Investment Highlights

• We maintain HOLD on S P Setia (Setia) with a lower fair value (FV) of RM0.60/share from RM0.84/share based on a higher discount rate of 60% (from 55% previously) to our revised RNAV and a neutral ESG rating of 3 stars (Exhibits 5 & 6).

• Our higher discount rates stems from the lowering of FY22F/FY23F/FY24F core net profit (CNP) by 12% to factor in higher finance cost due to its high floating rate exposure of >90% of borrowings.

• Setia’s 9MFY22 CNP of RM168mil was below expectations, making up 46% of our FY22F earnings and 44% of consensus.

• Meanwhile, we anticipate lumpy recognition of revenue from its overseas projects, Sapphire by the Gardens (unbilled sales of RM1.2bil) and UNO Melbourne (unbilled sales of RM1.1bil) in 4QFY22. Sapphire by the Gardens are on track to be handed over to buyers in October 2022, whilst UNO Melbourne expected to reach partial completion stage by end of December 2022. Notably, the income from its development business in Australia and United Kingdom will be recognised only upon completion and handover of the developed properties.

• YoY, Setia’s 9MFY22 CNP fell 3% as a result of a drop in property sales after the expiry of the Home Ownership Campaign in December 2021, as well as higher finance cost following 3 consecutive OPR hikes from May to September 2022.

• In 9MFY22, Setia registered new sales of RM2.7bil (-20% YoY), attaining 67% of its FY22F sales target of RM4bil (Exhibit 4). The group has secured RM592mil bookings as at 30 September 2022, and remains focused on converting these into sales.

• Despite lower sales in 9MFY22, the company is confident of meeting its FY22F sales target of RM4bil. We anticipate subsequent sales to be mainly derived from its previously launched projects and completed inventories.

• We observe a declining trend in Setia’s inventory level, down 12% to RM906mil in 3QFY22 from RM1bil in 2QFY22 (Exhibit 4), primarily due to lower new launches so far this year and higher sales from its ongoing project.

• Local projects remained the main contributor, making up 87% of 9MFY22 new sales. The central region in Malaysia accounted for 62% of total sales, in which the townships of Setia Alam Impian, Setia Eco Park, Setia Alam, Setia Sky Seputeh and Bandar Kinrara made up 32% of the total sales. The remaining sales in Malaysia came from the southern region (17%) and the northern region (7%).

• The main contributor for its international projects, which accounted for the remaining 13% of 9MFY22 group sales, was the Battersea Power Station in London together with Daintree Residence in Singapore.

• We observe that new launches in 3QFY22 was higher at RM1.2bil vs. RM806mil in 1HFY22. Setia registered commendable average take-up rate of >80% for its 3QFY22 new launches, including Eco Lakes in Vietnam, Bandar Kinrara, Setia Alamsari North, Setia Alamsari South and Setia Tropika.

• QoQ, Setia’s 3QFY22 CNP fell 45% due to higher volume of project development phases which have been completed and handed over, coupled with realised cost savings from completed projects in 2QFY22.

• We expect the group’s FY22F revenue and CNP to be largely supported by unbilled sales of RM8.4bil (-15% YoY) as at end-September FY22, which represent a cover ratio of 2.1x of FY22F revenue (Exhibit 4). The main contributors to unbilled sales are its international projects, particularly Battersea Power Station project (16%), Sapphire by the Gardens (14%) and also UNO Melbourne (13%).

• The stock currently trades at a fair FY23F PE of 10x, at parity to its 4-year average.

Source: AmInvest Research - 21 Nov 2022