Investment Highlights

• We maintain HOLD on S P Setia (Setia) with a lower fair value of RM1.17/share from RM1.22/share based on a revised RNAV valuation. Our fair value is based on a 40% discount to its RNAV and a neutral ESG rating of 3 stars (Exhibits 1 & 2).

• We lower our FY22F/FY23F net profit by 33%/12% to reflect a potential slowdown of new property launches and margin compression as a result of higher building material cost. Additionally, we have incorporated the impact of the prosperity tax in FY22.

• We recently met up with Setia’s management for updates. Here are the key takeaways:
  (i) Property sales in 1QFY22 will be slightly lower than in 4QFY21 due to the end of the Home Ownership Campaign. Historically, Setia’s 1Q property sales of each financial year are the weakest.
  (ii) Setia may defer future launches should construction costs continue to rise. Meanwhile, it will absorb some of the cost increase. It intends to defend its gross profit (GP) margin at 25% vs. the pre-pandemic 5-year (FY15 to FY19) average GP margin of 30%. Current GP margin stands at 26%.
  (iii) Setia adopts value engineering in its building design and construction processes to mitigate the impact of rising construction costs.
  (iv) To address affordability issues, Setia may launch more residential properties with prices starting from RM500K.
  (v) High-rise residential units and landed units contributed evenly to Setia’s completed inventories. Its premium highrise residential, Setia Sky 88 in Johor (RM240mil) and Setia V Residences in Penang (RM90mil) accounted for 32% of the total completed inventories. We are concerned about the low take-up rate of 35% for Setia Sky 88 (completed on 2016) and 70% for Setia V Residences (completed on 2017).
  (vi) Setia intends to divest non-strategic landbanks in existing townships to large corporations that plan to construct their headquarters therein. It is hopeful of attracting employees of the companies to acquire the group’s residential properties located in the vicinity of their workplace. In the past, Setia has sold non-strategic land in Setia Alam to Top Glove, Kossan and Audi to facilitate the relocation of their headquarters.
  (vii) Setia does not intend to acquire new landbanks in Malaysia. Instead, it will be looking to replenish its landbank in Australia, particularly in Melbourne.

• In late April 2022, Setia announced that it will issue RCPS-C to redeem RCPS-B in order to avoid the stepped-up increase in dividend rate. However, the lower tentative implied conversion price (from RM3.70 to RM1.39) may result in increased potential conversions from preference to ordinary shares, hence capping the upside of the share price.

Source: AmInvest Research - 19 May 2022