Investment Highlights

• We maintain HOLD on S P Setia (Setia) with a slightly higher fair value (FV) of RM0.61/share (from RM0.60/share previously), due to the increase in FY24F/FY25F core net profit (CNP) by 4% to factor in lower interest expense with the group’s borrowings expected to be reduced from the proposed disposal proceeds of Tebrau lands.

• Our FV is based on a 60% discount to revised RNAV and neutral ESG rating of 3 stars (Exhibits 6 & 7). This also implies an FY24F PE of 9x, 1 standard deviation below its 3- year median.

• Setia’s wholly-owned Pelangi has entered into interconditional sale and purchase agreements with Scientex Lestari, a JV between Scientex Quatari (70%-owned) and Dato’ Azman bin Mahmud (30%-owned) (Exhibit 5), to dispose 8 parcels of freehold land totaling 960 acres situated in Tebrau, Johor for RM548mil (Exhibit 1).

• The land disposal is expected to be completed by 2QFY24. The one-off gain on the land disposal is estimated to be substantial at RM438mil or 80% of the sales proceed.

• Upon the completion of the disposal, we expect the group’s cash position to increase by 14%. The sales proceed is assumed to be utilised for debt reduction, leading to an improvement of FY24F net gearing ratio to 0.49x from 0.54x.

• Setia categorised the land as an undeveloped landbank. As such, we have not factored in the earnings contribution of the lands into our revenue forecast.

• The proposed disposal will be subject to the approval of the Estate Land Board, Economic Planning Unit, and shareholders of Scientex (if required).

• The subject lands are the same lands that were initially agreed to be sold to Scientex’s wholly-owned Scientex Quatari as announced on 7 May 2021. However, the transaction was terminated in March 2023 due to the nonapproval of the waiver for 30% bumiputra equity ownership condition imposed by the Economic Planning Unit.

• Nevertheless, we anticipate that this condition precedent will be satisfied with the involvement of a bumiputra individual, Dato’ Azman bin Mahmud as a joint venture partner of the purchaser, Scientex Lestari (Exhibit 5).

• Notably, the selling price for the lands is 5% higher than the previous selling price of RM518mil.

• We deem that the disposal price of RM13 psf for the land to be reasonable given that the asking price for surrounding agriculture lands ranges from RM5 psf to RM13 psf.

• We positively view the disposal, which is in line with Setia’s plan to pare down its high-level debt by monetising undeveloped land banks.

• The stock currently trades at a fair FY24F PE of 8x, at parity to its 3-year average.

Source: AmInvest Research - 6 Jul 2023