Investment Highlights

• We maintain HOLD on S P Setia (Setia) with a lower fair  value (FV) of RM0.60/share (from RM0.64/share previously)  based on a 60% discount to our revised RNAV-based  valuation and a neutral ESG rating of 3 stars (Exhibits 6 &  7). 

• Our FV Implies An FY24F PE of 9x, 1 Standard Deviation  Below Its 3-year Median.

• The lower FV stems from the cut to our FY23F/FY24F/FY25F core net profit (CNP) by 5%/5%/3% to  account for higher marketing expenses and finance cost  associated with the Battersea Power Station project.

• Setia’s 1QFY23 CNP of RM50mil was below expectations,  making up 15% of our earlier FY23F earnings and 17% of  street’s. 

• The variance to our forecast was mainly due to higherthan-expected share of losses from the Battersea Power  Station.

• Nevertheless, we anticipate sequential improvement in  revenue from its other overseas projects, Sapphire by the  Gardens (unbilled sales of RM311mil) and UNO Melbourne  (unbilled sales of RM997mil) this year. Both projects are on  track to be handed over to buyers in 2QFY23 and 3QFY23.

• Notably, the income from its development business in  Australia and United Kingdom will be recognised only  upon completion and handover of developed properties.

• YoY, Setia’s 1QFY23 revenue rose 12% while CNP fell 7%.  The higher property sales were more than offset by an  increase in the finance cost and higher share of losses  recognised from Battersea Power Station. 

• In 1QFY23, Setia registered new sales of RM1bil (+52%  YoY), attaining 25% of its FY23F sales target of RM4.2bil  (Exhibit 5). 

• Local projects remained the main contributor, making up  87% of 1QFY23 new sales. The central region in Malaysia  accounted for 53% of total sales, in which the townships  of Setia Eco Park, Setia Alam Impian and Setia Alam were  the major contributors. The remaining sales in Malaysia  came from the regions in the south (28%), north (4%) and  east (1%). 

• The main contributors for its international projects, which accounted for the remaining 13% of 1QFY23 group sales,  was the Battersea Power Station in London together with UNO Melbourne in Australia. 

• The group has secured RM512mil bookings (-22% YoY) as at 31 March 2023, and remains focused on converting  these into sales.

• Setia’s 1QFY23 launches of RM683mil (+35% YoY) were only 11% of its FY23F targeted launch of RM6.2bil.  Nevertheless, Setia is committed to launch the remaining RM5.5bil worth of projects in the subsequent quarters,  with a concentration on its well-established townships in the Central region (70%). 

• QoQ, Setia’s 1QFY23 CNP plunged 47% due to the significant lumpy contribution from Australian operations upon  the handover of Sapphire by the Gardens and UNO Melbourne (Phase 1) in the previous quarter (4QFY22). 

• We expect the group’s FY23F revenue and CNP to be largely supported by unbilled sales of RM7.2bil (-2% QoQ) as  at end-March 2023, which represents a cover ratio of 1.4x of FY23F revenue (Exhibit 5). The main contributors to  unbilled sales are its Malaysian projects (67%) and UNO Melbourne in Australia (14%).

• The Stock Currently Trades at a Fair FY24F PE of 8x, at Parity to Its 3-year Average.

Source: AmInvest Research - 18 May 2023