Investment Highlights

• We maintain HOLD on S P Setia (Setia) with a lower fair value (FV) of RM0.75/share (from RM0.76/share previously) based on an unchanged discount of 50% to our revised RNAVbased valuation and neutral ESG rating of 3-star (Exhibits 6 & 7).

• Our FV also implies FY24F PE of 12x, slightly below the prepandemic 2-year (2018-2019) median of 13x.

• The revised FV stems from the lowering of FY23F/FY24F/FY25F core net profit (CNP) by 27%/10%/8% after accounting for possible deferment of launches. Setia’s 9MFY23 launches of RM2.0bil (+16% YoY) were only 32% of its FY23F targeted launch of RM6.2bil. Given the weakerthan-expected launches, we believe Setia will reschedule a few of its FY23F launches to FY24F. Meanwhile, we also take into account the delay in the recognition of unbilled sales from UNO Melbourne. We understood that the recognition of 80% of unbilled sales from UNO Melbourne amounting to RM557mil will be deferred to FY24F.

• Setia’s 9MFY23 CNP of RM154mil made up only 48% of our earlier FY23F earnings and 53% of street’s. As a comparison, 9M accounted for 64% of FY21-FY22 CNP.

• The variance to our forecast was mainly due to slower-thanexpected recognition of revenue from UNO Melbourne.

• YoY, Setia’s 9MFY23 CNP fell 9% despite a 9% increase in revenue. The increase in revenue recognition from its Australian projects from the handover of UNO Melbourne (Stage 2) were more than offset by an increase in the finance cost.

• In 9MFY23, Setia registered new sales of RM3.9bil (+44% YoY), attaining 93% of its FY23F sales target of RM4.2bil (Exhibit 5). The new sales include proceeds from land sales amounting to RM1bil in 9MFY23 (Exhibit 10).

• Local projects remain the main contributor, making up 87% of 9MFY23 new sales. The central region in Malaysia accounted for 47% of total sales, in which the townships of Setia Alam Impian, Setia Eco Hill 2 and Bandar Kinrara as well as sale of Glengowrie land were the major contributors. The remaining sales in Malaysia came from regions in the south (35%), north (3%) and east (1%).

• The main contributors for international projects, which accounted for the remaining 13% of the group’s 9MFY23 new sales, was the Battersea Power Station in London together with Sapphire by the Gardens and UNO Melbourne in Australia.

• The group has secured RM450mil of new bookings (-24% YoY) as at 30 September 2023, and remains focused on converting these into sales.

• QoQ, Setia’s 3QFY23 CNP dropped 29% despite a 15% growth in revenue. The weaker CNP margin of 4% in 3QFY23 vs. 6% in 2QFY23 was mainly attributed to higher administrative costs associated with the commencement of hotel business as well as some cost savings realised from completed projects in 2QFY23.

• We expect the group’s FY24F revenue and CNP to be largely supported by unbilled sales of RM6.8bil (-1% QoQ) as at end-September 2023, which represents a cover ratio of 1.4x of FY24F revenue (Exhibit 5). The main contributors to unbilled sales are its Malaysian projects (79%) and UNO Melbourne in Australia (10%).

• In FY24F, we also expect an acceleration of progress billings for the group’s Malaysian projects given the improvement in labour market conditions. Notably, Setia’s Malaysian projects has an unbilled sale of RM5bil- 74% of the group’s total.

• Despite concerns on rising finance cost (+35% YoY), we anticipate the uptrend of interest rate to peak in the near term with the approaching end of global monetary policy tightening. As at 30 September 2023, Setia has 78% of borrowings denominated in MYR, 12% in GBP and 10% in AUD with the remainder in JPY and USD. Meanwhile, we expect Setia's gearing ratio to pare down in subsequent years through ongoing efforts to monetise non-strategic land banks and divestment of non-core assets. In 9MFY23, Setia has disposed 1,469 acres of lands with total proceeds of RM1bil (Exhibit 10).

• The stock currently trades at an unexciting FY24F PE of 13.5x, slightly higher than its pre-pandemic valuations of 13x.

Source: AmInvest Research - 24 Nov 2023