Investment Highlights

• We maintain HOLD on S P Setia (Setia) with a higher fair value (FV) of RM0.76/share (from RM0.60/share previously) based on a lower discount of 50% (from 60% previously) to our revised RNAV-based valuation and neutral ESG rating of 3-star (Exhibits 7 & 8).

• The higher FV is mainly driven by the lower discount rate, which results from improving sentiments on the property market in Malaysia. The revised discount rate of 50% to our RNAV is similar to the discount which Setia’s share price traded at in FY19 (pre-pandemic).

• The FV also implies a FY24F PE of 11x, slightly below its prepandemic 2-year (2018-2019) median of 13x.

• Setia’s 1HFY23 CNP of RM111mil made up 35% of our FY23F earnings and 38% of street’s. Nevertheless, we deem 1HFY23 earnings to be within expectation in view of the expected sequential improvement in revenue from its other overseas projects, particularly UNO Melbourne (unbilled sales of RM1bil) this year. UNO Melbourne is on track to be handed over to buyers in 4QFY23.

• We also expect the acceleration of progress billings for the group’s Malaysian projects (unbilled sales of RM5bil) given the improvement in labour market conditions. Hence, we have made no changes to our earnings forecasts.

• YoY, Setia’s 1HFY23 revenue inched up 1% while CNP fell 13%. The higher property sales were more than offset by an increase in the finance cost and higher share of losses recognised from the Battersea Power Station.

• In 1HFY23, Setia registered new sales of RM2.6bil (+53% YoY), attaining 61% of its FY23F sales target of RM4.2bil (Exhibit 5). The new sales include proceeds from land sales amounting to RM504mil in 1HFY23 (Exhibit 6).

• Local projects remain the main contributor, making up 86% of 1HFY23 new sales. The central region in Malaysia accounted for 57% of total sales, in which the townships of Setia Eco Park, Setia Alam Impian and Setia Alam as well as sale of Glengowrie land were the major contributors. The remaining sales in Malaysia came from the regions in the south (23%), north (3%) and east (1%).

• The main contributors for its international projects, which accounted for the remaining 14% of the group’s 1HFY23 new sales, was the Battersea Power Station in London together with Sapphire by the Gardens and UNO Melbourne in Australia.

• The group has secured RM470mil of new bookings (-16% YoY) as at 30 June 2023, and remains focused on converting these into sales. The major contributors to the new bookings are its new launches in Bandar Kinrara, Setia Alam Impian and Setia Ecohill 2.

• Setia’s 1HFY23 launches of RM1.5bil (+81% YoY) were only 23% of its FY23F targeted launch of RM6.2bil. Nevertheless, Setia is committed to launch the remaining RM4.7bil worth of projects in subsequent quarters, with a concentration on its well-established townships in the central region (constituting 70% of FY23F planned launches).

• QoQ, Setia’s 2QFY23 CNP grew 20% despite a 3% drop in revenue. The stronger gross profit margin of 33% in 2QFY23 vs. 28% in 1QFY23 was mainly attributed to some cost savings realised from completed projects.

• We expect the group’s FY23F revenue and CNP to be largely supported by unbilled sales of RM6.8bil (-5% QoQ) as at end-June 2023, which represents a cover ratio of 1.3x of FY23F revenue (Exhibit 5). The main contributors to unbilled sales are its Malaysian projects (75%) and UNO Melbourne in Australia (15%). Based on management guidance, we foresee a lumpy revenue recognition from UNO Melbourne, totaling RM1bil, upon the project’s handover in 4QFY23.

• Despite the concern on increasing finance cost (+62% YoY, +23% QoQ), we anticipate the uptrend of interest rate to peak in the near term given that we are approaching the end of global monetary policy tightening. As at 30 June 2023, Setia has 77% of borrowings denominated in MYR, 11% in GBP and 11% in AUD with the remainder in JPY and USD. Meanwhile, we expect Setia's gearing ratio to pare down in subsequent years through its ongoing efforts to monetise non-strategic land banks and divestment of non-core assets. In 1HFY23, Setia has disposed 509 acres of lands with total proceeds of RM504mil (Exhibit 6).

• The stock currently trades at FY24F PE of 11x, lower than its pre-pandemic valuations of 13x.

• However, we remain cautious on Setia due to the potential dilution of ordinary shares resulting from the issuance of RCPS-i C in November 2022. Based on the issue price of RM0.38, the implied conversion price of RCPS-i C is low at RM0.7956. This may result in increased potential conversions from preference to ordinary shares, hence capping the upside of the share price. Assuming RCPS-i C is fully converted into ordinary shares, Setia’s ordinary shares will expand by 36% to 5.5bil from 4.1bil currently.

Source: AmInvest Research - 17 Aug 2023