Investment Highlights

• We maintain HOLD on S P Setia (Setia) with a lower fair value (FV) of RM0.84/share from RM0.86/share based on an unchanged 55% discount to our revised RNAV and a neutral ESG rating of 3 stars (Exhibits 4 & 5).

• Setia’s 1HFY22 core net profit (CNP) of RM128mil was generally within our expectation, making up 46% of our FY22F earnings but slightly below consensus at 44%.

• Nevertheless, we lower our FY23F/FY24F CNP by 23%/21% to reflect lower revenue assumptions on the expectation that the group is likely to closely monitor the construction cost trends and be prudent on new launches.

• We observe that new launches in 2QFY22 remained low. This brought the 1HFY21 new launches to RM505mil, only 20% of its targeted launch of RM4bil for FY22F.

• We also factor in a higher finance cost to our earnings estimate due to its high exposure of >90% to borrowings in a floating rate.

• YoY, Setia’s 1HFY22 revenue declined 12%, attributed to a 38% drop in property sales after the expiry of the Home Ownership Campaign in December 2021. This led to 1HFY22 CNP dropping by 29% YoY, further dragged by higher finance cost and steeper losses from its joint venture company, Battersea, as a result of increased marketing and delivery expenses.

• In 1HFY22, Setia registered new sales of RM1.7bil (vs. RM2.7bil in 1HFY21), attaining 42% of its FY22F sales target of RM4bil (Exhibit 3). The group has secured RM559mil bookings as at 30 June 2022, and it remains focused on converting these into sales.

• Despite the lower sales in 1HFY22, the company is confident of meeting its FY22F sales target of RM4bil. A stronger sales momentum has been seen in July/August 2022 in comparison to the early months of the year. We anticipate subsequent sales to be mainly derived from its previously launched projects and completed inventories (worth RM1bil as at 30 June 2022).

• Local projects remained the main contributor, making up 82% of 1HFY22 new sales. The central region in Malaysia accounted for 56% of total sales, in which the townships of Setia Alam, Setia Eco Park, Setia Sky Seputeh and Setia Eco Glades made up 26% of the total sales. The remaining sales in Malaysia came from the southern region (17%) and the northern region (9%).

• The main contributor for its international projects, which accounted for the remaining 18% of 1HFY22 group sales, is Battersea Power Station in London together with Daintree Residence in Singapore.

• Meanwhile, Setia recorded a strong average take-up rate of >95% for its 2QFY22 new launches (landed residential projects) with a total gross development value (GDV) of RM301mil.

• We expect the group’s FY22F revenue and CNP to be largely supported by unbilled sales of RM8.7bil as at end-June FY22 (-15% YoY from RM10.3bil as at end-June FY21) which represent a cover ratio of 2.5x of FY22F revenue (Exhibit 3). The main contributors to unbilled sales are its international projects, particularly Sapphire by the Gardens (14%) and UNO (13%) in Melbourne, and also Phase 3A of the Battersea Power Station project (12%).

• QoQ, Setia’s 2QFY22 CNP expanded 34% due to higher volume of project development phases which have been completed and handed over, coupled with some realised cost savings from certain completed projects. Additionally, we saw a narrower LBT QoQ in the construction segment (Exhibit 2).

• The stock currently trades at a fair FY23F PE of 12x, at parity to its 4-year average.

Source: AmInvest Research - 19 Aug 2022