are based in Johor Bahru.

• We expect the group’s 1QFY21 results, scheduled to be announced on 25 May 2021, to be within our expectations, supported by strong unbilled sales of RM10.1bil (3.1x FY21F revenue) as at 31 December 2020, substantial overseas contribution and inventory clearing efforts.

• However, due to the run-up in its share price, we deem the stock as fairly valued at a FY21F PE of 22x vs. a 3-year average of 17x.

Source: AmInvest Research - 10 May 2021